Analysis - Economic Trends

The Expected Reform

Is the Tunisian Economy Affected by the Decisions of President Saied?
Thursday، August 05، 2021
The Expected Reform

The economic situation in Tunisia is going through a critical stage following the extraordinary decisions of the Tunisian President, Kais Saied, invoking Chapter 80 of the Tunisian Constitution, on July 25, 2021. These decisions included the dismissal of the government headed by Hisham Al-Mashishi, the freezing of Parliament for a month and the lifting of immunity for its members, in addition to other measures. Some analysts have described these decisions as being abrupt, and may intensify the country's economic uncertainty. 


Nevertheless, these decisions gained tangible public support, in addition to the support of the influential parties in the Tunisian political arena. This may contribute to reaching political consensus regarding the adoption of an urgent economic program that addresses the economic challenges, which Tunisia has been experiencing for over 10 years. 


Economic challenges

The economic situation in Tunisia has deteriorated sharply over the past ten years, due to the political shifts that the country has undergone since late 2010, in addition to the occasional turbulent security situation and the prolonged public and labor protests. These conditions posed several economic challenges, including a slow economic growth, high unemployment and poverty rates, in addition to the growing government fiscal deficit. 


The outbreak of COVID-19 worsened the economic conditions in Tunisia. The effects of the pandemic negatively rebounded on the entire economic activity, particularly the tourism and travel sectors, which represent the main source of foreign exchange earnings in Tunisia. This led to a contraction of the economy by 8.8 per cent in 2020, according to World Bank estimates. With the increase in local infections with COVID-19, the weak performance of the Tunisian economy continues, recording a decline of about 3 per cent during the first quarter of 2021 compared to the same period last year.

  

In addition to the deteriorating political situation in Tunisia, one of the repercussions of the COVID-19 outbreak was the decline in the sources of foreign exchange earnings. In addition to the drop of tourist revenues last year, foreign investment flows decreased, exports declined, and Tunisia's trade balance recorded a deficit of USD 2.2 billion in 2020, which is about 5.5 per cent of GDP last year. 


Regarding the public finance aspect, the Tunisian budget has witnessed a continuous deficit over the past years, which forced the government to raise the external debt ceiling. Foreign debts increased to around USD 40.3 billion, which represents about 110 per cent of GDP in 2020. This is a dangerous indicator, particularly since the country's reserves were estimated to be USD 8.9 billion in the same year, which could only meet 22 per cent of the external debt.  


Based on this data, it is now evident that Tunisia's economy is more fragile than ever, considering that this year Tunisia must pay over USD 4.5 billion to service the debt. Thus, it needs additional USD 6 Billion to finance and gap the budget deficit. These developments prompted the Fitch credit rating agency to downgrade Tunisia's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'B-’ with a negative view of the Tunisian economy.


Betting over economic reform

The decisions of President Saied mark a turning point in the course of the political and economic situation in Tunisia. Many Tunisians, who are in support of the recent decisions, are waiting for President Saied to address the pressing economic issues, including the low standard of living, high inflation, in addition to the devaluation of the local currency. These are problems that successive governments since 2010, including the Al-Mashishi government, have failed to mitigate.


Accordingly, many views believe that the Tunisian President, with the support of the political forces, must present an urgent economic and financial reform program that sets reviving the Tunisian economy and raising the standard of living, as a priority. Involving all influential political parties and trade unions, led by the General Labour Union (UGTT) in setting up the economic reform program, may be a key element in its success. It should be noted that the UGTT had previously expressed reservations about the Tunisian government's plan to reduce the public wage bill. 


Successive Tunisian governments over the past years have introduced limited measures to control public finances, including raising fuel or electricity prices. Yet, they have not succeeded in addressing the country's wide fiscal imbalance. The previous government, headed by Al-Mashishi, had begun negotiations with the IMF in order to obtain a loan of USD 4 billion. However, proceeding with this would have forced Tunisia to implement economic and fiscal reforms that some describe as “painful”, particularly since some of these reforms involve lifting subsidies on basic goods, and the reduction of over 15 per cent of public wages.


The issue in discussion here is not about addressing the positive aspects of Tunisia reaching an agreement with the IMF, but rather about proposing a comprehensive economic reform program that enhances Tunisia's financial and monetary stability, and that aims to improve the business environment for the benefit of the Tunisian people. Tunisia's access to international financial support will definitely be a major factor in overcoming the country's economic difficulties and enhancing international confidence in the Tunisian economy. 


Yet, some have raised concerns that the recent presidential decisions may leave an executive vacuum which may prolong, making support by international institutions a difficult issue. In this respect, Fitch Agency recently indicated that the Tunisian President's decision to suspend parliament may reduce the readiness of Western partners to support Tunisia, which are simply allegations that cannot be established.


Political consensus

Many are counting on Saied’s decisions to be conducive to a political consensus regarding the priority of adopting rational economic reform program that would support the Tunisian economic stability, unlike the previous situation where political differences between the three heads (the state, the government and the parliament) intensified in a way that burdened the economy with severe problems. In that regard, the Tunisian Labor Union supported the recent presidential steps, requiring respect for the constitution, the continuation of the democratic process and the restoration of stability. 


On a global level, the IMF expressed its willingness to continue supporting Tunisia in addressing the repercussions of COVID-19 in order to reach a full recovery. This represents a testimony of confidence to move forward with further economic reforms. 


Therefore, the next Tunisian government must make the most of the current situation to present an economic program aimed at achieving financial stability, supporting inclusive growth, and providing an attractive business environment. All this is expected to be translated into providing more jobs, alleviating the living burdens of Tunisian citizens and improving public services available for them. Perhaps the first thing President Saied stressed, on July 29, 2021, regarding the economy, is the necessity of controlling prices of consumer goods, in addition to the possibility of making financial settlements with businessmen to restore the state’s financial rights of USD 4.8 billion, in a measure which may provide ample liquidity to the government amid the economic strain the country is experiencing.


In conclusion, although the recent decisions of the Tunisian President may temporarily impose a state of uncertainty, they may pave the way for shaping a political environment that supports making economic decisions in the interest of the Tunisian people, enabling them to confront their economic problems. 

Keywords: EconomyTunisia