Tunisia reaches preliminary agreement with IMF on $1.9bn rescue package

Loan will support North African country’s economic reform programme to restore external and fiscal stability, enhance social protection and promote growth

People walk past shops at the old city in Tunis. The IMF expects Tunisia’s economy to grow by 2.2 per cent this year and inflation to rise to 7.7 per cent. EPA
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The International Monetary Fund IMF has reached a staff-level agreement with Tunisia for a new 48-month Extended Fund Facility (EFF) worth about $1.9 billion, which will support the authorities’ economic reform programme.

A final agreement is subject to the approval of the IMF’s executive board, which is scheduled to discuss Tunisia’s request in December, the Washington-based lender said on Saturday.

“The worsening global environment and high international commodity prices are weighing heavily on the Tunisian economy, adding to underlying structural weaknesses amid challenging socio-economic conditions,” said Chris Geiregat and Brett Rayner, who led an IMF team that met with Tunisian authorities in Washington from Monday to Saturday.

“Growth will likely decelerate in the near term, while higher international commodity prices will put pressure on inflation as well as on external and fiscal balances.”

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 had sought $4bn 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.

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 gross domestic product growth of 3 per cent this year.

Tunisia’s government debt rose to 79.2 per cent of the GDP in 2021, according to government estimates, lower than the 85.6 per cent initially projected in the 2021 budget.

“The new EFF arrangement will support the authorities’ economic reform programme to restore Tunisia’s external and fiscal stability, enhance social protection, and promote higher, greener and inclusive growth and private sector-led job creation,” Mr Geiregat and Mr Rayner said.

The Tunisian government’s reform programme will improve tax equity by taking steps to bring the informal sector into the tax net and broadening the tax base to ensure equitable contributions from all professions, the fund said.

It will also aim to contain public expenditures and create fiscal space for social support. The authorities have already taken steps to contain the civil service wage bill and started to gradually phase out wasteful price subsidies through regular price adjustments that link domestic prices to international prices, while providing adequate targeted protection to vulnerable segments, including through social transfers, according to the IMF.

In June, the Tunisian 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.

The government will also expand the coverage of social safety nets by increasing cash transfers to compensate vulnerable households for the impact of higher prices.

Other reforms include reforming state-owned enterprises, stepping up structural reforms to create a level-playing field for investors by offering investment incentives and strengthening governance and transparency in the public sector.

The reform programme will also aim to protect the purchasing power of Tunisians in the face of high and accelerating inflation, the IMF said.

“To reinforce macroeconomic stability, the Central Bank of Tunisia has started to tighten monetary policy,” it said.

The government will also promote investments in renewable energy as well as land and (waste) water management, and adopt measures to preserve Tunisia’s coastlines, agriculture, health and tourism as part of the reform programme.

The fund said the international community has an important role to play in facilitating Tunisia’s bailout programme through the rapid release of financing to ensure the success of the government’s policy and reform efforts.

Political turmoil in the country has impeded earlier 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.

Moody’s Investors Service placed Tunisia’s long-term foreign currency and local currency issuer ratings on review for downgrade this month. Prior to this action, Tunisia’s rating was Caa1 with a negative outlook, the New York-based rating agency said.

Updated: October 16, 2022, 9:56 AM
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