Mohamed Lounissi pulls out freshly baked bread for patrons at the non-subsidized bakery he owns in Ariana, Tunisia, on Friday, April 1,2022. (Photo by Amine Landoulsi for The Washington Post via Getty Images)
Analysis

Tunisia’s IMF Deal: The Country’s Subsidies Under Threat

Tunis seems to become the city of queues. Whether at gas stations, at supermarkets, or at bakeries, long lines of increasingly frustrated citizens are a clear sign of the socioeconomic crisis enveloping the country particularly when it comes to food and fuel. Police forces are escorting milk and fuel distributors, indicating fertile grounds for social unrest in this winter.

Empty shelves in supermarkets are also increasingly becoming the norm in what could be qualified as one of the worst economic crises hitting Tunisia since its independence. The government’s hopes of getting the country out of its financial troubles seems to cling on a deal with the IMF, as expressed by Prime Minister Najla Bouden.

The IMF made energy and food subsidies elimination a cornerstone of their deal with Tunisia, urging the government to “contain expenditures and create fiscal space for social support,” something that the government already initiated by phasing out “wasteful” subsidies. These conditions are not new. Since 2013, the IMF has repeatedly demanded that the Tunisian government eliminate their energy subsidies in favor of a more direct program that only targets the poor. At that time however, food subsidies were considered to be too important for poorer households, and despite leakages to the non-poor—to hotels or the industry sector for example—the government was given the possibility to delay the removal of the subsidies and “assess at a later stage how to reform.”

The IMF acknowledged in a report from 2014 that removing energy subsidies would have immediate effects, particularly an increase in the general price level, the global competitiveness of local energy-consuming products, and the exposure of domestic prices to shocks that may arise from price fluctuations in the global market, similarly to what happened to European consumers’ energy bills after the war in Ukraine and the rise in gas prices.

To reduce the likelihood of social unrest, the government was advised at the time to engage in PR campaigns to win over public support while maintaining a “depoliticized” approach by removing any discretionary power over it and making it an automatic regular increase. A targeted compensation mechanism for the most vulnerable households was also recommended to ease these painful reforms.

Amen Social, a program that employs direct targeted compensation was started in 2019 with backing from the World Bank. The initiative aims to improve the social safety system more broadly by focusing on poverty. Amen Social brings together all of the country’s present non-contributory and targeted social security programs, such as the National Program of Assistance to Needy Families which dates back to 1986, the Free Medical Assistance program, and a care plan that allows 585,000 families to access medical care in public health facilities for a fixed symbolic annual fee. Amen Social, as a database of the poorest households, attempts to make up for the elimination of subsidies, a process started in 2016, by providing direct cash transfers to the poorest households.

In the 2021 consultation report with Tunisia, the IMF urged the government to complete setting up Amen Social and start providing cash transfers to make up for the cancelled energy subsidies. The report also underlined that targeted subsidy reform, such as reforms to energy and food subsidies, should be one of the first stages in easing the social effects of the COVID-19 epidemic, as part of a “social compact” that involves all the main stakeholders committing to support the reforms.

For the most vulnerable people, the switch from a general fuel subsidy scheme to a targeted assistance system was therefore planned by the government complying with IMF conditions. However, the identification and targeting modalities create concerns about inaccuracies and exclusion rates in targeting systems, and about delays in the compensation payment for the most vulnerable.

It is important to note that the rationale behind such measures can be attributed to how the IMF views social protection. Far from being viewed as a human and justiciable right that the state is obligated to ensure, the IMF views social protection as a mere mechanism to offset the negative effects of structural reforms and minimize social risks. Universal subsidy programs are deemed inefficient by the IMF as they are used by everyone, even those who do not need them. The IMF argues that these programs should instead solely target the poor, but the problems with such an approach are numerous. The biggest issue has to do with actually measuring poverty. The IMF uses the World Bank’s Proxy Means Test (PMT), a method used to estimate the income or consumption when precise measurements are unavailable or difficult to obtain. This method was heavily criticized for being costly, and requiring both skill and capacity that are usually scarce in developing countries. As concluded by a recent study by the Friedrich-Ebert-Stiftung, using PMT leads to significant exclusion and inclusion errors due to the lack of regular household surveys and the presence of a large informal sector in Tunisia, as well as other developing countries. The study concludes that both food and energy subsidies have a positive effect on poverty eradication, and surpasses the targeted cash transfers of the country’s National Program of Assistance to Needy Families.

