Political tension in Tunisia aggravates economic crisis

With rising energy and commodity prices globally and a growing current account deficit, Tunisia cannot afford to delay building a national consensus on key political and economic structural reforms. to unlock aid from the International Monetary Fund for its struggling economy.

At the heart of the economic transformation agenda is the government’s attempt to secure $4 billion in IMF financing, which could help it pull the country out of its worst economic and financial crisis.

However, IMF financing is forcing 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 reduced government power. ‘purchase.

It is a delicate balancing act for Mr Saied’s reform agenda as rising consumer prices are fueling public discontent across the country, leading to mass protests and labor strikes in all the countries.

Earlier this month, Finance Minister Sihem Boughdiri said she expected to resume discussions with the fund on the loan program soon. In preparation, the government will start cutting food and fuel subsidies in 2023 and cut the public wage bill by 5% over the next three years.

However, the IMF has not yet indicated its willingness to accept the loan program with Tunisia.

“Tunisia faces major structural challenges that translate into deep macroeconomic imbalances, weak growth despite its strong potential, high unemployment, low investment and social inequality,” the Washington-based lender said after three days of meetings with the Tunisian authorities. in March.

“The impact of the pandemic and the war in Ukraine now adds to these structural challenges.”

The North African country faces “stronger current account outflows caused by rising global commodity prices, such as oil and wheat,” Fitch Ratings said in a May research note.

“We expect the country to run a current account deficit of 8.4% of gross domestic product in 2022. [up from 6.3 per cent in 2021]”said the rating agency.

Rising import prices also fueled already high inflation and added to the government subsidy bill.

“Partly as a result, we expect the fiscal deficit to widen to 8.5% of GDP in 2022, from 7.8% in 2021,” Fitch said.

The IMF predicts that the Tunisian economy will grow by 2.2% this year and that inflation will reach 7.7%. The World Bank estimates GDP growth at 3% this year.

Tunisia’s economic outlook remains highly uncertain as the economic rebound in 2021 has been relatively moderate.

“Debt sustainability concerns remained acute” due to budget deficits and high financing needs, according to the World Bank.

Worsening political unrest in the country continues to hamper reforms. Ahead of a referendum on constitutional reforms, Mr Saied dissolved parliament and took control of the country’s judicial system after sacking 57 judges.

In March, Fitch downgraded Tunisia’s rating to “CCC” from “B-“, seven notches below investment grade and on par with El Salvador and Ethiopia.

The downgrading of the rating denotes a very high level of default risk compared to other issuers or bonds, mainly due to increased threats of fiscal and external liquidity.

The threats are the result of further delays in agreeing to a new IMF deal after political changes in July 2021, when Mr Saied suspended parliament and sacked the prime minister.

“In this context, it is difficult to imagine the government being able to credibly commit to reforms and implement the politically difficult prior actions necessary to secure an IMF program,” said Patrick Curran, senior economist at Tellimer Research.

Last month, the Tunisian government invited the Tunisian General Labor Union (UGTT), along with lawyers and human rights organizations, to participate in discussions to develop a national consensus on constitutional reforms and economic.

However, the powerful UGTT rejected the government’s plans. Hundreds of thousands of Tunisian public sector workers marched on June 16 as part of a nationwide strike to demand higher wages and protest against planned spending cuts and the privatization of public entities.

It is hard to imagine the government being able to credibly commit to reforms and implement the politically difficult prior actions necessary to secure an IMF program

Patrick Curran, Senior Economist at Tellimer Research

“The UGTT is ultimately big and powerful enough to bring the country to a standstill if [Mr] Saied ignores his economic demands, which are fundamentally incompatible with the IMF’s likely reform demands,” Curran said.

“The constitutional referendum will keep [Mr] Saied on a collision course with the UGTT and the opposition and will continue to absorb most of its bandwidth and political capital.

The government faces mounting pressure and will need to find a solution quickly as its debt is set to become unsustainable unless a strong and credible reform program is passed with broad support, Fitch said.

Tunisia’s public debt reached 79.2% of GDP in 2021, according to government estimates, which is lower than the 85.6% initially forecast in the 2021 budget.

“However, the trajectory ahead is less favorable, given the expected widening of the deficit in 2022 and the worsening of the real growth interest rate differential,” said Mr. Curran, who forecasts a sharp increase. central government debt to around 90% of GDP this year.

“Even if Tunisia gets an IMF program, there is a risk that its stock of debt will be deemed unsustainable and that the IMF will not be able to provide financing without debt restructuring,” he said. declared.

Updated: June 22, 2022, 03:30

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