From stalling funding negotiations to free fall

The board of the International Monetary Fund (IMF) has yet to approve a bailout package for Tunisia originally discussed for USD1.9bn. The package, which may help restore external and fiscal stability as well as provide social protection, was tentatively agreed upon with Tunisian authorities in October 2022 and widely seen as a multiplier of much-needed international financial assistance for an amount of around USD5bn, equivalent to 4% of Tunisia’s GDP. The distance between the two sides has increased considerably in early 2023 and it is now unlikely that a staff-level agreement on a financing deal with Tunisia will be signed in the short term.

Growth will likely remain below +1% in 2023 as a result of stalling negotiations with the IMF, political turmoil, sluggish growth in Europe (Tunisia's main export partner) and a prolonged tightening cycle across advanced economies. Tunisian authorities expect to repay the Eurobonds maturing this year (USD166mn in yen-denominated guaranteed Eurobonds in August and EUR0.5bn in euro-denominated Eurobonds in October) since repayments are stipulated in the 2023 Budget Law with an eye to a EUR850mn Eurobond maturing in February 2024. The balance of payments will remain under pressure as long as external financing remains limited and funding needs are elevated due to the historically high current account deficit. We calculate that the sum of the current account deficit and external debt repayments maturing in the next 12 months is more than double the size of foreign reserves held at the central bank.

Some relief from donors is likely to continue, but foreign reserves will drop sharply to keep the economy afloat in the absence of external financing at a reasonable cost. At about USD7bn, reserves could offer a limited cushion as the government may be forced into default to ensure that the residual liquidity remains available for the import of critical goods. Under such a scenario, restricted access to external financing would likely result in the monetization of the fiscal deficit, an increase in inflation and a severe depreciation of the Tunisian dinar. The banking sector may suffer significant damage and impose capital controls to prevent depositors to transfer en masse their money out of the banks or out of the country in response to the aggravated conditions.

The economic and social turmoil in Tunisia, the cradle of the Arab Spring pro-democracy movement more than a decade ago, have only increased since President Kais Saied seized power, began cracking down on his opponents and suspended the Parliament in July 2021.

In July 2022, a new constitution was voted, which gave almost absolute power to the president. In March 2023, the first session of Parliament took place after legislative elections highlighted record-high abstention rates on both rounds (89%) on the back of calls for a boycott from opposition parties. The extremely low turnout is reflective of the country's splintered political landscape and the ongoing instability of Tunisia's institutional structure.

Moreover, public statements by President Saied against black communities raised tensions across the country as well as with Sub-Saharan partners and multilateral lenders. Tensions between the government and trade unions, including the Nobel-prize winning Tunisian General Labor Union (UGTT), remain latent and have led to the arrest of political opponents amid concerns over spending cuts affecting the public sector, with public salaries totaling 15% of GDP in 2022. The arrest of former parliamentary speaker and opposition leader Rached Ghannouchi in April 2023 confirms that the clampdown is far from over and this is likely to alienate donors and multilateral institutions for long and increase reputational risk for companies dealing with Tunisian entities associated to the regime.