Tunisia has made 'good progress' on economic policies and reforms, IMF says

North African country will need to reduce its civil service wage bill and gradually phase out energy subsidies through regular price increases while also strengthening tax equity

Tunisians shop at Halfaouine market near central Tunis. The North African country is mired in a deep recession. AFP

Tunisia has made “good progress” on economic policies and reforms to be supported by an International Monetary Fund programme and discussions will continue over the coming weeks, the Washington-based lender said.

“Discussions on a new Extended Fund Facility to support the authorities’ economic policies and reforms have been productive,” Bjorn Rother, who led an IMF team that visited Tunis from July 4 to July 18, said on Tuesday.

“They will continue over the coming weeks towards reaching a staff-level agreement … the authorities are making important progress with their economic agenda, co-ordinating well across ministries and agencies around a shared vision that is sound. It is now critical to accelerate implementation of this agenda.”

Tunisia's economy was severely affected by the war in Ukraine, which widened its current account deficit, as well as the coronavirus-induced slowdown, high debt and deteriorating finances, all of which required that it introduce several reforms to secure funding from the IMF.

The North African country has sought $4 billion in funding from the IMF, which could help it to steer the nation out of its worst economic and financial crisis that has been exacerbated by the rise in energy and commodity prices globally.

A final agreement on a programme for Tunisia is subject to the approval of the IMF's executive board.

“The near-term outlook is challenging as growth will likely decelerate while higher international prices for energy and food are adding to already high inflation and are increasing fiscal and external deficits and debt. Urgent measures are needed to reduce these imbalances in a socially sustainable manner,” Mr Rother said.

While the fund supports the priorities of Tunisia's economic policy and reform programme, it has emphasised the importance of the government building on recent progress made to improve tax equity, expand coverage of social safety nets through increased cash transfers, turn around loss-making public enterprises and contain current public expenditures.

This will require measures to reduce the growth of the civil service wage bill in the years to come and the gradual phasing out energy subsidies through regular price increases that link domestic oil and gas prices to global prices, the fund said.

The fund also urged Tunisian authorities to strengthen tax equity and bring in the informal sector into the tax net, while also ensuring stronger contributions from liberal professions.

“As critical will be swift progress with ongoing efforts to strengthen the social safety net and expand its coverage to compensate for the impact of higher prices for administered goods through cash transfers to vulnerable households and also some relief to the middle class,” Mr Rother said.

“The Central Bank of Tunisia has started monetary policy tightening to protect the purchasing power of Tunisians in the face of high and accelerating inflation. We agree that this action should continue in the time ahead.”

The freezing of wages and reduction of energy and food subsidies at a time when rising inflation has slashed spending power has led to a flurry of protests.

Rising consumer prices have stoked public discontent across the country, resulting in mass protests and countrywide labour strikes.

Political turmoil in the country has also impeded reform efforts. President Kais Saied dissolved parliament before a referendum on constitutional reforms and took control of the country’s judiciary after firing 57 judges. In July, Mr Saied suspended parliament and dismissed the prime minister.

Political instability and the deteriorating economy led Fitch Ratings to cut Tunisia’s rating in March 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.

In June, the government said it would begin to cut food and energy subsidies in 2023 and reduce the public wage bill by 5 per cent over the next three years.

“We welcome the openness of the government and social partners for a constructive dialogue on implementing a socially conscious and growth-friendly economic programme,” Mr Rother said.

“We hope that social partners and other important stakeholders can unite around this effort. Broad buy-in will be essential to accomplish the urgent task of reducing macroeconomic imbalances, shore up stability, and support the job-creating growth that is required to activate the substantial economic potential of Tunisia for the benefit of all Tunisians.”

The fund said the international community will need to help Tunisia through financing intended to ensure the success of policy and reform efforts.

In addition to Tunisian authorities, the IMF team also held discussions with the UGTT labour union, the Utica and Conect employer federations, civil society, development partners and the diplomatic community.

The IMF expects Tunisia's economy to grow by 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 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.