It is equally important to consider how the removal of subsidies would work concretely. The price of a large loaf of bread would quadruple from 230 millimes (7.3 cents) to 956 millimes (30 cents). A baguette’s price would similarly increase from 190 millimes (6 cents) to 570 millimes (18 cents). As for vegetable oil and couscous, their prices would be five times more expensive if subsidies were to be lifted. Considering how essential these elements are to the regular Tunisian diet, the impact on purchasing power would be drastic.

The Tunisian Institute of Strategic Studies (ITES), a think tank attached to the Tunisian presidency, concluded in a study that the universal compensation system is certainly an expensive system but its contribution to social peace and economic progress is undeniable. Moreover, the high cost of the system is most often linked to the slowdown in the country’s economic growth and/or the surge in the price of subsidized products on the international markets. One way of protecting against the volatility in international prices is to reduce the dependency on foreign imports of wheat, a key component of numerous subsidized products. Even the World Bank reversed its position from saying that Tunisia does “not have a strong comparative advantage in cereals” and it is therefore ill-advised to invest in its cultivation, to advising Tunisian authorities to reduce import dependency and increase domestic grain production.

The fuel subsidy is part of the broader policy of compensation implemented in Tunisia since the 1970s, not only to support the most vulnerable families but also to protect the purchasing power of Tunisians by ensuring the supply of the local market with products at affordable prices, away from fluctuations in the global market. An increase in energy prices would not only have a direct impact, but would also lead to an increase in the price of consumer goods as the cost of energy required to produce and transport them would increase. A rise in costs will decrease demand as well as production across sectors with disastrous consequences on the overall economy.

The social impact of international financial institutions’ recommendations for the Tunisian economy could be seen as early as 1978 in what came to be known as the “black Thursday.” In 1977, the World Bank published a report advising Tunisian authorities to mobilize more financial resources by reducing subsidies to public enterprises and to the compensation fund. The Tunisian government implemented the recommendations and increased the prices of certain food products. Tensions grew and on January 26, 1978, a countrywide general strike was called. The authorities chose violence by shooting protestors with live ammunition, resulting in a big number of casualties—nearly 200 were killed and a thousand injured.

Tunisia’s economy was hit by a crisis in the mid-1980s, with sluggish growth and mounting foreign debt. The Tunisian government applied to the IMF for a loan, which was contingent on the adoption of austerity measures and the eventual elimination of the Compensation Fund, which subsidizes essential food supplies. The price of bread and wheat derivatives had more than doubled and as a result, popular upheavals erupted in all parts of the country between December 1983 and January 1984. The government ordered the army and police to fire on protesters to disperse them, killing and injuring numerous people. A surge of arbitrary arrests and dubious prosecutions followed this violent repression. On July 16, 2019, Tunisia’s Truth and Dignity Commission sent memoranda to the World Bank and the IMF seeking reparations for Tunisian victims of human rights violations claiming that both institutions bear “a share of responsibility” in social unrest linked to structural adjustment policies from the 1970s to 2011.

It is undeniable that the compensation fund—particularly food subsidies—is deeply rooted into the Tunisian welfare system and has a major historical significance as part of the post-independent state. To say that recurrent attempts to reduce or eliminate it have been faced with enormous resistance would be an understatement.

What is clear is that the Tunisian government is trying to push for unpopular reforms in the hopes of securing a deal with the IMF. Such approach was heavily criticized for lacking any transparency or public debate by the Tunisian General Labor Union (UGTT), the country’s largest labor union. UGTT further emphasized that they would lead protests over any painful measures and that a participatory dialogue was the only way to reach fair and just reforms.

There seems to be a growing consensus among civil society organizations and academics that it is vital to be attentive to the country’s food import dependency, and to think about the best way to bring down that dependency to sustainable levels. Additionally, there is a need to contain the costs of subsidies to a level that can be supported by the state budget: this implies periodic adjustments of the prices of subsidized products, as well as reinforced controls and lifting subsidies on products that would have the least impact on the purchasing power of poorer households.

Additionally, the removal of subsidies falls within the overall objective of fiscal consolidation, which is reducing government deficits and as a result debt accumulation. An alternative to austerity measures would be to kickstart growth through public investment and adopt more fiscally progressive reforms. A 2022 report by Al Bawsala, a leading Tunisian democracy watchdog, highlighted 14 measures that go in that direction, including reforming the taxation system such as restoring the progressivity of the income tax and rationalizing tax breaks.

Any attempt of reform that does not take into consideration the current tense social climate and does not include all stakeholders including civil society and labor unions, especially the UGTT, would be doomed to fail. Engaging in a national dialogue or any consultative process that leads to a popularly backed crisis recovery plan will only help the country move in the right direction, and would certainly send a strong message even if it does not adhere to the IMF’s vision of reform.

 

Ayoub Menzli is an independent consultant, analyst, and researcher from Tunisia.