Tunisia

MAJOR MACRO ECONOMIC INDICATORS

(e): Estimate (f): Forecast

RISK ASSESSMENT

The Arab Spring’s “success story” at risk of democratic backsliding

Using a highly contentious reading of the 2014 Constitution, President Kaïs Saïed, elected in October 2019, suspended Parliament activity in late July 2021, dismissed the prime minister Hichem Mechichi and his government, and took the executive power. This was a response to social unrest, political stalemate, and quarrelling between president, prime minister and parliament. The Assembly of the Representatives of the People was deeply fragmented, with an opposition between the secularists and clerics (represented by Ennahdha, the conservative Islamist party, which holds 52 seats out of 217). In September 2021, Saïed suspended most of the constitution and declared that he would rule by decree, then, appointed a cabinet of technocrats in October. Although it is expected that Parliament will eventually be allowed to reconvene, M. Saïed will likely try to undermine its power. Even if he cannot amend the Constitution without a two-third parliamentary majoritythe president is planning a constitutional referendum in July 2022Furthermore, he will seek to capitalize his strong popularity by triggering snap elections in December 2022. The political and constitutional standoff will likely delay or water down structural reforms to the costly debt-laden SOEs. The business climate is further hampered by the  high frequency of strikes. The government will be under increasing pressure from the U.S. and the EU to re-establish constitutional order, and reaching an agreement with the IMF will be crucial for avoiding a full-blown financial crisis.

Between the pandemic and the political crisis, the scope for recovery is limited

The health and political crises, combined with social unrest, continue to affect the economy. While the country has started to recover, convergence to pre-pandemic output will be heavily  constrained by a slow vaccine rollout, the ongoing political crisis and the underlying threat of social unrest. These uncertainties, alongside still high unemployment (expected at 16% in 2022), are expected to undermine consumer confidence, weighing on the contribution of household consumption (75% of GDP).  The unfavourable effect of uncertainty is even stronger for investment, as businesses will likely adopt a “wait and see” attitude until the political situation is resolved and a deal with the IMF is reached.  Public investment will be constrained by the need to keep fiscal spending under control. The fragile banking sector will not be able to support the real economy in the event of an adverse shock, which poses a further downside risk to the investment outlook. The hard-hit services sector (50% of GDP), led by tourism, will rebound in tandem with the vaccination campaign. Still, tourist activity is not set to recover to pre-pandemic levels before 2024. The manufacturing industry (16% of GDP) is relatively well-diversified (hydrocarbons, chemicals, phosphates, basic electronics, automobile and aeronautical parts) and should benefit from recovering external demand, particularly from Europe. Olive oil producers (one of the rare sectors not to have suffered from the crisis) benefitted from the commodity price boom and should continue to prosper. Despite a rising energy import bill, higher exports and still subdued imports due to weak domestic demand will lead to a smaller negative contribution of net exports.

Without IMF support, a sudden stop crisis cannot be ruled out

Tunisia received assistance support from the EU in mid-2021 (EUR 300 million) and the African Development Bank (EUR 60 million) for economic recovery and social integration. This partly compensated the amortization of maturing loans and the pressure on foreign exchange reserves, which still stand at around 4 months of imports. However, the ongoing political crisis is putting strain on relationships with key foreign backers. Chief among these is the IMF: without a new extended facility, short-term financing needs are unlikely to be covered, posing a serious threat of restructuring or default. Nonetheless, a deal can be reached if the government makes the necessary fiscal commitments. Although still high, the fiscal deficit is expected to narrow as revenues pick up (modestly) and capital and current expenditures decline. Although the foreign currency share of debt is high (56% in Euro), around 70% of it is owed to multilateral and bilateral creditors. Moreover, the debt ratio will be vulnerable to currency depreciation. The external debt (over 90% of GDP) is expected to remain high and the majority of it (80%) will continue to be public or publicly-guaranteed debt. The dinar has remained stable in recent years, but failure to ensure debt sustainability could trigger capital flight and a currency crisis.

 
While the modest recovery in tourism will help improve the services balance, this will be more than compensated by a deterioration in the goods balance due to rising import prices (energy in particular). Hence, and in spite of positive contributions from the income and current transfers accounts, the current account deficit will widen. Failure to resolve the political crisis will result in lower FDI, adding further pressure on the dinar and on currency reserves.

Last updated: February 2022