On October 15, 2022, the International Monetary Fund (IMF) announced that it had reached a staff-level agreement with Tunisia, one year and a half after Hichem Mechichi’s government had officially requested a new financing program, and one year after Najla Bouden’s government took charge. Negotiations are yet to be finalized, as Tunisia is facing an economic crisis that has been building up for years given the successive governments’ failure to reform. The effects of the Covid-19 pandemic followed by the Russian invasion of Ukraine have also exacerbated the situation and increased Tunisia’s vulnerability.
The agreement with the IMF came around the end of the IMF and the World Bank Group’s Annual Meetings in Washington D.C., which was attended by Tunisia’s ministers of finance and of the economy, as well as the governor of the central bank. The Tunisian government’s spokesperson had revealed in September that such an agreement was expected. While this represents an important step for the country, the final agreement depends on the IMF’s Executive Board which will review it in December. By all accounts, the Tunisian government needs this deal to secure funds in order to mitigate and address its fragile and deteriorating economic situation, mainly its budget deficit. Of note, however, the country had already benefited from three other IMF agreements under three different mechanisms since 2011, and still owes the IMF $2.01 billion as of September 2022. An IMF deal, on its own and without proper reform, might not be enough to get Tunisia out of this cycle.
What reforms should Tunisians expect?
The announcement states that this agreement is for another $1.9 billion over a 4-year period and under the Extended Fund Facility (EFF), less than half of the $4 billion that the government was hoping to secure earlier this year. The statement also indicates that the IMF supports Tunisia’s “home-grown” reform program. The specifics detailed in the press release issued by the IMF show that the government seeks to: 1) integrate the informal sector into the tax net to improve tax equity; 2) contain expenditures; 3) replace direct subsidies with cash transfers; 4) reform state-owned companies; 5) enhance the business climate; 6) improve public sector governance and transparency; and 7) build resilience to climate change via investments in renewable energy and water management.
These headlines are in line with the Tunisian cabinet’s stated strategy. On June 7, 2022, the government held a press conference to present the contours of their “national reform plan,” which was presented to a number of high ranking public servants a few days earlier. This reform plan, presented as a powerpoint presentation, contained mostly objectives of reforms with little to no details on steps or outcomes for these policies, with the exception of some numbers on the cost of subsidies. It is therefore safe to assume that the reform program approved by the IMF, is the same as what the government had previously announced.
Based on the various statements made by officials, however, the only information that citizens have received are on two elements: cutting down on subsidy expenses and reducing the public wage bill in accordance with what the previous government had planned. It should be noted that, in addition to fuel, food products such as sugar, vegetable oil, milk, and grain-based products like couscous, flour, and bread are all subsidized. Any change in the subsidies would have great consequences for citizens’ socio-economic conditions. More importantly, these two reforms, as well as the restructuring or the privatization of state-owned companies—all mentioned in the latest IMF announcement—are some of the Fund’s oldest recommendations. Different governments had considered applying these changes, including Bouden’s current cabinet which, since December 2021, has sought to bring the Tunisian General Labor Union (UGTT) on board.
In dire financial straits
The focus of the IMF and the government on cutting down on subsidies and the public wage bill is due to the real and perceived effects these expenses have on public finance. Given the situation of the country’s economy, the perceived solution is to seek to restore a financial equilibrium. In fact, the 2022 budget was enacted with the objective to secure 34 percent of revenues via loans, as the budget deficit is accelerating. According to the IMF’s recent numbers, the account deficit stands at -9.1 percent of GDP and the country’s gross debt is at a record 88.8 percent of GDP, compared to 82.8 percent in 2020 and 47 percent in 2011.
The government’s reliance on debt for over one third of its revenues has become only one of its many worries within a few months. Oil prices have skyrocketed, with a single barrel of oil trading at over $100 earlier this year, far exceeding the forecasted $75 per barrel price accounted for in the 2022 budget. The difference raised fuel subsidies expenses between January and March 2022, increasing them by 655 percent compared to the same period in 2021. Ministers also stated during the press conference announcing the national reform plan that global food price increases have put further pressure on government expenses, given that 87 percent of the subsidies’ budget is allocated to grain products and vegetable oils.
Empty shelves and rising prices burden citizens
At the backdrop of these macroeconomic indicators, it is becoming difficult for citizens to make ends meet in the face of rising inflation. Numbers show that overall inflation rose to 9.1 percent in September 2022, and was 13 percent for food products and 8.3 percent for transportation. As for the minimum wage, it is currently set at 429 Tunisian Dinars (TND) (around $130), when a study published in 2021 indicates that a family of four living in the Tunis Metropolitan Area requires an income of 2,400 TND ($870) to live a decent life. As for poverty rates, 15.2 percent of the population lived in poverty in 2015, the most recent numbers available. In other words, 1,669,336 Tunisians live below the poverty line, with 5 TND (around $1.5) or less per day. Moreover, unemployment was at 15.3 percent by mid-2022, while for university graduates it was at a staggering 30.1 percent according to numbers from 2020.
