Prolonged crisis to undermine Tunisia's chances of bagging IMF funding deal, Moody's says

Talks between the lender and the country's financial policymakers have already stalled following disagreements on how to implement economic reforms

Tight security in Tunis following President Kais Saied's sacking of prime minister Mechichi and suspension of the Parliament on 25 July. AP

A long-drawn political crisis will undermine Tunisia’s chances of successful negotiations with the International Monetary Fund for a multi-year funding programme it needs to support its economy, Moody’s Investors Service says.

Delays in the successful conclusion of talks with the Washington-based lender will increase uncertainty about the government’s ability to secure official funding, the ratings agency said in a note on Monday.

It also casts doubts on Tunisia’s ability to maintain access to international capital markets on affordable terms to finance its gross borrowing needs, which Moody's estimates at 15 per cent to 20 per cent of its gross domestic product this year and next.

Discussions between the IMF and Tunisia's financial policymakers had stalled on disagreements about how to reduce the civil service wage bill, implement subsidy reform and about the role of state-owned enterprises in the economy.

Tunisia is seeking as much as $4 billion from the IMF, but it is likely that the size of the programme will not exceed $3bn, according to reports.

“We deem it unlikely that the IMF will subscribe to a new programme without a credible endorsement of a comprehensive reform package [a “social compact” according to the IMF] from domestic stakeholders for which a functioning government would be a necessary precursor,” Moody’s said.

Tunisia is facing one of its worst political crises yet after President Kais Saied sacked prime minister Hichem Mechichi last month and suspended parliament for a month. The move has brought to the fore a power struggle that has been brewing for two years.

The crisis could derail the progress Tunisia has made on the economic front after an uprising more than a decade ago toppled dictator Zine El Abidine Ben Ali, causing economic chaos.

The absence of a constitutional court increases the risk of a prolonged political crisis, further slowing reforms. The agency rates Tunisia as “B3 negative”.

Implementation of economic reforms is crucial as the disbursement of an “envisioned new loan” from the IMF hinges on it, Moody’s said.

“As a result, government liquidity risks remain elevated and debt sustainability increasingly challenged,” it said.

However, if Mr Saied forms a new government after 30 days, “it could pave the way to unblock the political impasse ... but this seems quite unlikely”, James Swanston, an economist covering the Middle East and North Africa for London-based Capital Economics said last week.

Tunisia's economy was already in a weakened state before Covid-19, with a fiscal deficit averaging 5 per cent of GDP in the decade ending in 2019, Capital Economics said.

The budget gap increased to 10.6 per cent of GDP last year as 2.6 billion dinars ($946m) was pumped in to support its economy. That is forecast to hit 9.3 per cent this year, according to the fund.

"In the absence of a sustainable adjustment in the fiscal spending structure or a return to higher trend growth, the government's debt-to-GDP ratio risks climbing to unsustainable levels amid tightening domestic and external funding conditions,” Moody’s said.

“Even under the targeted improvement in the financial balance to 6.6 per cent of GDP in the current budget for this year from 10.2 per cent in 2020, Tunisia's debt-to-GDP ratio is set to reach 90 per cent of GDP at the end of 2021 from 84 per cent in 2020,” the ratings agency said.