On Tuesday December 5th, news filtered out that Tunisian authorities had asked the IMF to postpose a visit scheduled to commence the next day. The purpose of the visit, planned to extend until the 17th, had been a consultation meant to lead to the issuing of an economic assessment, per the IMF’s Article IV procedures.1 Though the Banque Centrale de Tunisie (BCT) confirmed the postponement, it is safe to assume that the decision to delay the Fund’s arrival in-country had been made by Carthage.
Kaïs Saied’s determination to continue his improvisational and somewhat confused dance with the IMF came just eight months after he announced, with great pomp, that he was rejecting the $1.9 billion Extended Fund Facility (EFF) which his own policymakers had negotiated with IMF representatives over the course of 2022. Despite his country’s deteriorating financial situation, the President justified this move in view of what he called the IMF’s “diktats”. The dance also proceeded two months after Saied thumbed his nose at EU creditors: On October 2nd, the President announced Tunisia would be returning the €60 million Brussels had only just sent over—moneys initially earmarked for Covid relief—as part of a broad cooperation agreement signed in July. Under the terms of that agreement, the capital injection had been designated to help Tunisia reduce EU-bound migrant departures, particularly those headed for Italy. Come October, however, Saied would be accusing the EU of not complying with the terms of the deal. Explaining that the €60 instalment was “small” and showed a “lack of respect” to Tunisia’s sovereignty, Saied reminded that “Tunisia…doesn’t accept handouts or charity” in instructing his officials to return the cash.2
Taking the full picture into view, Saied appears to have adopted a “just say no” strategy in dealing with powerful financial partners. Regardless of the economic troubles his country faces and the immediate benefit which hard currency loans might furnish, the President is, for the moment, seeking a different way out. This all begs a number of questions: Can Tunisia afford Saied’s strategy? Does the President and his government have alternative solutions to what the IMF, EU and the other international institutions like the World Bank can offer? Does Saied risk being called on his bluff—and driving a very fragile and ailing economy over the cliff?
Is Tunisia’s financial position sustainable?
Tunisia’s Loi de Finance for 2023 (LF23) had projected a rather staggering budget deficit of 25 billion Tunisian Dinars (TND). Post-facto evaluations, however, will likely push the final tally higher. This is because GDP growth for the year settled well below expectations, in the area of 1.2%. Marking a roughly 50% decline from 2022’s already weak mark3, weak growth translated to significantly depressed tax revenue yields as compares to the figures projected in the LF23. Though annual numbers are yet to be released, for a sense of their prospective scale, consider that tax revenues in the first half of the year were 50% lower than what was projected in the budget.
To fund the 2023 deficit, Saied’s financial planners had counted on the availability of almost 15 billion TND in external financing (i.e. loans denominated in US dollars and Euros). In other words, planners hitched the balancing of the state’s books for the year to hard currency receipts of approximately $4.5 billion. They did so, moreover, despite the intensity of the external debt repayment schedule, which was to require repayments of 6.6 billion TND, or $2 billion, by year’s end. (They also did so with knowledge that things will not get any easier when the calendar turns over. A Eurobond maturing in February 2024 is to demand that $850 million be dug up somewhere, and total external debt payments for the year are to come in at $2.6 billion.4) If reckless in the first instance, this devil may care approach to debt financing would only grow more dubious once Saied’s lieutenants struggled to actually raise the moneys in question. Indeed, the data suggests that 2023 will wrap up with a fiscal gap (i.e. the difference between the state’s annual receipts, loans included, and its annual expenditures) equivalent to 4.8 billion TND, or $1.4 billion. No source for plugging this gap was identified at the time of writing.
Against this backdrop, the ringing of alarm bells has predictably grown louder. Ratings agencies issued cautionary notes warning of a potential sovereign default throughout 2023.5 They also expressed concern for the condition of Tunisia’s commercial banking sector, whose exposure to the state’s debts has increased significantly over the past three years. And as our earlier reference to the debts coming due portends, fiscal risks are going to heighten further in 2024. Drafts of the 2024 Loi de Finance again display large funding gaps, with 28.2 billion TND in expenditures still needing to be financed.6 Furthermore, the budget is calling for 16.5 billion TND worth of external funding, though only 6.5 billion TND of this total is already secured. 10 billion TND, or $3 billion, then, must still be mobilized from hitherto unnamed sources. For now, foreign exchange reserves have stabilized. After sliding for much of 2022 and early 2023, they bounced back to $8.3 billion in October on the back of healthy tourism revenues7, an amount sufficient to cover 111-112 days of imports. This healthy level of liquidity, alas, does little to shift the outlook from lenders in New York, London, Paris and Frankfurt, whose interpretation of Tunisia’s structural condition (and eye on incoming funding gaps) assures they will not open the checkbook any time soon: On secondary markets, buyers are currently demanding a 50% yield on Tunisian Eurobonds, such is their worry over a default.8
Cyclical and structural economic problems add to an already unsustainable financial position.
