Tunisian economy improves for first time since 2014, but bold challenges remain

The Tunisian economy has showed signs of recovery in the first quarter of 2018, with the highest growth since 2014 supported by agriculture and exports. Besides due to the more flexible exchange rates, the current account deficit has also improved to some extent. However, at the same time, risks to macroeconomic stability, especially inflation, have increased and require a decisive response, complemented with measures to protect the poor.

Recently an International Monetary Fund (IMF) staff team, led by Björn Rother, visited Tunisia (from May 17–30) to discuss the authorities’ policy plans under the Third Review of Tunisia’s economic reform program supported by a four-year IMF Extended Fund Facility (EFF) arrangement.

Committed to reforms

“The Tunisian authorities have expressed firm commitment to act swiftly on urgent economic reforms to pave the way for the consideration of the Third Review by the IMF’s Executive Board, tentatively scheduled for early July. Completion of the review would make available about $257 million, bringing total disbursements under the EFF to about $1.2 billion,” said a recent statement from IMF.

“The Tunisian economy showed signs of recovery in the first quarter of this year. Economic growth at 2.5 percent (year-on-year) was the highest since 2014, based on strong agricultural production and exports. The current account deficit improved somewhat, helped by a more flexible exchange rate. Inflows of foreign direct investment have also picked-up, and the new one-stop shop for investors ‘Tunisia Investment Authority’ will further improve the business climate. Planned reforms to reinforce governance and improve access to finance will help the recovery to create more jobs in the private sector,” it added.

After the IMF staff’s visit, the team members have expressed their views and based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF’s Executive Board for discussion and decision.

Risks ahead

Nevertheless, risks to macroeconomic stability have become more pronounced in Tunisia. Inflation reached 7.7 percent (year-on-year) in April, the highest level since 1991. Monetary and credit aggregates continue to grow rapidly and will put additional upward pressure on prices in the months ahead. The IMF staff team also observed that the foreign exchange reserve coverage of imports has declined further.

In addition, Tunisia’s external environment has become less favorable in recent months due to the increase in international oil prices and greater risk aversion in international financial markets.

Needs decisive action

“Decisive action is necessary this year to fight inflation, reduce the fiscal deficit, and protect the poor — prerequisites for creating more economic opportunity for Tunisians and shielding the young from an excessive debt burden in the future. The IMF team agrees with the central bank that more tightening of monetary conditions is necessary to reduce the gap between interest rates and inflation,” stated the IMF statement.

“On the budget, three priorities stand out in the near term: first, pressing ahead with efforts to reduce energy subsidies that disproportionately favor the better-off; second, containing the public-sector wage bill, which is among the highest in the world as a share of GDP; and third, adopting the pension reform bill to improve the financial viability of social security. Increased transfers to the most vulnerable families to shield them from the impact of higher prices will accompany the reforms efforts.”

During its visit, the IMF team also met Tunisian Ministers of Finance, Investment, Major Reforms and Central Bank Governor. It also had discussions with the representatives of Union Générale Tunisienne du Travail (UGTT), Union Tunisienne de l’Industrie, du Commerce et de l’Artisanat (UTICA), and civil society.