Inflation is projected to slow from 7.1% in 2019 to 6.7% this year and 6.1% in 2021.
TUNIS - With a young, highly qualified workforce and the most diversified economy in the Maghreb, Tunisia should be in good shape to jump-start economic growth but government instability and poor planning have the country in dire need of reforms to realise its potential.
The task of rebuilding the country’s shaky economy will likely fall to Tunisian Prime Minister-designate Elyes Fakhfakh, who recently announced the formation of a coalition government.
Fakhfakh, a former tourism and finance minister, outlined an agenda to energise growth and alleviate poverty in the short term while proposing bold reforms to integrate Tunisia into the global economy.
Tunisia’s diverse industries, including aeronautics, chemicals and textiles, key natural resources, such as phosphates, oil and gas, and booming tourism sector are causes for hope that progress can be made.
However, experts said Fakhfakh faces a difficult task in seeing his agenda through as he struggles to hold together a fragile coalition government that includes partners with disparate economic visions. The Islamist Ennahda Movement, for instance, a major part of the proposed government, supports economic liberalism, while the nationalist Echaab Movement advocates state economic command policies.
Mustapha Ben Ahmed, of the liberal Tahya Tounes party led by outgoing Prime Minister Youssef Chahed, said he was not optimistic about the government’s prospects.
“As it is stands now, the cabinet is a coalition of personalities with different visions and agendas with no substantial programmes and clear vision for the government,” he said.
Tahya Tounes proposed Fakhfakh as prime minister after intense negotiations with five of the country’s main political parties, which together control 121 deputies in the 217-member parliament — 12 votes more than needed to win a vote of confidence.
If approved, the government’s immediate challenge will be to stabilise public finances and nurture good ties with the International Monetary Fund (IMF) to keep capital markets open.
Tunisia’s economic indicators are mixed. While the budget deficit is down slightly and inflation has slowed, unemployment, especially among young people, remains high and foreign borrowing continues to undermine the budget.
Official figures show Tunisia’s budget deficit improved from 4.6% in 2018 to 3.9% in 2019 but the current account deficit — 10% of GDP in 2019 — is projected to remain approximately the same this year.
Inflation is projected to slow from 7.1% in 2019 to 6.7% this year and 6.1% in 2021 despite the Central Bank of Tunisia’s policy since 2017 of tightened monetary policy with rising interest rates.
The unemployment rate is another concern, hovering at 15% in 2019 and reaching 34% for Tunisian youth.
Real GDP was at a low of 1% in 2019 but was expected to rebound to 2.1% in 2020 and 2.6% in 2021. However, recovery could be slowed if a looming drought does negatively affect agriculture and social unrest in the phosphates-producing region of Gafsa cuts output.
Public spending has soared since 2011, with priorities on consumption rather than investment or capital expenditures. The spending has mainly been financed by foreign borrowing, causing the country to pile up debt.
Economists said tackling the debt issue is an urgent matter because of the risks it entails. They pointed out figures indicating public debt exploded from 40% of GDP in 2010 to 73% last year. As the budget deficit widened, the balance of payment deficits increased, they said, pushing the country to rely even more on foreign debt.
If those trends continue, debt repayment will overtake spending on public investment, services and social programmes, while the risk of currency devaluation and rocketing inflation would hurt already deteriorating living conditions of many Tunisians.
Foreign capital markets could pressure Tunisia into painful reform measures, including budget-cutting measures, experts argue.
Economists said Tunisia’s debt level coupled with an expansionary monetary policy did not spur strong growth rates even during the 2017-19 period when the country enjoyed relatively stable security.
They said widespread corruption and an unchecked informal economy harmed the business climate and blamed government’s efforts to preserve political consensus instead of pushing for wide-ranging reforms for prolonging the problem.
Looking ahead, economists said the need to maintain political consensus and an aversion to painful reforms are major constraints for Fakhfakh, amid a power struggle between Tunisian President Kais Saied and parliament Speaker Rached Ghannouchi, who is also president of Ennahda.
Economist Belarbi Ezzedine said one solution could be constitutional revisions that allow a new ruling system greater authority to implement bold initiatives and reforms.
“Two exceptional circumstances could set off the acceleration of the current transition: revising the principles of the constitution and the implementation of structural reforms that require the urgency of the macroeconomic stabilisation and the safeguard of good relations with the IMF and the World Bank as well as other financial and technical partners,” said Ezzedine.
Written By: Lamine Ghanmi
Lamine Ghanmi is a veteran Reuters journalist. He has covered North Africa for decades and is based in Tunis.