Tunisia’s recently passed 2025 Finance Law has been fraught with controversies. Perhaps most discussed on social media was the article passed to reduce the value-added tax on raw olives for pickling. This specific reduction was suggested and supported by Abdelkader Ben Zineb, an MP from the Nabeul governorate. Ben Zineb owns a factory for pickles, locally called torchi, which is a business that stands to benefit from the reduction.
Many Tunisians took to social media to decry what they saw as special interest and corruption. Public outrage sparked again when the MPs passed an article to abandon all fines and financial punishments related to the 2023 parliamentary elections, essentially allowing MPs to pardon themselves of these potential crimes. According to some MPs, these fines range from 37,000 to 70,000 Tunisian dinars (from around $11,700 to around $22,180), all linked to issues with the use of public financing during the 2023 electoral campaigns.
However, corruption accusations aside, the law also brings about significant economic changes. Two years after the staff-level agreement with the International Monetary Fund (IMF) was put on hold and eventually abandoned, and with significant debt repayments expected in the future, Tunisian President Kais Saied’s government seems to have turned to domestic resources to finance the budget bill by using this law to increase some taxes as well as domestic borrowing.
If these fiscal gambles pay off, Tunisia might be on the road to solving its chronic budget deficits and building a more robust and fair tax system. Failure, however, might have grave consequences, including a deeper budget deficit and rampant inflation.
A move toward progressivity and justice?
One of the major risks in the 2025 Finance Law is an overhaul of the two income taxes: the personal income tax and the corporate income tax. The reforms to both taxes run counter to all previous reforms undertaken during and after Tunisia’s 1986 Structural Adjustment Program (SAP) with the IMF leadership. The latter was a program by the IMF that sought to liberalize the Tunisian economy and integrate it further into the global economy through reforms aimed at encouraging exports, lowering tariffs on imports, and reducing the role of the government in the economy to encourage more private sector-led growth.
Over the last 40 years, Tunisia’s income tax policies followed an obvious neoliberal trend. The personal income tax was “simplified” to include fewer brackets and decreased tax rates on the highest income brackets, stripping it of its progressivity. The number of brackets decreased from 16 pre-SAP to five, making the tax less able to assign different tax rates to different levels of income. The marginal tax rate, which targets the highest earners, also fell from 68 percent in 1986 to only 35 percent. The logic behind the reform was that a simpler tax was easier to collect. Imposing lower rates on high earners would also encourage them to reinvest their savings into the economy.
The logic behind the reform was that a simpler tax was easier to collect
The corporate income tax followed a similar logic, with its rate declining by over 20 points in 15 years. Here, the assumption was that by reducing their taxes, the private sector would reinvest these savings back into the business and therefore allow companies to grow and create jobs. An additional assumption was that the lower tax rate would encourage the informal economy to formalize and the widened tax base (meaning the additional entities registered and paying taxes) would make up the loss in revenues anticipated from the lower rate. As such, taking effect in 2007, the government decreased the corporate income tax rate from 35 percent to 30 percent. Following IMF loan conditionalities, the rate was then decreased again through the 2014 Finance Law to 25 percent. Finally, the 2021 Finance Law reduced it by another 10 points to reach 15 percent.
Contrary to predictions, and following decreases in tax rates, revenues saw a sharp decline in 2008 and 2014. In fact, revenues from the corporate income tax did not recover their pre-2014 levels until 2021. Unemployment remains high and investment stagnant. In 2013, corporate income tax accounted for 20 percent of government revenues, while personal income taxes accounted for 22 percent. In the 2024 Finance Law, the share of corporate income taxes from total tax revenues fell to 13 percent, while the share of personal income taxes rose to 28 percent. People receiving a salary, people working on commission, and other groups earning an income from labor saw their share of taxes increase, while corporations in the private and financial sectors saw their share of tax contributions significantly decrease, deepening existing inequalities between individuals and corporations. This put further pressure on a population already dealing with years of rampant inflation, unemployment, and a decline in social conditions.
The 2025 Finance Law aims to reverse these trends. Regarding the personal income tax, the law introduces three additional brackets to make for a total of eight brackets instead of five, including one adding a reduced rate for low-earners. The law also raises the marginal tax rate, assigned to the highest income bracket, from 35 percent to 40 percent, thus presumably increasing the tax contribution on the highest earners.
The introduction of the lower rates and additional brackets is expected to lower taxation on most workers, such as teachers and nurses. According to figures shared by the finance ministry, around 60 percent of salaried individuals would experience lower taxes while the highest earners would see their tax contributions slightly increase. However, this does not come without cost as the proposed reforms are expected to reduce personal income tax revenues by 650 million dinars ($202 million or around a fifth of the personal income tax revenues for 2024).
To make up for the expected loss in revenues, the government increased the corporate income tax rate. The general rate rose from 15 percent to 20 percent. Other special rates also rose, including the one on banks and insurance companies which increased from 35 percent to 40 percent. The new rates are aimed at increasing the contribution of corporations to the general budget and raising the resources necessary to finance the general budget and public services such as healthcare and education.
Another notable reform is the introduction of minimum effective tax rates of 25 percent for banks and insurance companies and 10 percent for all companies falling under the new 20 percent regime. This means that while companies can decrease their taxes through tax reductions and exemptions, the taxes they actually pay cannot fall under this new minimum rate, limiting the use and abuse of the arsenal of tax incentives existing within the Tunisian legislation. This could potentially address the issue of tax avoidance through the excessive use of incentives such as tax rate reductions and exemptions. The estimated cost of revenues lost to tax incentives is estimated at more than 10 percent of the general governmental budget, or 1.15 times the budget of the Health Ministry.
