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EXPLAINER - Tunisia efforts to stave off bankruptcy

June 29, 2023 at 5:22 pm

International Monetary Fund (IMF) [Flickr]

Tunisia faces a full-blown crisis in public finances that could destabilise the country with knock-on effects around the central Mediterranean region.

European countries have offered about 1 billion Euros ($1.1 billion) in aid to try to get Tunisia to agree to an International Monetary Fund (IMF) programme, but the offer was meant to be finalised before Thursday’s European Council meeting and remains unfinished.

This article explains why Tunisia is in trouble, the difficulties of securing a foreign bailout and where things may go from here.

Why are Tunisia’s finances in a mess? 

The economy has suffered repeated hits since being unsettled by a 2011 revolution.

Deadly militant attacks in 2015 damaged the important tourism sector and the 2020 COVID pandemic caused the economy to shrink by 8.8 per cent. Drought has devastated agriculture, worsening the trade deficit.

READ: EU considering major Tunisia aid package as migration surges

Over the past decade, fragile governing coalitions kept ducking tough decisions. Analysts say they failed to take on powerful business interests that obstructed competition. And they tackled unemployment by over-hiring at state companies, which became unprofitable.

In 2021, the IMF said the state wage bill was about 18 per cent of gross domestic product, among the highest in the world, while subsidies accounted for 8 per cent of GDP and the debts of loss-making state companies represented 40 per cent of GDP.

Tunisia’s budget deficit last year was 10 per cent of GDP and its debt has reached 77 per cent of GDP. External borrowing needs for this year were projected at over $5 billion.

What is the danger now? 

There are already signs of strain: subsidised staple goods and medicines have periodically disappeared from shops, suggesting problems financing imports. Last year, some state salaries were delayed.

How long Tunisia can hold out is a matter of conjecture.

Most state debt is held by Tunisian banks, but they may have little scope to lend the government more dinars.

Printing money to repay local banks or meet other commitments would undermine Tunisia’s currency, aggravating all the other problems.

International markets fear Tunisia will default on sovereign loans. Credit ratings agency, Fitch, has graded its debt deep in “junk” territory,  with big repayments due later this year.

Meanwhile, foreign currency reserves have dwindled by a quarter, to cover 91 days of imports, compared to 123 days a year ago.

The only bright spots are a recovering tourism industry, bringing in more hard currency and lower global energy prices than last year, reducing the expected fuel bill.

What is happening with the proposed IMF bailout? 

Tunisia’s government negotiated a $1.9 billion preliminary IMF loan agreement last October, but talks to finalise it stalled months ago.

READ: French press criticises Saied’s ‘gamble’ with Tunisia sovereignty; Italian FM accused of ‘racist’ remarks

The agreement was based on commitments to put Tunisia’s finances on a more sustainable footing and reassure donors their loans can be repaid, along with reforms intended to grow the economy.

The government proposed expanding the tax base, replacing expensive subsidies of fuel and food with targeted assistance for poor people, and restructuring loss-making state-owned companies.

What is the snag?

President Saied,  who amassed nearly unchecked power after shutting down parliament two years ago, has come out against his government’s proposals, calling them IMF diktats.

Removing subsidies would be incredibly unpopular and Saied has said he fears a repeat of deadly 1980s riots over rising bread prices.

The powerful UGTT labour union, which says it has a million members and can shut down the economy through strikes, rejects subsidy cuts or the privatisation of state-owned companies.

No IMF deal is possible without Saied’s approval: donors want him to publicly endorse it to stop Tunisia  taking their money and then reneging on agreed reforms.

Government officials have said Tunisia is trying to negotiate a revised deal without subsidy cuts – but that could take a long time and it may struggle to convince donors that its sums add up.

Can Tunisia get the money elsewhere? 

Western and Gulf donors have, so far, said significant bilateral help depends on Tunisia finalising the IMF deal.

However European states, particularly Italy, fear a wave of migration and other effects, such as new militant threats,  if Tunisia’s economy collapses.

The EU has offered about 1 billion Euros ($1.1 billion) in support, but that appears to be mostly pegged to the IMF deal or other, unspecified, economic reforms.

Neighbouring oil exporters, Algeria and Libya, may have the ability and motivation to step in. But it is far from clear how much either might offer.

READ: IMF: We do not want steps that threaten Tunisia’s stability

That leaves Tunisia dependent on much smaller humanitarian aid donations to help cover specific imports, development projects or other pressing problems in sums far short of overall budget requirements.

The views expressed in this article belong to the author and do not necessarily reflect the editorial policy of Middle East Monitor.