Tunisia’s growing trade deficit raises questions over currency devaluation

Tunisia’s import bill for the first eight months of the year rose 20.4% to $13.9 billion compared to the same period last year.
Friday 14/09/2018
Tunisia's Prime Minister Youssef Chahed speaks during a national conference over 2019 budget in Tunis, Tunisia, September 14, 2018. (Reuters)
Tunisia's Prime Minister Youssef Chahed speaks during a national conference over 2019 budget in Tunis, Tunisia, September 14, 2018. (Reuters)

TUNIS - Tunisia’s trade deficit hit a 6-decade high for the first eight months of the year, raising questions about the sustainability of the government’s currency devaluation strategy.

The deficit, which exceeded the country’s net currency reserves from January-August, is likely to widen over the rest of the year, analysts warned, because Tunisia needs to import 1.6 million tonnes of grain to compensate for a lower domestic crop, adding to its soaring import bills.

The value of Tunisia’s exports rose 20.2% during the first eight months of 2018 compared to the same period last year, reaching $9.5 billion, the state-run National Institute of Statistics said.

The combined sales of olive oil and dates abroad jumped 63% to $758 million compared to last year, mainly due to strong harvests. Exports of manufacturing and textile products rose 24.6% and 18.7%, respectively, and the sales of mechanical and electrical components abroad increased 15.2%.

However, exports of phosphate and phosphate derivatives, once a key foreign currency earner, declined nearly 4% compared to the same period last year, the institute’s figures showed.

Tunisia’s import bill rose 20.4% to $13.9 billion compared to the same period last year, with all sectors registering higher levels of imports, including non-oil products, which soared 17.6%. As a result, the trade deficit widened to $4.4 billion, up from $3.6 billion last year and $3 billion in 2016, official data showed.

The deficit exceeded the country’s $3.9 billion in net foreign currency reserves, raising concerns about the country’s ability to pay for imports and reimburse its foreign debt service at $1.7 billion.

The value of the Tunisian dinar continued to drop. In 2010, the dinar traded at 1.44 to the dollar. By mid-September, it traded at 2.78 to the dollar.

The International Monetary Fund has argued that “exchange rate flexibility, supported by more competitive central bank foreign exchange auctions, is critical to help improve the current account position and rebuild (the country’s) international reserves.”

Economists said keeping up with such “flexibility” is counterproductive for Tunisia’s economy and could be “suicidal” in the long run, arguing that the country would be unable to cover the growing trade deficit, further feeding the current accounts imbalance.

They said they expected the trade deficit for 2018 to exceed the record trade deficit of 2017, which reached $5.6 billion, 24% higher than in the previous year.

Former Tunisian Tourism Minister Slim Tlatli, an economist, said: “They (the authorities) continue to let the dinar depreciate for the so-called goal of halting the trade deficit. We have to change the policy, which is pushing the country into a deep hole that has no bottom.”

He and other economists said the dinar’s depreciation would have helped open new markets for sales abroad if the economy were more productive and innovative but that it has proven unsuccessful.

Tunisia, widely hailed as the economic success story of the Middle East and North Africa in the two decades prior to until 2010, was outranked by neighbouring Morocco and Algeria in the World Economic Forum’s latest Global Competitiveness Index.

Tunisia was 95th, nine notches below Algeria and 24 spots lower than Morocco, in the competitiveness scale.

“When elasticity of prices for imports and exports is weak as it is the case for Tunisia, the devaluation of the dinar further amplifies the trade deficit,” said Abdelaziz Halleb, chief executive officer of the electrical components company Omnitech.

He said Tunisia’s trade deficit had been widening since 2011, with the dinar steadily losing ground to the dollar.

“That it is why this monetary policy is simply suicidal,” warned Halleb, who is a leader in the Tunisian Confederation of Industry, Trade and Handcrafts (UTICA).

He said the dinar’s drop has seriously hurt the value of mechanical and electrical component exports.

"When these deals are reached, the amounts of their exports are not influenced by the value of the dinar. For some foreign companies specialised in these components, the only thing they leave for Tunisia is the salaries of their local employees who are paid in dinars and when the dinar falls these salaries come down too,” Halleb said.

For farming products, “the foreign currency earnings will not rise from their exports if the dinar depreciates,” he added.

The declining value of the dinar hit the tourism industry, another major currency earner.

“The deals are negotiated with foreign tour operators for the summer and in dinar. When we depreciate the dinar, we lose in terms of foreign currencies,” Halleb said.

Tourists from neighbouring Algeria and Libya, he added, “go to the black market for exchanging money. We also lose too as we devalue the dinar.”

The government said tourism receipts from January 1-August 20 totalled $937 million, 46% higher than in 2017. More than 5 million tourists arrived in the country during that period, including 2.6 million from the Maghreb and 1.7 million from Europe.