Tunisia’s new central bank chief faces challenging situation with IMF deal in limbo

To avert a full-fledged debt crisis, the government must urgently implement reforms and land the deal with the International Monetary Fund, experts say

Halfaouine market near central Tunis. Inflation and unemployment are rising in Tunisia. AFP

The new Central Bank of Tunisia chief faces “an exceptionally challenging situation”, with the North African country struggling to avert a debt crisis as talks with the International Monetary Fund remain in limbo, analysts have said.

Fethi Zouhair Nouri was last week revealed as the new bank governor after being appointed by Tunisia’s President Kais Saied to replace Marouane Abbasi. A row over the IMF bailout programme had soured relations between the President and Mr Abbasi.

“The new governor faces an exceptionally challenging situation”, Hamza Meddeb, a research fellow at Beirut-based Malcolm H Kerr Carnegie Middle East Centre, told The National.

"His immediate priorities involve navigating the delicate balance of financing the government deficit, servicing debt obligations and curbing inflationary pressures," he said.

"With very little foreign funding forthcoming, this task will be undeniably challenging.”

Mr Nouri, a professor at the Faculty of Economics and Management Sciences in Tunis, served on the Tunisian Economic and Social Council from September 1994 to January 2011. He is also a specialist on energy and worked as an economic adviser at the Financial Market Council from 2013 to 2015.

He must now seek to maintain the independence of the central bank after Tunisia's Parliament this month approved a law authorising the banking regulator to fund part of the government's financial needs for the year ahead.

Fethi Zouhair Nouri, right, the new governor of the Central Bank of Tunisia, took office on February 16. Photo: Central Bank of Tunisia

The law allows central bank financing on a one-off basis for an amount of 7 billion Tunisian dinars ($2.2 billion or 4 per cent of GDP) to be repaid over 10 years, exempt from interest.

However, the new law is expected to “erode the [bank's] autonomy, complicating its price and financial stability goals and ultimately weighing on the effectiveness of the monetary policy", Moody's Investors Service said in a report.

"Before replacing Mr Abbasi, it was clear that President Saied was not ready to agree to the IMF conditions," Intissar Fakir, senior fellow and director of the North Africa and Sahel Programme at the Middle East Institute, told The National.

"The ball from the IMF's perspective was in his court and despite the lack of money – the country's liquidity challenge – he felt he had alternatives, namely borrowing from the central bank. Mr Abbasi and the presidency had had months of disagreements about monetary policy approaches from interest rates, to borrowing from the central bank. Mr Abbasi was against policies that would impact the Central Bank of Tunisia's relative independence. And so that was bound to come to a head."

Tunisia's economy was hit hard during the Covid-19 pandemic, contracting 9.2 per cent in 2020, the worst in the Mena region, according to the World Bank.

While its economy has since rebounded, it continues to face strain from rising inflation amid the Russia-Ukraine war as well as growing national unemployment.

The country’s GDP contracted by 0.2 per cent on an annual basis in the fourth quarter of last year amid a decline in agriculture production due to a drought and a decrease in domestic demand, latest data from the country’s National Institute of Statistics found.

Inflation and unemployment levels continue to rise in the country, which has a population of more than 12 million.

'Crucial' IMF deal

“To avert a fully fledged balance of payments and debt crisis, and to restore macroeconomic stability and debt sustainability, implementing a comprehensive medium-term reform programme, supported by the IMF, is urgently needed,” Garbis Iradian, chief economist for Mena and Central Asia at the Institute of International Finance, told The National.

Tunisia is seeking $4 billion from the IMF and reached a staff-level agreement with the Washington-based lender for a 48-month Extended Fund Facility worth about $1.9 billion in 2022.

However, the IMF board rejected the deal, citing opposition to an agreed reform of fuel subsidies by Mr Saied.

The fiscal reforms specifically relate to subsidies that reached 8.3 per cent of GDP in 2022 and 7.2 per cent of GDP last year, and account for about 20 per cent of public expenditures.

