Slow reform progress and social tensions weigh on the medium-term outlook, while economic expansion remains heavily dependent on the security situation.
High discontent ahead of the general elections
The first round of the presidential elections in September 2019 reflected widespread disillusion and distrust of the political elite, with a low turnout of 45%, and the two contenders that advanced to the second round being anti-establishment candidates.
The lack of economic progress has led to general discontent with the political system. The current government coalition of national unity remains shaky and prone to tensions. Consisting of both secular and (moderate) Islamist parties it lacks ideological cohesion, which hinders effective decision making and reform progress. Parliamentary elections are due October 6th, 2019.
Social dissent has led to frequent protests and strikes that disrupt business operations and negatively influence the investment climate. The internal security situation is still tense and the risk of terrorist attacks remains elevated. Countering this threat while maintaining democratic freedoms is a major challenge.
Major challenges remain
In 2019 and 2020, GDP growth is expected to remain moderate and insufficient to substantially reduce the high unemployment rate of over 15%. Despite an increased inflow in tourism, subdued industrial expansion and investments, higher oil prices and less demand from Tunisia’s main trading partners in Europe are weighing on the economic expansion. Since early 2018 the Central Bank has increased the interest rate to combat inflation several times, but high consumer prices still negatively affect households’ disposable income.
Slow reform progress and social tensions continue to weigh on the medium-term outlook, while economic expansion remains heavily dependent on the security situation. The financial sector remains weak and the level of non-performing loans high.
The budget deficit is expected to decrease only gradually in the mid-term, guided by an IMF programme. Public debt will increase to about 80% of GDP in 2019 and remains vulnerable to exchange rate fluctuations, due to the high foreign currency denominated share of about 65%. Reforming inefficient public institutions and containing the enormous public wage bill (which amounts to 70% of primary current spending) are key fiscal reform priorities, and some austerity measures have been implemented to do so. However, austerity measures have led to public protests and met the strong resistance of the powerful labour unions. Therefore, IMF program implementation has been weak so far. Any missed IMF disbursement could have a large impact, as Tunisia is heavily reliant on international assistance to finance its deficits.
Tunisia´s external position also remains vulnerable, with high annual current account deficits of about 10% of GDP. Foreign exchange reserves decreased to a minimum import cover of three months (insufficient to cover the large gross external financing requirement), and the country will remain dependent on multilateral support for the time being. In order to improve external competitiveness and reduce pressure on reserves the central bank agreed with the IMF to intervene less and to let the managed exchange rate (basket of mainly euro and USD) depreciate further.
More structural reforms are needed to accelerate economic growth and to reduce the high unemployment rate. Tackling bureaucracy, reducing corruption, and reforming the tax and subsidy systems are necessary to improve the economic conditions.