Zooming out, it becomes clear that Tunisia’s financial unsustainability is the product of adverse cyclical developments, yes, but also deep lying structural flaws. Pertaining to the former, inflation ranks highly: Juiced by movements on international commodities markets, the inflation rate may have declined throughout 2023, but presently remains elevated at 7%.9 The food component of the index, meanwhile is hovering distressingly above 13%, and is projected to increase further throughout the year.10 Inflation has redounded onto the macroeconomy (and the state’s finances) by way of central bank policy. Mindful of price levels, the central bank has maintained high interest rate levels despite investment and economic activity already being depressed, thereby slowing growth and reducing tax yields. Also contributing to the economy’s financial troubles on the cyclical level is drought. Drinking water rationing was implemented during the first quarter of 2023, with restrictions imposed on agriculturalists and urban service firms, too.11 In terms of economic output, the consequence for the two sectors’ productivity sufficed to drag down GDP growth to the lowest rates of the post-pandemic era, an estimated 1.2-1.3%, as earlier mentioned.
Structurally speaking, two major issues stand out. The first is energy expenditures. Despite the relative easing of global prices in 2023, Tunisia’s energy bill continued to rise at a very rapid pace. In fact, it currently represents two thirds of the country’s total trade deficit. This is attributable to rising demand—which has powered increases in import volumes—and declining domestic production capacity, the latter still at levels far below those of 2010. With the price of energy on the domestic market still subsidized by the state, all this translates not only to current account stress, but fiscal pressure, even if the latter is reduced by the taxes collected on the final consumption of oil and gas-derived products.
The other structural issue is Tunisia’s State-Owned Enterprises (SOEs). Their rising deficits have been financed by government fiscal contributions for a long time. With accumulated losses having now reached levels higher than 40% of GDP, SOE debt obligations, factored in alongside the state’s, push the overall state debt to GDP ratio above 120%.12
Taking a hard line amidst crisis
The financial prospects of the Tunisian state are, at this stage, self-evidently negative. Indeed, the trend of accumulated external deficits is leading the country into an impasse where a potential bankruptcy becomes far from improbable. Despite all this and as detailed at the outset, the President continues to criticize partners willing to engage with him on financial support programs, resistant as he is to the economic and fiscal restructuring demands that such partners make their support conditional upon.
Set at the highest level of abstraction, Saied’s gamble is that Tunisia’s traditional international lenders will, with time, prefer to remain engaged and therefore agree to lower the constraints and conditions typically attached to financial assistance. Recent squabbles with the EU also suggest that the President wants to increase, not decrease, the size of his credit line. In the context of intense financial pressures, rising external financing, and exclusion from international capital markets, the President and his governors alike realize they need more aid—and an exemption from requirements forcing them to afflict pain on a population already struggling with inflation, unemployment, and low economic activity and rising food insecurity.
There are signs the bet could improbably pay off. The IMF maintained relatively normal relations with Tunisia across 2023, despite Saied’s many public attacks and the strong words he spoke in refusing to sign the staff agreement negotiated in December 2022 (for a $1.9 billion EFF). Comments from Director the IMF MENA and Central Asia department Jihad Azour13 also suggest the Fund is softening up when it comes to the clauses of a new lending arrangement. Specifically, Azour’s remarks reveal an openness to extended time frames for decreasing subsidies, support for stronger safety nets for the poorest segments of the population, and the prioritization of energy subsidy reform above food subsidy reform.
As for the EU, despite the humiliation suffered from Saied’s dismissive return of the €60 million, Brussels’ ambassador in Tunis issued a conciliatory statement expressing that the President’s act hadn’t affected the larger strategic agreement, and that the EU would review the situation to clear up any potential misunderstandings. It as yet unclear if this meant a renegotiation of the financial package was on the table, though the Ambassador did add that he thought the tranche received by Tunisia this summer was “small” and not at the level of the country’s needs.
The December postponement of the IMF team’s visit to Tunisia establishes, of course, that the Fund’s newfound flexibility is not as yet to Saied’s liking. Nevertheless, the fact that all the official creditors are still taking Tunis’ calls could persuade the President to remain steadfast in his obstinance. Giving him further encouragement in that regard has been the relief recently extended by Algeria and partners in the Gulf. The former appears to have offered up $300 million on concessionary terms. Saudi Arabia, for its part, contributed $500 million this autumn, adding a second boost to an international reserves’ stock already steadied by way of weak import demand.
Saying “No” without a “Yes we can” strategy is not possible.
Though acts of Arab solidarity and the apparent amenability of institutional creditors seem to lend validity to Saied’s hardline approach, it would be a grave mistake for the Tunisian President to push this game of chicken too far. Saudi Arabia and other Gulf partners have publicly affirmed that they will extend no more credit without Tunisia signing off on an IMF deal. The same goes for China. This being the case, there is no external financing road forward outside the one which begins with the grand Bretton Woods institution. And external financing is unavoidably needed. As recent reports from credit rating agencies detail, the financial situation of Tunisia is unsustainable, and Loi de Finance for 2024, as currently written, is but an exercise in magical thinking.14 Time is not on Tunisia’s side. In this context, Saied’s bid for higher levels of financial support and lesser loan conditionalities could represent the start of a viable way out. The politics of it are undoubtedly easier to sell: If he managed to pull the feat off, Saied could plausibly sell new borrowing arrangements with the IMF and EU as being in defense of Tunisia’s “sovereignty” and “dignity” rather than as instruments of dependency. A degree of popular patience could be expected to follow.
