War in Ukraine deepens Tunisia's economic woes, IMF says

Country 'faces structural challenges' leading to weaker growth and investment, high unemployment and social inequality

Customers at a bakery in Tunisia's capital Tunis. The IMF says the Covid-19 pandemic and war in Ukraine are adding to the structural challenges facing the country. AFP

Russia's war in Ukraine is deepening Tunisia's economic crisis and posing “important challenges” for the North African country as it emerges from the Covid-19 pandemic, says the International Monetary Fund.

The team of IMF staff that visited Tunisia between March 23 and 25 held “constructive discussions” with Tunisian government officials on the country's reform programme and also discussed the impact of the war in Ukraine, the Washington-based lender said in a statement on Wednesday.

“Tunisia is facing major structural challenges that result in deep macroeconomic disequilibria, a weak growth in spite of its strong potential, a high unemployment rate, weak investment and social inequality,” the IMF said.

“The impact of the pandemic and the war in Ukraine are now adding to these structural challenges.”

Tunisia, North Africa's fourth largest economy and the continent's 14th biggest, remains in talks with the fund for a $4 billion loan tied to a restructuring programme amid rising concerns of a debt default. The country is facing its worst economic crisis.

An entrenched social opposition and resistance by labour unions to further austerity measures, such as scaling down subsidies, are limiting the government's ability to enact strong fiscal consolidation measures, complicating efforts to secure the IMF programme, according to Fitch Ratings.

The credit rating agency downgraded Tunisia's sovereign debt rating to CCC from B-, pushing it deeper into junk territory, citing “heightened fiscal and external liquidity risks” amid delays in agreeing on a new programme with the IMF. A CCC rating indicates a country is a substantial credit risk and default is a real possibility.

Tunisia's outstanding public debt reached nearly 102.2bn dinars ($35bn), or 81.5 per cent of gross domestic product at the end of October 2021, 12 per cent higher than the same period a year earlier. Fitch forecasts debt to GDP to reach 84 per cent in 2022 and 84.7 per cent in 2023.

The Russia-Ukraine war is exacerbating the country's economic woes due to a rise in food and energy prices. The two warring countries are major suppliers of wheat and other grains to North African nations who are rushing to find new sources to keep rising food prices in check.

Research by the Kiel Institute and African Development Bank that simulated the long-term consequences of the war on Africa's grain supply shows that a war-triggered decline in Ukrainian and Russian grain harvests will have the biggest impact on Egypt and Tunisia, because their dependence on grain imports from Ukraine and Russia is highest.

According to the estimates, wheat imports declined most significantly in Egypt by 13.3 per cent, followed by Tunisia with 12.3 per cent and Ethiopia with 10.8 per cent. For other cereals, Tunisia is the most affected with a 15.2 per cent decline in imports.

The highest price increases for wheat are found in Kenya with 5.8 per cent, Uganda with 5.2 per cent and Tunisia facing a 4.3 per cent hike.

To overcome the economy's structural challenges, the Tunisian authorities have proposed a reform programme.

“The authorities’ programme aims to overcome these challenges in a durable and equitable way,” the IMF said after the visit.

In the short term, it aims to mitigate the impact of the war in Ukraine, and in the medium term assure stronger growth and social protection.

“In that context, the programme seeks to create fiscal space for public investment and increase social protection,” the IMF said.

The fund said that a “conscientious reduction” of the fiscal deficit through equitable taxation reform, strict control over the public sector wage bill, better targeted subsidies and deep reforms of state-owned enterprises were necessary to restore macroeconomic stability.

Such measures will also improve the efficiency of state-owned enterprises and the competitiveness of the Tunisian economy, it said.

Initiatives aimed at improving business conditions are also critical to unlock the country’s potential growth and job creation, the IMF said.

“At this moment we continue to stand by the side of the Tunisian authorities in their efforts to advance economic and social reforms to the benefit of the population,” it said.

“In this context, the mission has made further progress in the technical discussions with the Tunisian authorities.”