Economic Studies
Tunisia

Tunisia

Population 12.0 million
GDP per capita 3,897 US$
C
Country risk assessment
B
Business Climate
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2020 2021 2022 (e) 2023 (p)
GDP growth (%) -8.7 3.3 2.5 0.7
Inflation (yearly average, %) 4.9 6.6 9.4 8.5
Budget balance (% GDP) -9.1 -7.6 -6.6 -5.5
Current account balance (% GDP) -5.9 -6.1 -9.1 -8.0
Public debt (% GDP) 82.8 81.8 88.8 89.2

(e): Estimate (f): Forecast

STRENGTHS

  • Diversified economy: manufacturing, petrochemicals, transport, agriculture, tourism
  • Proximity to the European market
  • Support from external donors
  • Tourism potential
  • Natural resources (phosphates and hydrocarbons)

WEAKNESSES

  • Social tensions: youth unemployment (~40%), coast-inland disparities, brain drain and illegal emigration, fragile social calm
  • Political uncertainty and institutions not yet stabilised following the 2011 revolution
  • Public sector stubborn to reform and wage bill weighing on the state budget
  • Tourism sector permanently weakened by successive shocks
  • Declining competitive advantage (textiles, tourism)

RISK ASSESSMENT

President faces an uncertain future and multiple opposition

A decade after the 2011 revolution, a dysfunctional parliamentary system, which saw clashes between the President, Prime Minister and Parliament, has been replaced by an ultra-presidentialist regime. After being elected in October 2019, President Kaïs Saïed gradually imposed his institutional agenda, suspending Parliament, dismissing the Prime Minister and taking over the judiciary at the end of July 2021 to govern by decree. A constitutional referendum in July 2022, approved a system centred on the President and introduced local powers with persistently unclear remits. Between December 2022 and January 2023, two rounds of early legislative elections were held with a very low turnout due to a boycott by the parties and the call to abstain given by the powerful UGTT union, which is highly present in public enterprises. President Saïed still boasts a certain aura among the working classes, but a weaker economic situation, union opposition and mistrust of liberal elites will pose challenges to the rollout of reforms.

Tunisia's position vis-à-vis its international partners has weakened since 2020. First, Western countries appear to be concerned over what they consider to be a democratic setback, but are nonetheless continuing to provide financial support. Europe appears bent on avoiding unrest in the country, which would fuel migratory flows. After the brain drain that saw 39,000 engineers and 3,000 doctors flee the country between 2015 and 2020, unemployment (~20% in 2022) and now inflation are prompting  illegal departures to Italy. Second, Tunisia has difficulty in maintaining its traditional position of regional neutrality. Algiers uses gas as a means of pressuring Tunis to move away from Cairo and Rabat.

 

Between political crisis, austerity plan and European slowdown, growth is landing fast

After an already difficult year for purchasing power, 2023 should see a further slowdown in consumption squeezed by inflation, a restrictive monetary policy and a reduction in subsidies promised to the IMF. Persistent external financing difficulties are creating shortages of imported products, namely food, fuel, medicines. Moreover, the gradual lifting of subsidies on basic products should weigh particularly heavily on the working classes. Local agriculture (~13% of GDP and employment) is struggling: water shortages are worsening, while political instability is delaying adaptations supported by concessional financing. The climate of uncertainty is weighing on investment as companies will continue their wait-and-see attitude until the political situation has stabilised and the agreement with the IMF has been concluded. In a difficult budgetary context, public investment (excluding subsidised projects) should remain an adjustment variable.

Opportunities for the Tunisian economy be sluggish given its strong links to the European economic cycle. Despite an 83% annual increase in tourism revenues in 2022, visitor arrivals are expected to only reach 60% of the 2019 level. Industry (16% of GDP), which is relatively diversified, has been dented by high energy prices and weak European demand since the end of 2022. For example, the textile industry seems particularly affected, with 6,000 jobs lost between September 2021 and 2022. The phosphate industry, which is located in the country’s interior and is plagued by unemployment, was further disrupted in 2022 by recurrent blockages, causing it to fall from 5th to 12th place in the world's production rankings in a few years. The difficulty in financing deficits and a depreciation of the Tunisian dinar on the official and parallel markets should, however, logically lead to fewer imports, resulting in net imports stabilising at a high level.

 

Without IMF support, a financial crisis cannot be ruled out

Faced with the risk of default, Tunisia is negotiating a 4-year USD 1.9 billion Extended Fund Facility (EFF) programme with the IMF. Without this facility, it is unlikely that short-term financing needs will be covered, which poses a serious threat of debt restructuring or default, despite regular financial assistance from bilateral partners. In December 2022, Algeria granted a USD 200 million loan coupled with a USD 100 million grant. In the budget bill presented at the end of December 2022, the government foresaw an increase in the public wage bill, investment and debt servicing that would be more than offset by an increase in taxes on private companies and a decrease in consumer subsidies. Given the bill’s inflammatory nature, President Saïed will have to deploy all his political capital to find ways and means to implement this budget and fend off opposition from the UGTT. Nevertheless,  midway through January 2023, the IMF had not yet confirmed the agreement in principle reached in October, with Tunis having to provide additional guarantees on the consolidation measures and the United States using its veto after having financially supported the fledgling democracy.

The political crisis risks delaying or harming the structural reforms of costly and debt-ridden state companies. Even though public debt denominated in foreign currency is elevated and exposed to exchange-rate risk, around 70% of it is held by multilateral and bilateral creditors.

 

The dinar has lost ground since 2020, but the state’s inability to repay debt could prompt investors to pull out their capital, thereby accelerating the depreciation trend. Imported inflation already pushed the trade goods deficit wider in 2022 despite the modest uptick in tourism, which is helping the balance of services. The latter is more than counterbalanced by a weaker balance of goods owing to the rise in import prices, particularly the energy tab. Already in 2022, the trade deficit totalled EUR 7.4 billion, versus EUR 4.8 billion a year earlier. Expatriate remittances are also likely to shrink as Europe enters an expected recession during the course of 2023, which will consequently maintain upward pressure on the deficit. The government is having difficulty financing the current account deficit and is therefore forced to curb imports, plus make concessions to international creditors, namely by introducing concrete reforms. The IMF has warned of the risk of political instability that would ensue if FDI were to wane, which would accentuate pressure on the dinar and dry up foreign exchange reserves. On that score, the Tunisian central bank’s foreign exchange reserves dropped to cover the equivalent of three months of imports at end-2022. In response, the central bank raised its key interest rate from 7.25% to 8% at end-December 2022.

 

Last updated: April 2023

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