Key Questions on Tunisia

Last Updated: July 18, 2019

Read the key questions regarding the IMF agreement with Tunisia

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What is the IMF’s current assessment of the economic situation in Tunisia? Are things improving?

Tunisia has made important economic progress in recent years and is experiencing recovery in some sectors. Tourism has been on the upswing since 2018, agriculture is performing well, phosphate production has been recovering in early 2019, and social spending has increased from 1.9 percent of GDP in 2017 to 2.7 percent in 2019. Coverage of the national assistance program to vulnerable families was expanded from 250,000 to 285,000 families in 2018.

The authorities have also made progress on the implementation of economic reforms. Notably, the budget deficit was reduced from 6.0 percent of GDP in 2017 to 4.6 percent of GDP in 2018, largely as a result of increased tax revenues due in part to improved collection of tax arrears. This was achieved while ensuring protection of the poorest. The transition to a more market-based exchange rate regime has helped curb the current account deficit by promoting Tunisian exports and replenishing international reserves. Inflation also fell, although it remained relatively high, at 7.5% as of December 2018.

However, a lot of work still lies ahead of Tunisia as its economy remains vulnerable to external shocks, including the growth slowdown in Europe, oil price swings, and security risks. It is likely that growth will accelerate marginally in 2019, although investment and exports are expected to remain weak. Additionally, unemployment remains high at 15.5 percent, especially among the youth, women and Tunisians living outside the urban centers.

It is critically important for the authorities to work toward bringing down inflation, and gradually lowering the public and external debt that ended in 2018 at a level of 77 and 94 percent of GDP, respectively.

The good news is that these significant challenges can be addressed so that the Tunisian people can feel the benefits of reform. For example, the authorities have committed to implementing reforms to help the private sector create jobs, and to effective social policies that will protect low-income households from the detrimental impact of ongoing macroeconomic adjustments. It is equally important to contain the growth of the public wage bill and reduce energy subsidies. This will be the only realistic way to ensure that the initial visible results at the macroeconomic level begin to be felt at all levels of society.

In parallel, the IMF is working with the international community to ensure they continue to support Tunisia’s efforts with financial aid and capacity building assistance.

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How can public debt be reduced without hurting the poor?

The expansion of the public sector, resulting from repeated wage increases and the associated growth in the public wage bill, is one of the principal reasons for the rising budget deficit in Tunisia. This high budget deficit and the dinar’s depreciation have contributed to a rapid accumulation of debt, which now stands at 77 percent of GDP. This level of debt presents a significant challenge for Tunisia.

First, interest payments on such high levels of debt now consume 10 percent of total central government spending. This means that less funding is available for public infrastructure, health, education, and social transfers for vulnerable populations. Second, such high debt levels reduce investor confidence (and indeed the confidence of the population as well) in macroeconomic stability and negatively affect job creation. Third, the government's frequent reliance on international capital markets for its financing needs exposes the country to sudden interest rate increases and investor mood swings.

But the most worrisome issue of this high public debt is that it effectively equates to a mortgage on future generations: Tunisia’s youth will need to shoulder the bill for today’s spending. This might have been acceptable if the borrowing had been invested in high quality public investment that enhanced growth and jobs creation. It is, however, difficult to justify if, as in Tunisia, the borrowed funds are used for current expenses, such as the public wage bill and energy subsidies. This is unfair to the Tunisian youth.

For these reasons, the government has made it a priority to reduce its debt burden; but to do so in a way that is fair, conducive to growth and social equity. The main pillars of this strategy include:

1. Increasing revenue mainly by expanding the tax base, cracking down on tax evasion, and strengthening the collection of unpaid taxes;

2. Containing energy subsidies that mostly benefit the more affluent, while simultaneously improving social protection

3. Slowing the growth of the public wage bill through strict limits on hiring, wage restraint, and voluntary departure and early retirement schemes; and

4. Reforming pensions to ensure their financial viability and reduce the need for budget transfers to the pension funds.

The authorities are conscious that these reforms may place low-income families into hardship. To offset this, the government has undertaken recent efforts to support the purchasing power of at-risk households by increasing and better targeting transfers, and implementing new programs, such as the scheme designed to help low-income families repay their outstanding debts to the energy utility STEG (Société tunisienne de l’électricité et du gaz).

