Tunisia, beset by inflation, hikes interest rate again

Tunisia’s inflation rate soared to 7.7% year-on-year in May, the highest level in two decades.
Monday 25/06/2018
Outside view of of the Central Bank in Tunis. (Reuters)
Tough times. Outside view of of the Central Bank in Tunis. (Reuters)

TUNIS - The Central Bank of Tunisia raised its landmark interest rate for the second time this year, prompting criticism from the country’s main business group and trade union.

The Central Bank raised the key interest rate 100 basis points to 6.75% to control inflation and move forward with an International Monetary Fund (IMF)-backed reform programme.

The move was opposed by the Tunisian General Labour Union (UGTT) and the Tunisian Confederation of Industry, Trade and Handicrafts (UTICA), which said it would hurt investment and increase hardship for the poor. However, many economists backed the decision, saying it was needed to stem inflation and secure IMF funding necessary to cover the national budget and trim deficits.

Tunisia reached a $2.8 billion loan deal with the IMF last year but agreed-upon reforms have failed to take shape. As in Jordan, Tunisia has faced public outcry when attempting to implement IMF-backed measures.

Tensions escalated in January after the implementation of the government’s 2018 budget, which included tax hikes that led to the cost of basic goods to rise. Protesters took to the streets throughout the country, including in relatively prosperous coastal towns.

Tunisia’s governing coalition has since been paralysed by political infighting, with the UGTT joining efforts with the main ruling Nidaa Tounes party’s leadership against Prime Minister Youssef Chahed.

That leaves the Central Bank to push for IMF-linked reforms alone by using its monetary policy tools.

“The Central Bank of Tunisia is determined to conduct a proactive monetary policy to curb inflation that has experienced a strong acceleration in 2018,” the Central Bank said in explaining its rate rise.

Tunisia’s inflation rate soared to 7.7% year-on-year in May, the highest level in two decades. The Central Bank said it expected that number to grow to 8% by the end of the year and warned that unchecked inflation would stunt growth and drive up the cost of living.

The UGTT said in a statement that it rejected “the central bank’s solution, which is the easy one.” It called on the government to “fight against the informal economy, smuggling and tax evasion.”

UTICA said that raising the interest rate would “increase the difficulties enterprises are facing including higher tax and customs duties as well as the falling value of the dinar and proliferation of informal economy and smuggling.”

Experts warned that the Central Bank’s policies, if not accompanied by bold government reforms, would make the country’s economic situation worse.

“The dizzying rise of the interest rate by the Central Bank risks causing strong economic contraction by stifling investment without curbing the inflation,” said former minister Slim Tlatli.

Economist Moez Joudi said the situation was becoming “almost impossible to bear for most Tunisians and economic operators.”

“All this is done to satisfy the conditions and demands of the lenders to disburse loan instalment to finance (the) deficit and cover bloated public spending instead of curing the core of the problem, which is stepping up the required reforms,” he added.

Tunisian experts and leading business groups agreed that painful reforms are needed to remedy the government’s high budget and current account deficits. They said state-owned companies that fail to operate at a profit should be privatised.

However, bureaucrats and others with interests that benefit from the status quo oppose such reforms and back protests against them.

Government instability, which has led to the progression of seven different cabinets in seven years, has hurt the pace of the reform. The stability of Tunisia’s government, headed by Chahed, is uncertain, with many analysts expecting a change.

In the meantime, politicians are eager to see the IMF release a $250 million loan instalment to Tunisia in July, needed to cover public salaries and trim the deficit. The IMF said in a statement that “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 said there should be three budgetary priorities: pressing ahead with efforts to reduce energy subsidies, containing the public-sector wages and adopting the pension reform bill to improve the financial viability of social security.

A change of prime minister would make it more difficult for Tunisia to face such demands.

“Three months of latency as the new prime minister studies the dossiers to understand the situation,” said Nizar Bahloul, editor of Business News magazine. “Then three more months to tackle the decisions, which are identical to the ones taken by his predecessor.

“During all this time we will ask our partners to be patient with our stupid stubbornness before elections result in a new government and we do it all again.”