Several nations, including Egypt and Tunisia in the Middle East, are apparently in danger of declaring bankruptcy or failing to meet their debt obligations.
Tunisia’s economy is dealing with long-term issues, starting with state debt, which shot up to more than 80% of Tunisia’s national revenue or GDP in 2010, just before the Arab Spring, from less than 40%.
Due to global inflation, the Ukraine war, and rising import prices over the past 18 months, the nation’s current account deficit (balance of trade) has reached 15% of GDP. Imported products like basic commodities and energy sources have seen dramatic price increases.
In combination, these events caused the country’s inflation to reach a record high of over 10% from January through April of 2023.
Given the economic challenges Tunisia is experiencing, it is important to consider whether there is a way to avoid defaulting.
A large portion of the globe observed the Tunisian people leading the Arab Spring revolutions in 2011 with enormous enthusiasm. However, COVID-19’s effects later made the economic recession that followed the nation’s political instability worse.
Weak investment caused economic growth to slow down, which in turn reduced job growth. The government employed populist policies, such as raising fuel subsidies and increasing the price of essential products, in response to these difficulties.
Governments used to create jobs in the public sector without a genuine strategy to correct the economic inefficiencies due to pressure from the powerful Tunisian Labor Union.
The nation seemed to be headed for economic disaster as a result of this clumsy approach to managing the economy, along with political disputes that have only gotten worse since 2021, when President Kais Saied handed himself exceptional powers.
It’s Getting Messier
Tunisia has a negative trade balance, which implies that its imports are greater than its exports. This imbalance has doubled in 2022 to around USD 1.9 billion, matching the amount of the IMF bailout plan that the country’s President rejected as global inflation rates rose.
Saied stated in his speech on April 5 that he “would not hear diktats” from the IMF. Although his technocratic staff stated that there is no other option than to move forward with the IMF loan arrangement, his refusal to reduce commodities’ subsidies as well as the public sector payroll bill is a major factor in his rejection of the idea.
While government representatives claim that Tunisians must “rely on themselves,” this admirable goal is regrettably unachievable in the near term. They might consider possibilities like assistance from Algeria or the African Export-Import Bank (Afreximbank), but even these choices wouldn’t completely resolve Tunisia’s financial issues.
It is important to emphasize that the IMF loan is seen as a sign that more financial support for Tunisia’s economy from the European Union and Gulf Arab states is now acceptable.
In reality, the current version of the IMF agreement pushes the international community to provide Tunisia with broader financial help, which will be critical in 2023–2024, according to Fitch, the rating agency that downgraded Tunisia to CCC, which is one step below default.
A path ahead conclusion, secondary causes, Tunisia’s large public salary bill, and generous subsidies have contributed to a sizable general budget deficit. The country has a sizable balance of trade deficit as a result of its exports outpacing imports.
The Central Bank of Tunisia is currently depleting its foreign exchange reserves, which may only be sufficient for 90 days given the steep decline in value to USD 7.8 billion.
The Tunisian government has said in its financing plan that it needs over USD 5 billion from outside sources for the years 2023–2024 to close the trade deficit, increase the reserve at the central bank, and pay for the import of fuel and food.
The proposal is also expected to fund USD 1.5 billion in instalment payments to the European Union on a loan with a 2023–2024 maturity date. To address budgetary deficits, it also advocates for additional local financing in Tunisian dinars (TND).
There is no other option except to agree with the IMF shortly. This agreement will open the door for a global bailout, to which the EU and the Gulf nations are also expected to contribute. The Tunisian government must finally accept that lenders often take the IMF’s lead and approve whatever the organization endorses. The GCC nations applied the same standard to Egypt as well.
Long-term economic recovery will require several actions, including the battle against corruption and the restoration and advancement of democracy and transparency.
The rentier state’s management of the economy must terminate because it was unable to function in Tunisia due to its lack of resources. This includes reducing the public wage bill while still ensuring that the help reaches the deserving and vulnerable classes, as well as correcting the inequities in the government’s system of subsidies for goods and fuels.
Further steps to lower the balance of payments deficit include revising investment legislation, eliminating red tape, enhancing security, and making changes to the tourism industry, which accounts for 7% of the economy.
To rectify the balance of payments deficit and, as a result, build foreign currency reserves in the central bank safes, the government must also encourage the private sector’s participation in agricultural and industrial development.