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Sat, 18 Jan 2020 06:04 GMT

Tunisia: Economic Crisis Worsens amidst Hard Choices

Politics

Ahmed Nadhif - 7Dnews Tunis

Wed, 24 Oct 2018 14:12 GMT

Tunisia has once again sought international funding in a bid to ease its budget deficit as the country’s authorities said they are considering selling international bonds worth $1 billion this week. 

The North African country, which has struggled with a severe economic crisis since 2011, accorded the task to Deutsche Bank, JPMorgan Chase, City Group and Natixis. Back in September, the International Monetary Fund (IMF) had paved the way to this step as the IMF agreed to grant Tunisia $245 million as the fifth batch of a loan programme. However, the IMF step was on condition that Tunisia makes a range of economic reforms and keeps the budget deficit under control.

The fact is, all the economic indexes in Tunisia are alarming, given the public debt has increased hugely since 2011, with the debt service reaching 19% of the country’s budget between 2008 and 2018.

According to Tunisia’s Ministry of Finance, $3.5 billion of loans are expected for this year, of which $2.7 billion are foreign loans; this burden is nearly 71.45% of GDP.

IMF has already warned that Tunisia’s public and foreign debts have reached 71% GDP whilst they were at 80% at the end of last year. Things are not due to improve in the short term as Mohamed Ridha Chalghoum, the finance minister, said the loan repayment will climb to a record of more than $3.24 billion.

Faced with this gloomy situation, observers are wondering if Tunisia can handle its debts in the medium-term. While the country has continually requested foreign loans, the local economy is worsening, with climbing unemployment and paralysed production, a situation that is unprecedented in contemporary Tunisia.

IMF reports reveal that inflation rose to 7.6% in March, a level not recorded in the country for 25 years, due to the decline of the Tunisian dinar, salary increases and high prices.

In an attempt to tackle this dilemma, Tunisia’s central bank increased the interest rate by 75 bps to 5.75%, as its current account deficit grew to more than 10% of the GPD in 2017. Meanwhile, the country’s foreign currency reserves have dropped dramatically and Moody’s has downgraded Tunisia’s credit rating to B2 with a negative outlook.

Since 2012, the IMF has urged Tunisia to make structural reforms through bold steps such as reducing public spending and boosting tax income along with limiting jobs in the public sector, cutting fuel subsidies, privatising many public companies and reforming retirement laws and pensions. However, none of these measures have been effective.

It seems that the political crisis is the major cause of the economic collapse. With seven cabinets in seven years, no government has been able to implement an economic reform programme.

In the meantime, social anger is growing with an unprecedented number of strikes and protests in the gas, phosphate and oil sectors. Furthermore, there were a lot of terrorist attacks between 2012 and 2016, a destabilisation that worried foreign investors and pushed them into leaving Tunisia.

Today, Tunisia faces a critical impasse. On one hand, the country needs to introduce a range of economic reforms in order to overcome its problems but on the other hand, it cannot cut subsidies for many products as this move would trigger huge social anger. The power of the trade unions in Tunisia makes it hard for the government to touch salaries, nor can the cabinet raise taxes since this could anger companies and entrepreneurs who invest and create jobs.

This complex economic state of affairs exists within the context of a fragile political situation as internal tensions escalate inside the ruling party, with the coalition parties becoming more and more divided.

Middle East Africa