The proposed reforms do not come without criticism: the business community laments these tax raises. The Tunisian Union of Industry, Trade and Handicrafts says the law is not conducive to encouraging business and leads to tax instability, causing investors to rethink investments in fear of future tax increases. In response, business owners see these taxes as a burden on growth and investment.
Fears are also raised around the ability of the Tunisian state to keep up with the tax evasion that could result from these tax increases. The foreign affairs minister cited an International Transparency figure, stating that Tunisia is losing $1.2 billion every year from illicit financial flows alone. However, such risks might be lower than previous estimates. Stronger collection and auditing efforts by the tax administration in 2024 and 2023 have led to higher revenues from these taxes, including an impressive 20 percent rise in revenues from corporate income taxation on non-petrol companies.
It is important to note that the efforts to fight tax evasion and other financial crimes have also been used as an excuse to crack down on civil society organizations, activists, and journalists, as President Saied further consolidates power. Several government watchdogs, including Mourakiboun (Observers) and I-Watch, have come under investigation for suspicious foreign funding and have had their assets frozen. Saadia Mosbah, president of Mnemty, an anti-racism non-governmental organization, was arrested based on supposed financial crimes linked to the 2015 anti-terrorism law.
It remains to be seen if the expected increases in the revenues from the corporate income tax are enough to balance out the losses from the personal income tax
It remains to be seen if the expected increases in the revenues from the corporate income tax are enough to balance out the losses from the personal income tax. This extends to whether the reforms are enough to make the Tunisian tax system more equitable while providing the necessary resources to maintain Tunisia’s current public spending.
This comes at a time when the healthcare, education, and food subsidy systems are in desperate need of additional financing to meet the needs of individuals and communities in accessing social services. This could be the start of just, sustainable tax mobilization for Tunisia, or a risk to further erode domestic resources and widen the budget deficit.
Inflation risks and private sector threats
Through the 2025 Finance Law, the Tunisian government continues its reliance on domestic borrowing, with plans to take on more loans from national banks. At 47 percent in 2023 and 42 percent in 2024, domestic public debt as a share of the public debt is the highest recorded since 1984, at least. The government also plans to continue the exceptional borrowing from the Central Bank, with the 2025 Finance Law giving the government access to zero-interest loans up to a maximum of 7 billion dinars ($2.19 billion) to be repaid over 15 years with a three-year grace period.
Adopted after the refusal of the government to capitulate to the “diktats” of an IMF program and out of a need for additional resources, this new paradigm of domestic borrowing may pose risks to Tunisia’s banking system and its economy as a whole.
A recent Carnegie Endowment report suggests that the loaning may be leading to a crowding out of private loans for investments. The cost of administering a significant loan to the government is less than the cost of administering multiple smaller loans to businesses and investors. With the Tunisian banking sector being risk-averse, banks are less inclined to issue small loans to businesses and consumers, and may be more inclined to offer loans to the government, both in Tunisian dinars and in hard currency.
The borrowing has also caused concern around inflation. The need to borrow from domestic banks and the Central Bank increases the amount of money in the economy. The productivity of the economy will determine to what extent this extra money will drive up inflation. The latter poses a risk to the purchasing power of households and the affordability of food, fuel, electricity, medicine, as well as other essential goods and services.
It is worth mentioning that, despite rising domestic borrowing in the last few years, inflation has remained stable in 2024, even decreasing slightly. The inflation risks have, so far, been mitigated by a number of factors, including agriculturally with strong olive and date seasons, as well as a record number of tourists. This effectively provides the country with significant amounts of hard currency to cover the costs of imports and facilitate debt repayment. As such, inflation risk mitigation for 2025 remains linked to factors prone to fragility, such as the productivity of export-facing agricultural products—linked to unpredictable rainfall patterns—and unpredictable levels of tourism.
Borrowing from the Central Bank reignited concerns and launched a debate around the independence of the Central Bank. The law mandating the independence of the bank was passed in 2016 as a conditionality of the 2013 loan agreement with the IMF. Recently, the exceptional levels of borrowing had government critics accuse the president of circumventing this law, forcing the Central Bank to directly lend to the government at concessional rates and putting the Tunisian Dinar at risk. Meanwhile, proponents of the government applaud the actions as a positive step toward reclaiming the sovereignty of monetary policy. Of these proponents, 27 MPs from the Tunisian Parliament introduced a draft law in October 2024, proposing a revision of the Central Bank law and a reduction in its independence. The President brought up the issue again in February 2025, in a meeting with the Central Bank’s governor.
All of this financial complexity puts Tunisia’s foreign currency reserves, inflation, and the stability of the dinar into question.
The make-or-break year for Kais Saied’s economic model
President Saied and his cabinet have placed their bets for 2025 and the years to come, hedging on domestic resources such as taxation and borrowing. Risks for the economy and the national budget remain high, including taxation resources falling short of predictions, borrowing-induced inflation, and the depletion of foreign currency reserves as a result of large imports and fragile export products and services. However, if correct, these gambles might help Tunisia chart a more progressive, independent path to economic recovery.
These gambles might help Tunisia chart a more progressive, independent path to economic recovery
These gambles come at a politically critical time for Saied, with regard to national and international criticisms over the growing number of political prisoners and the continued mistreatment of migrants.
To dig itself out of this years-long economic crisis, Tunisia must take precautions. The tax reforms must be managed and enforced in a fair and just way rather than politicized to punish regime opponents. Loans, both domestic and foreign, must be carefully studied and balanced to avoid private investment crowding out. To ensure sustainability and economic stability, Tunisia’s economic model must move away from a reliance on low value-added volatile agricultural and tourism exports; they must move toward domestic production, guaranteeing food and energy sovereignty to the population and negating the need for expensive imports.
Sahar Mechmech is the Inclusive Economies Manager at TIMEP.