Tunisia raises interest rates again to stave off inflation

The Tunisian Central Bank raised the key interest rate 100 basis points to 7.75% to tame inflation in accordance with economic measures backed by the International Monetary Fund.
Thursday 21/02/2019
Outside view of the Central Bank in Tunis. (Reuters)
Outside view of the Central Bank in Tunis. (Reuters)

TUNIS - The Central Bank of Tunisia increased interest rates for the third time in a year to combat inflation while what is predicted to be the country’s worst growth decade in 50 years closes.

The Central Bank raised the key interest rate 100 basis points to 7.75% February 19 to address inflation in accordance with measures backed by the International Monetary Fund (IMF).

The move came after the government-run National Institute of Statistics released data on Tunisia’s economics performance for 2018, which showed that the country posted meagre growth, low productivity, high inflation rates and a weakening currency.

In May, the Central Bank tightened its key interest rate 100 basis points to 6.75% in a bid to check inflation, at the time the second hike in three months.

The increase was opposed by the Tunisian General Labour Union (UGTT) and the Tunisian Union of Industry, Trade and Handicrafts, which said it would hurt investment and increase hardships on the poor. However, Tunisian experts said the decision was necessary to fight inflation and secure IMF funding 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.

UGTT staged a nationwide strike January 17, the first such work stoppage in 40 years, to protest the government’s refusal to raise the salaries of public service employees. It called off a later planned strike after the government agreed to wage increases.

Economists estimated the move would cost the country $327 million and warned that such salary hikes would hurt the poor because they would fan inflation and begin a cycle of high inflation and more pay hikes.

“Regarding inflation, the Central Bank’s board of directors have noted that the monetary policy measures taken since 2016 had contributed to a relative deceleration of the inflation pace at 7.1% in January 2019 versus an average inflation rate of 7.3% for 2017,” the bank said.

“However, the board of directors has expressed its serious concern about the prospects of inflation pressures, namely the underlying inflation.”

“Underlying inflation” is the main gauge used by a Central Bank to decide interest rate targets. It looks at general increases in prices over a certain amount of time, excluding products like energy, meat and fruit.

The National Institute of Statistics said Tunisia’s GDP grew 2.5% in 2018 versus 2% the previous year but the country missed a target of 2.9% for 2018 set by the government. It expects a GDP increase of 3.5% this year.

The institute’s data showed that most of the GDP growth over the past seven years has been in the farming sector. It expanded 9.8% for the year, while manufacturing industries, Tunisia’s former mainstay, were almost unchanged at 0.3% for 2018.

“With such a lack of growth, we cannot create enough jobs to trim unemployment rates, which remained unchanged at 15.5% for two successive quarters in 2018,” said analyst Zied Krichene. “We are far from what those who won the elections of 2014 promised, with pledges to achieve an average annual growth of 5% and cut the unemployment rate to 11%.”

Former central bank Governor Taoufik Baccar said, regardless of the level of growth in 2019 and 2020, Tunisia will record its weakest decade of growth in 50 years.

Baccar, president of Ciped think-tank, cited figures issued by the institute in warning that Tunisia could not escape economic austerity in the next decade even if it were to get out of its impasse.

“Those who are gearing up now to win, return to power or keep power must remember that the lifeline and the dignified salvation for Tunisia is an austerity policy,” he said. “The next decade will subject us all, our children in particular, to the consequences of the ‘madness and extravagance’ of this decade.”