Last year, rating agencies including Fitch and Moody’s downgraded Tunisia’s rating over concerns it was struggling to meet IMF requirements to clinch a financing deal.

Fitch downgraded Tunisia's rating further into junk territory and the country's long-term foreign currency issuer default rating was revised to 'CCC-' from 'CCC+', seven levels below investment grade.

Junk status makes it more difficult for a country to access capital markets and raise funding that it needs when it wants to borrow.

"The IMF’s assistance is conditional on the implementation of reforms that the authorities largely rejected due to their potential impact on large segments of the population," Nassib Ghobril, head of group economic research and analysis at Byblos Bank, told The National.

"But officially, the talks between the two sides have not been terminated. The economy is in need of external financing and these needs are increasing so the way to access foreign financing would be through a deal with the IMF."

Tunisia posted a current account deficit of 3.8 per cent of GDP last year and the deficit is expected to widen in 2024, as the country has $3.6 billion in debt amortisation this year compared to $2.8 billion in 2023.

The country’s external debt was 84 per cent of GDP at the end of 2023 and is forecast to stay at that level this year, he said.

"The external account benefited last year from a very good tourism season, the inflow of expatriates’ remittances and the decline in the prices of imported commodities, which has helped the central bank increase its foreign currency reserves to about $8 billion last year," Mr Ghobril said.

But this is still low and offers about three and a half months of import cover.

"Further, accessing international capital markets is difficult, given the tight financing conditions in global markets," Mr Ghobril said.

"So it will be difficult to meet the country’s external financing needs from funding sources other than official assistance, which means it will be difficult to access external funding without an agreement on a programme with the IMF."

Lack of pro-reform leadership

A lack of dedicated leadership committed to economic reforms is also hindering economic growth, Mr Meddeb said.

“Since his power grab in 2021, the President has prioritised reshaping the political landscape to centralise authority rather than tackling economic problems,” he said.

Mr Saied has rejected agreements with the IMF and the EU and preferred to rely heavily on windfalls from foreign currency through remittances and tourism to service debt and postpone necessary reforms.

"The problem is he seems to have surrounded himself with people who are pushing or supporting the lessening dependence on external debt by raising domestic debt," said Ms Fakir.

"Tunisia's high foreign debt levels have been an issue, but trading a foreign debt issue for domestic borrowing raises its own set of challenges from inflation, to depleting foreign currency reserves, to currency depreciation."

With Mr Saied getting rid of some of the few remaining voices able to provide caution and dissent on his economic plans, it is a "not a positive outlook", she said.

Mr Meddeb stressed that Tunisia must devise an investment strategy to stimulate economic growth and jobs creation.

"This entails establishing fair competition policies and strategically transitioning toward renewable energy sources.”

Currently, Tunisia imports 60 per cent of its gas and half of its oil needs, highlighting the need to bolster renewable energy production.

Tunisia's economy is expected to grow less than 1 per cent in 2024. EPA

Bleak outlook

There are bleak prospects for the country's economy as it heads for a presidential election later this year, analysts say.

The economy is expected to grow at less than 1 per cent in 2024, with current account and fiscal deficits to remain high, at 4 per cent and 5 per cent of GDP, respectively, Mr Iradian said.

"The Tunisian economy is highly dependent on economic activity in major European economies, which we expect to weaken in 2024," he said.

"In the absence of deep reforms and an IMF programme, persistent fiscal and balance of payments financing shortfalls will constrain growth and jeopardise macroeconomic stability, potentially leading to a default."

Direct borrowing from the central bank to pay back the February maturing Eurobond and to partially fund the fiscal deficit has further damaged the credibility of economic policy under Mr Saied, said Hasnain Malik, head of emerging market equity strategy at Tellimer.

“While foreign reserves have increased recently, most of this is down to higher external borrowing and there is a requirement for over $4 billion of fresh external funding in each of 2024 and 2025," he added.

"In other words, this hit to policy credibility is going to make it harder to secure the IMF deal and foreign portfolio capital needed.”