Tunisia secures IMF loan tranche but debt concerns rise

Tunisia plans to borrow $3.2 billion to finance its deficit this year, increasing the total debt to $28.4 billion for 2019, official figures show.
Sunday 23/06/2019
A Tunisian public sector worker holds a poster criticising IMF Managing Director Christine Lagarde in Tunis, last November.(AP)
Next generations’ problem. A Tunisian public sector worker holds a poster criticising IMF Managing Director Christine Lagarde in Tunis, last November.(AP)

TUNIS - The International Monetary Fund approved a $245 million loan instalment for Tunisia and encouraged the country to tap into capital markets abroad for more money but local experts warned against implications of the government’s soaring debt problem.

Tunis plans to borrow $3.2 billion to finance its deficit this year. Of that, $2.67 billion is projected to come from abroad, increasing the country’s total debt to $28.4 billion for 2019, up from $26 billion in 2018, official figures show.

The International Monetary Fund (IMF), whose recent loan tranche is part of a $2.9 billion package to Tunisia tied to reform measures, said that, after eight years of stagnation, risks to the country’s economy remain high.

The instalment had been delayed while Tunisia’s government struggled to balance demands from a powerful trade union with IMF conditions, which include unpopular spending cuts and price hikes, including for petroleum products.

Other difficult reform measures include increasing taxes, lowering energy subsidies and reducing production costs, which the IMF insists are crucial to turning around the economy.

“There is no room for relaxing the effort on taxes or current expenditure after the recent increase in civil service wages,” David Lipton, IMF first deputy managing director and acting chairman, said in a statement.

Since the ouster of President Zine el-Abidine Ben Ali in 2011, when GDP growth was 5% per year, nine successive governments failed to turn the country’s economy around. Heading into an election season, many Tunisians are disillusioned with a political class that is often mired in infighting while social and economic concerns go unsolved.

Public service workers grew so frustrated with their economic position that earlier this year, they staged the first national walkout in four decades to press for wage increases. The government agreed to modest salary increases for public sector workers, effectively pushing back the IMF’s loan instalment for months.

At the same time, authorities introduced cuts on energy subsidies, raised the retirement age and increased interest rates to help the dire state of public finance.

Taoufik Rajhi, a top economic adviser to Tunisian Prime Minister Youssef Chahed, said the IMF’s loan dispersal amounted to a “vote of confidence.”

To ensure long-term economic recovery, the IMF has pressed Tunisia to have greater exchange-rate flexibility to help boost international reserves but a weakened dinar could fan inflation.

“Monetary policy focuses on curbing inflation and continued exchange rate flexibility will help to improve the current account deficit and international reserves,” the IMF said.

The Tunisian dinar has lost almost 40% of its value against the dollar since mid-2016, experts said. This has improved slightly this year amid expectations of a record number of tourists and good cereals harvest.

The IMF stressed that reducing the country’s “external imbalances” depends on reaching a “market-determined exchange rate.”

“Competitive foreign currency auctions together with reduced Central Bank interventions and effective communication to the market remain critical to improve the current account and reserves cover,” Lipton’s statement said.

Still, government experts and independent economists said they fear further tweaking the exchange rate could decrease the value of the dinar and drive up debt.

Experts at the non-government Tunisian Observatory of the Economy said that, since 2016, the dinar’s depreciation has been the main cause of the debt increase. They argued that the decline of the dinar contributed to the country’s increasing foreign debt.

“The authorities’ efforts must focus five times more on stabilising the value of the dinar rather than in austerity on the budget, which contributes less to increasing the debt,” they said in an analysis.

Other economists said the debt was funding unnecessary expenses and not being used to finance productive investment.

A high rate of consumption on top of increased debt pushed the country to bring in more imports and widen the trade deficit, further driving down the value of the dinar, they point out.

“The money did not flow into the economic processes of production to yield growth and new wealth. It went to lubricate the government’s bureaucracy and the apparatus and to absorb social anger,” said economist Ezzeddine Ben Hamida.

Ben Hamida said that in 2018, debt service payment jumped 57% to $2.7 billion, the same amount budgeted for public investment.

“How could we see the light at the end of the tunnel of the economic crisis with such a situation?” he asked.

In a poll of leaders of 264 Tunisian companies, which together employ some 151,000 workers and have a combined $10.6 billion turnaround, 51% of respondents said they expected a worsening business climate and deteriorating economic indicators this year.

The poll, conducted by consultancy firm Ernest & Young, said that 35% of the leaders said they planned to invest more in 2019, compared to 48% last year; 58% of businessmen polled said they felt their companies’ existence would be at risk during the 2019-20 period.