More Tunisians could feel economic pinch next year

October 15, 2017
Needed reforms. People walk out of the Central Bank in Tunis. (Reuters)

Tunis - A growing number of Tu­nisians are likely to face financial hardship next year as the government wrestles to keep its budg­et afloat by cutting expenditure and raising taxes.

Under pressure from internation­al lenders to curb soaring subsidies and reduce public sector spending, Tunis is planning to move ahead with higher taxes to finance next year’s budget rather than imple­ment austerity measures.

The government has yet to unveil the draft budget for 2018 but details of the plan leaked to local media indicate it is struggling to achieve higher growth rates and balance the budget.

To turn things around, Prime Min­ister Youssef Chahed’s government must reverse years of big spending policies without any fiscal plans by Islamist-led governments from 2011- 13. Those tactics resulted in high debt, growing trade, budget deficits and a bloated bureaucracy. Spend­ing on subsidies quadrupled since 2010.

These factors left the government with little choice but to increase taxes, including on segments of the population exempted from them in previous budgets. This will include higher VAT and insurance rates and could cause the overall level of in­flation to rise across the board, al­though the Prime Minister insists his government’s ultimate goal will be to ensure “social justice” through taxation.

Despite the creation of a special police service to prevent tax eva­sion, the authorities could face a tough time imposing their will on professions such as lawyers, phar­macists and doctors, traditionally reluctant to accept strict control of their revenues.

Economic growth inched up 0.1% for the January-June period this year compared to the same period last year, data from the govern­ment-run National Institute of Sta­tistics indicated. Experts say Tuni­sia is unlikely to hit its target growth rate of 2.5% for the year.

The trade deficit grew by 22%, reaching $4.05 billion, for the first eight months of the year compared to the January-September period in 2016. The deficit grew to 6.6% of GDP for the same period. It was at 5.8% for the first eight months of 2016, official figures indicate.

“The current account deficit is likely to hit 10% for the year,” said Ezzeddine Saidane, a financial ex­pert. “That would be a record for Tunisia since its independence six decades ago. The highest normal deficit in the world is 3%.”

Despite foreign loans and aid ef­forts, the country’s foreign cur­rency reserves shrunk to $4.7 billion as of August 15, enough to cover 90 days of imports, compared with 118 days registered in the same period a year earlier, the Central Bank said.

Experts consider foreign curren­cy reserves equal to only 90 days of imports as a warning of possible economic problems.

There are a few reasons for op­timism, however, including rising phosphate production and what is expected to be a good olive har­vest.

Junior Energy and Mining Minis­ter Hachem Hmidi said phosphate output had risen 34% this year. He said he expected the commodity’s total output to hit 5 million tonnes in 2017 and 7 million tonnes in 2018.

When phosphate production is on target, it exceeds 8 million tonnes annually, making Tunisia the world’s fifth largest producer. However, so­cial unrest and work stoppages in the country’s south-western min­ing region caused major setbacks in the industry. Officials estimate that a decline in phosphate production caused Tunisia to lose $3.4 billion in recent years.

“For more than five years since 2011 we only had six months of normal conditions for production,” said Sadok Ben Othmane, the head of mining at the Ministry of Indus­try, Energy and Mines. “Our highest level of production was 40% of the output that we reached in 2010.”

Tunisia deployed troops in April to protect key industrial facilities after protesters disrupted oil and phosphate production and ship­ping.

The government’s tax plans and other measures to keep the coun­try’s budget afloat are likely to fuel unrest, mainly among young Tuni­sians, experts said.

Frustrated by the lack of economic opportunity, young Tunisians are increasingly looking abroad. Many have set sail on rickety boats to Italy, hoping that Europe can offer them a better life.

“The taxation measures in the draft budget for next year increased tax rates almost for everyone in Tu­nisia and that will add more finan­cial hardships for the middle class and the poor, especially the value-added tax and other taxes related to consumer goods,” wrote Fadhel Dabbashi in an opinion piece in al Achourouk daily.

“Targeting poor and the middle class with such taxes will not go without serious social repercus­sions including more dropouts from schools, as parents will cut spend­ing in the education of their chil­dren, more unemployment, crime and more problems within families alongside the spread of corruption and other social ills.”

Main trade unions the Tunisian Union of Industry, Trade and Hand­icrafts (UTICA) and Connect voiced concern about plans to increase taxes and urged the government to sell off 20% of stakes in state-owned firms to finance the budget.

The powerful Tunisian General Labour Union (UGTT) came out against the proposal and suggested a tax hike on wealthy businesspeo­ple.

The International Monetary Fund (IMF) has linked payment of a $2.8 billion loan over four years to Tunisia to reforms, including trim­ming the public sector and cutting losses of most state-owned compa­nies.

An IMF team visited Tunis to check on the pace of reforms. Its leader, Bjorn Rother, said: “The IMF and the government agree on the necessity of jobs creation and curbing public debt are at the core of efforts to economic reforms. A good management of the payroll, which is one of the highest wages bill in the world, and absorbing half of the public spending is also indispensable.”