While citizens were still processing news that subsidies might get cut, impacting many, shortages in various food products and delays in receiving salaries became a regular occurrence. Flour, sugar, rice, and at times bottled water and eggs have become much harder to find and vendors started rationing them. There were also reports of stranded ships demanding upfront payments before unloading their grain cargoes, which coincided with disruptions in supplies for bakeries. Bakeries operating with subsidized flour have also suffered a 14-month delay in payments, adding up to around $78 million that the government failed to pay, leading to an open strike that started on October 19, 2022. In addition to these shortages in food products, Tunis also saw shortages in fuel supply over the first half of October.
Officials tilting at windmills
In the face of these recurring shortages, statements by various officials blamed global supply disruptions and consumers’ panic-buying. Citizens, however, remain skeptical of such statements. As a matter of fact, there is an increasing belief that the shortages are the authorities’ stepping stone toward “real” prices, as people change their consumption habits, a theory hinted at by UGTT’s leadership as well. There is also a sense of poor response and planning by the government, as it did not seem to address this crisis. Either way, the disastrous level of the current government’s communications, and the lack of transparency, enables such reflections and rumors.
In the midst of these difficulties, President Saied believes that the repeated shortages are part of a conspiracy by speculators and profiteers to create panic and disturb social peace. On March 21, 2022, after weeks of threats, he promulgated a decree with heavy prison sentences for those who engage in speculations or the dissemination of false news that affect the market or consumers. The ministry of commerce’s Facebook page increased the frequency of posts showcasing seized goods, in an attempt to show that there were no shortages.
Since his power grab, President Saied seems to have delegated economic governance to his ministers. The only decrees of economic or financial nature that he passed were an amnesty decree for businessmen found guilty in corruption, which has not been applied to this day, and the launch of his “citizen enterprises,” a twist on social solidarity economy wherein local government representatives oversee local collectively-owned enterprises. In the face of a real economic crisis—locally and globally—the president continues to accuse an unidentified body of enemies that conspire against the country, and tends to his political goals while the government deals with the rising discontent.
Negotiating within and without
The Tunisian government had prepared the 2022 state budget with the assumption that the agreement would be reached by March 2022, only for a staff agreement to be reached last week. Meanwhile, as the timeline was pushed repeatedly, Tunisia’s ratings were downgraded by Fitch Ratings and by Moody’s which considered in September 2022 that “the absence of timely agreement […] elevated government liquidity risks” and raised the risk of default.
While it had to provide concrete plans that met the IMF’s expectations, the government was also negotiating with its social partners, the Tunisian Confederation of Industry, Trade, and Handicrafts (UTICA) and the UGTT, the biggest labor union in the country. This was necessary to provide broad buy-in and consensus for the reform packages encouraged by the IMF since 2021.
The request for this political, and most importantly social, consensus is due to the successive governments’ failure to commit to promised reforms during previous IMF packages. Despite the agreement between UGTT and the government on a 5 percent salary raise for the civil service public sector, which was the last stepping stone for the staff-level agreement, there was skepticism that the UGTT would yield to all the points in the reform program. Recent statements by the syndicate’s leadership stated it opposed subsidy reduction, claiming that the recent deal with the government was on wage increases only. It is important to note that following a general strike on June 16, UGTT also called for a second one with the date to be announced, which can be used to pressure the government.
Beyond the deal
Instead of enacting bold holistic policies to boost the country’s failing economy, successive governments have resorted to postponing reform. Political elites sought to avoid the political cost of these reforms, all while hiding behind UGTT’s opposition. Despite the various attempts by civil society organizations to provide policy alternatives, the socio-economic conditions were not the focus of elites’ attention. Under Saied’s unilateral rule and due to the absence of dialogue on governmental decisions, social tensions are likely to rise as a result of the unavoidable effects on citizens’ livelihoods.
The fact remains that the final approval of the deal depends on the IMF’s Executive Board decision in December. Such a timing points toward a high probability of the next parliamentary election results influencing the shareholders’ decision, despite their positive messages to Prime Minister Bouden in recent meetings. While attempts to condition the deal on more democratic and inclusive policy-making are expected, stabilizing the country is likely to have the upper hand and the deal will probably be confirmed. Furthermore, hard stances on political conditions could lead to Saied refusing to approve the deal altogether. Financially, the government will need to intensify efforts to secure bilateral and private loans, as the size of this deal only provides a temporary raft, and they need clarity to pass the 2022 complementary budget and that of 2023.
Simultaneously, the role the UGTT will play will be crucial. As things stand, it is likely headed to a confrontation with the government. With the increase of political protests, clashes with security forces over police brutality, and number of drownings during irregular migration attempts, social tensions will only intensify.
Even with an IMF deal, as well as other possible future loans, economic recovery will require deep and—most importantly—inclusive reforms that would boost the economy without sacrificing vulnerable households. Rising discontent among Tunisians is also bound to complicate an already complex political and socio-economic crisis regardless of the state’s attempts to solve the crisis now.
Aymen Bessalah is a Nonresident Fellow at TIMEP focusing on governance and the rule of law in Tunisia.