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Why reduce the wage bill when the cost of living is increasing?

Civil service wages are by far the biggest public expenditure and represent about half of the total budget or 15 percent of Tunisia’s GDP—which is among the highest ratios in the world. This high volume is the result of a rapidly expanding public payroll a few years ago (an increase in headcount of about 40 percent in the four years following the revolution) followed by repeated wage increases. The latter meant that on average employees in the public sector are paid twice as high as their fellows in the private sector.

Tunisia needs to contain its wage bill if it wants to redirect public spending toward public investment and social spending for inclusive growth. Such an effort will, of course, also be instrumental in reducing the deficit, which is needed to reduce the debt burden on future generations and to ease the pressures on prices and on the current account balance.

To contain the budget deficit for 2019 (and beyond, at levels consistent with available financing) despite these unanticipated wage increases, the government had to resort to increasing taxes and energy prices more than expected, which is harmful to the society at large and the private sector, the latter being critical for job creation and the reduction of high unemployment.

How to contain the wage bill in a socially acceptable way and decide which government jobs to prioritize is a decision be taken by the authorities, ideally based on a medium-term budgetary plan. International experience shows that relying on strict hiring limits and voluntary departure schemes can be efficient in the long term but takes time to produce significant effects. This means that wage restraint will have to be included as part of the strategy, especially to contain short-term wage growth.

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What policies does the IMF recommend reducing inflation?

High prices have become a major concern for all Tunisians who have not seen such high levels of inflation since the early 1990s. Inflation has recently stabilized at around 7.0 percent of GDP, which is still about twice the historical average.

In response to accelerating inflation, the Central Bank of Tunisia increased its policy interest rate by a total 275 bps since March 2018 to currently 7.75 percent, going in the right direction to address price pressures proactively. These efforts have started to decelerate credit growth.

The monetary tightening to reduce inflation will help to protect purchasing power, especially that of the most vulnerable segments of Tunisian society, who are not only the most exposed to the damaging impact of accelerating prices but who also have few opportunities to protect themselves. Lower prices also reduce uncertainty for economic agents, which tends to stimulate investment and jobs.

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Why does the IMF advise the government to remove fuel and other energy subsidies? Are Tunisians compensated for this loss?

In Tunisia, energy subsidies represent 2.5 percent of GDP, half of the 2018 budget deficit and more than spending on social programs. Fuel and energy subsidies are mostly enjoyed by the more affluent segments of the society who, on average, drive more and larger cars, and use more electricity, for example for air conditioning. Indeed, the richest 20 percent of Tunisians consume 28 percent of all subsidies, while the lowest 20 percent only receive 14 percent. Energy subsidies are thus highly inequitable. Moreover, as they provide an incentive for excessive energy consumption, subsidies encourage over-consumption and negatively impact Tunisia’s current account balance, considering that the country needs to import most of its energy. In fact, energy imports represent 8 percent of GDP or 80 percent of the 2018 current account deficit.

It therefore appears necessary to gradually phase out these subsidies, and the authorities have started to move in this direction through a series of price increases for fuels and hikes in electricity and natural gas tariffs.

The IMF supports the authorities’ efforts to increase social protection and, more precisely, to lower the impact on the most vulnerable. Specifically, spending on social programs will reach 2.7 percent of GDP in 2019 from 1.9 percent in 2017—a reallocation that is also monitored under the IMF-supported program through a floor on social spending. A significant portion of this spending is used to help low-income families through cash transfers, but also through new programs such as the scheme to pay off outstanding debts to the energy utility STEG (Société tunisienne de l’électricité et du gaz) and to provide improved access to public health care.