Tunisia’s foreign currency reserves drop to record lows

The Central Bank said reserves stood at the equivalent of 70 days of imports -- the lowest level in more than 25 years.
Wednesday 15/08/2018
A file picture shows Tunisia's central bank governor Marouane El Abassi (R) arriving at news conference in Tunis. (Reuters)
Falling rates. A file picture shows Tunisia's central bank governor Marouane El Abassi (R) arriving at news conference in Tunis. (Reuters)

TUNIS - Tunisia’s foreign currency reserves plunged to their lowest level in more than 25 years, even as the country secured loans and aid pledges from international lenders, increased farming exports and entered a promising tourism season.

The contrast raised alarms about the country’s economic malaise, underscored by a weakened currency and higher import bills for oil and wheat.

Tunisia’s Central Bank said foreign currency reserves on August 7 stood at 10.8 billion dinars ($4 billion), the equivalent of 70 days of imports, the lowest level in more than 25 years.

Financial experts said foreign currency reserves dropping below the equivalent of three months of imports was a “flashing red indicator of the country’s (poor) financial health.”

“The country is moving into a high gear towards announcing bankruptcy,” read a headline in Tunisia’s Arabic-language Al Chourouk newspaper, capturing the mood among Tunisians struggling to cope with higher costs and a sluggish economy.

Noureddine Bhiri, a member of parliament and leading figure of the Islamist Ennahda Movement, called for Central Bank of Tunisia Governor Marouane El Abassi to explain why foreign currency reserves have dropped “at a time when earnings from tourism and farming exports, namely olive oil and dates, are very significant.”

The Tunisian dinar also has continued to fall in value. The Tunisian dinar recently traded at 2.72 to the US dollar, compared to 1.44 to the dollar in December 2010.

The trend suggests that the Central Bank under Abassi has declined to prop up the dinar, despite calls from politicians, trade unions and business groups to do so.

Abassi insisted that, with declining foreign currency reserves, the country could not step in to inflate the value of the dinar “even if it wanted to” and must focus on trimming its trade deficit and bolstering economic growth.

In many circumstances, when a country’s currency falters, the central bank intervenes to strengthen it by selling foreign currencies from its stock. However, Tunisia appears unable to shield the dinar from falling, which has led to higher prices and pressure on the government to increase wages.

That trend is only likely to continue, analysts said, with the dinar expected to slip further before stabilising, if growth continues into next year, experts said.

Also concerning is the yield on the Central Bank’s $1 billion in eurobonds, due in January 2025, which has risen 142 basis points since January, reaching 7.07%. The yield represents the amount of return on an investment, such as interest or dividends received through holding a security, such as sovereign bonds.

Tunisia’s dollar debt has incurred a 4.5% loss this year, the most punitive after Argentina and Peru, the Bloomberg Barclays Emerging Markets USD Sovereign Bond Index indicates.

The growing yield means that Tunisia’s debt will hit the state budget even harder.

Tunis’s foreign currency market brokers cautioned against doling out foreign currency reserves when they approach record low levels. They pointed to commercial banks turning to the Central Bank for help in refinancing liquidity amounting to $5.9 billion to cover the hard currency needs of their clients.

Brokers said the demand for foreign currency relative to the amount of reserves available was a “worrying new situation.”

The country’s rising import bills are the main source of the country’s declining foreign currency reserves. Tunisia, the 74th largest export economy in the world, is North Africa’s most open economy, with diverse imports and exports. In 2017, Tunisian exports were worth more than $15 billion, while imports were worth $20 billion.

This year, Tunisia’s date exports increased 25% in value to $86.8, while olive oil exports increased 180% from November 2017 to April 30, 2018, the Ministry of Agriculture said.

Tunisia received new loan and aid pledges in July from European banks and financial institutions, as well as the World Bank and the International Monetary Fund, worth $6.4 billion, with $2.9 billion to be disbursed in 2018 and 2019. That means the government cannot expect much relief from those lenders to ease its hard currency pressures this year.

Increased oil prices and higher demand in North Africa for wheat imports are expected to hike up the country’s import bill.

Meanwhile, Tunisia expects its grain harvest to total 1.4 million tonnes this season, after reaping 1.6 million tonnes last season, because of drought, the Agriculture Ministry said. The average annual grain harvest in Tunisia, where output swings sharply due to cyclical drought, has been 1.7 million tonnes over the last decade.

Tunisia imports more than 600,000 tonnes of wheat, even during good harvest years.

“The European Union absorbs nearly 75% of Tunisian exports and represents about 50% of Tunisian imports, which explains the important weight of the euro in the Tunisian dinar anchor basket,” said Mohamed Ilyes Gritli, an economics professor at El Manar University in Tunis.

Gritli, who has conducted modelling research on the evolution of the dinar’s value at the university’s International Economic Integration Laboratory, predicted 1 euro would trade at “3.22409 dinars by October 2018.” The dinar traded at 1.9195 to the euro in 2010.

“This suggests that the degree of depreciation of the dinar will depend on the policy pursued by the Central Bank of Tunisia,” he added.