With the rise in energy and commodity prices globally and a widening current account deficit, Tunisia can ill afford delays in building national consensus on structural political and economic reforms key to unlocking International Monetary Fund assistance for its struggling economy.
At the heart of the economic transformation agenda is the government’s bid to secure $4 billion in funding from the IMF, which could help it steer the nation out of its worst economic and financial crisis.
However, the IMF funding requires President Kais Saied's administration to make tough and unpopular decisions, including freezing wages and cutting energy and food subsidies at a time when rising inflation has slashed spending power.
It is a delicate balancing act for Mr Saied's reform agenda as rising consumer prices fuel public discontent across the country, resulting in mass protests and countrywide labour strikes.
Earlier this month, Finance Minister Sihem Boughdiri said she expected to resume talks with the fund soon over the loan programme. In preparation, the government will begin to cut food and energy subsidies in 2023 and reduce the public wage bill by 5 per cent over the next three years.
However, the IMF has yet to indicate its willingness to agree to the loan programme with Tunisia.
“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 Washington-based lender said after three days of meetings with Tunisian authorities in March.
“The impact of the pandemic and the war in Ukraine are now adding to these structural challenges.”
The North African country is facing “stronger current-account outflows caused by higher global prices for commodities, such as oil and wheat,” Fitch Ratings said in a research note May.
“We expect the country to post a current account deficit of 8.4 per cent of gross domestic product in 2022 [up from 6.3 per cent in 2021],” the rating agency said.
Higher import prices have also stoked an already high inflation and raised the government’s subsidy bill.
“Partly as a result, we expect the fiscal deficit to widen to 8.5 per cent of GDP in 2022, from 7.8 per cent in 2021,” Fitch said.
The IMF projects Tunisia's economy to grow 2.2 per cent this year and inflation to rise to 7.7 per cent. The World Bank estimates GDP growth of 3 per cent this year.
Tunisia’s economic outlook remains highly uncertain as the economic rebound in 2021 was relatively moderate.
“Debt sustainability concerns remained acute” due to elevated fiscal deficits and financing needs, according to the World Bank.
The country's worsening political turmoil continues to hamper reform. Ahead of a referendum on constitutional reforms, Mr Saied dissolved parliament and took control of the country’s judiciary after firing 57 judges.
In March, Fitch cut Tunisia’s rating to “CCC”, from “B-", seven notches below investment grade and on par with El Salvador and Ethiopia.
The rating downgrade denotes a very high level of default risk relative to other issuers or obligations, mainly due to heightened fiscal and external liquidity threats.
The threats are a result of further delays in agreeing to a new IMF deal after the political changes of July 2021, when Mr Saied suspended parliament and dismissed the prime minister.
“Against this backdrop, it is difficult to imagine the government being able to commit credibly to reforms and implement the politically difficult prior actions needed to secure an IMF programme,” Patrick Curran, a senior economist at Tellimer Research, said.
The Tunisian government last month invited the Tunisian General Labour Union (UGTT), along with lawyers and human rights bodies, to participate in discussions to develop national consensus on constitutional and economic reforms.
However, the powerful UGTT has rejected government plans. Hundreds of thousands of Tunisian public sector employees participated in a march on on June 16 as part of a nationwide strike to demand an increase in salaries and protest against planned spending cuts and privatisation of public entities.
senior economist at Tellimer Research
“The UGTT is, ultimately, big and powerful enough to bring the country to a halt if [Mr] Saied does not take its economic demands into consideration, which are fundamentally incompatible with the IMF’s likely reform requirements,” Mr Curran said.
“The constitutional referendum will keep [Mr] Saied on a collision course with the UGTT and opposition and will continue to absorb most of his bandwidth and political capital.”
The government was facing mounting pressure and will have to quickly find a solution as its debt is set to become unsustainable unless a strong and credible reform programme is adopted with broad support, Fitch said.
Tunisia’s government debt rose to 79.2 per cent of GDP in 2021, according to government estimates, lower than the 85.6 per cent initially projected in the 2021 budget.
“However, the trajectory moving forward is less favourable, given the expected widening of the deficit in 2022 and worsening of the real growth interest rate differential,” said Mr Curran, who forecast a sharp increase in central government debt to about 90 per cent of GDP this year.
“Even if Tunisia secures an IMF programme, there is a risk that its debt stock will be deemed unsustainable and that the IMF will be unable to provide financing without a debt restructuring,” he said.