At the end of the day, however, whether Saied is able to save some key areas of social spending in the next round of loans or not, there will be no avoiding of deep reform. Put plainly, the economy cannot survive without major changes to its organization. Surely, the implementation of these changes could wind up jeopardizing political stability, or even Saied’s grip on power. Regardless, the President has no choice. Absent earnest reform, deficits will continue to accumulate and though default may be staved off, the fundamental bankruptcy of the economy will deepen.
Reality being what it is, it is imperative that the Tunisian President move from defensiveness and holding the line to a more constructive vision: He must move forward with a bold restructuring plan of his own design. And though any reform plan must address the three main sources of Tunisia’s deficits—(i) Subsidies, particularly those related to energy; (ii) SOEs; and (iii) public sector employment—a successful one will do so in a manner that is not pure negation. In the example of energy subsidies, for instance, the program going forward cannot simply be lifting state supports and leaving firms and households to fend for themselves thereafter. Rather, subsidies reform must be part of a broader energy transition plan—one that is socially just, ecologically sustainable, and developmentally additive.15 To be politically possible, such a reform initiative would, of course, require a far longer time frame than the typical 3-to-5-years of an IMF EFF allows. The financing mobilized by Tunisia’s creditors, moreover, would need to be qualitatively larger than the amounts being discussed today.
Kaïs Saied might be right in thinking EU and IMF proposals are not presently of a scale commensurate to Tunisia’s challenges. Nevertheless, he needs to show that he himself is capable of operating at the appropriate scale, too. He needs to become a positive force, engaging all potential partners with a transition plan for taking Tunisia away from a low growth, debt-financed, and consumption dependent economy to a more sustainable alternative. In asking Tunisians to buy into the national effort he keeps alluding to, he needs to put forth a model which offers them credible opportunities for building a better tomorrow.16
With every day that passes, labor market conditions continue to turn for the worst. Unemployment rates jumped to 16% in 2023, a figure comparable to what was witnessed during the peak of SARS-CoV-2 pandemic. Women have borne the brunt of this, with their unemployment rate climbing ten percent during the year, jumping from 20 to 22%.17 The time to act is now.
Notes
- Agence Tunis Afrique Presse, “Report de la visite d’une delegation du FMI en TUnisie (sources concordantes” (December 5, 2023). ↩︎
- Bouazza ben Bouazza and Sam Metz, “Tunisia rejects European funds and says they fall short of a deal for migration and financial aid”, Associated Press (October 3, 2023). ↩︎
- Massimiliano Cali, Mohamed Habib Zitouna et al, “Tunisia Economic Monitor: Migration Amid a Challenging Economic Context”, Report: World Bank (Fall 2023). ↩︎
- Editorial Staff, “Debt crunch looms for weaker economies with a wall of bond maturities ahead”, Today Online (April 11, 2023). ↩︎
- FitchRatings, “Tunisia—Rating Action Report”, Report (March 29, 2023). ↩︎
- See: Ministry of Finance, “Taqrir hawul mashru’a mizaniyya al-dawla l’senna 2024” (October 2023). ↩︎
- Banque Centrale de Tunisie, “Statistiques Financieres”, Report no.224 (October 2023). ↩︎
- See: Aswath Damodaran, “Country Default Spreads and Risk Premiums”, Database (last updated July 2023). ↩︎
- See: Banque Centrale de Tunisie (October 2023). ↩︎
- Massimiliano Cali, Mohamed Habib Zitouna et al (Fall 2023). ↩︎
- Ghaya ben Mbarek, “Tunisia introduces drinking water rationing as drought continues”, The National (March 31, 2023). ↩︎
- Oluremi Akin Olugbade et al. “State-Owned Enterprises in Middle East, North Africa, and Central Asia: Size, Costs, and Challenges.” Imfsg, International Monetary Fund (September 20, 2021) ↩︎
- Jihad Azour, “Statement at IMF April 2023 Middle East and Central Asia Department Press Briefing” (April 13, 2023). ↩︎
- FitchRatings, “Rating Action Commentary”, Report (December 8, 2023). ↩︎
- For what such a broader energy plan could look like, see: Imen Louati, “Tunisia: What is the energy transition about”, Report: Rosa Luxemburg Foundation (August 2022). ↩︎
- Tarek Amara, “Tunisia President rejects IMF ‘diktats’, casting doubt on bailout”, Reuters (April 6, 2023). ↩︎
- INS – Chomage. November 2023. https://www.ins.tn/statistiques/153 ↩︎