Tunisia is currently hurtling towards both economic collapse and political instability. As the country prepares to vote on a constitutional referendum on July 25th, President Kais Saïed has failed to address nearly all the economic challenges facing Tunisia. Since his self-coup nearly a year ago, Saïed has focused on consolidating political power into his hands rather than lowering unemployment, reducing the budget deficit, or addressing inflation. For example, in his proposed Constitution, he not only placed sole control over the country’s budget in the hands of the presidency but also replaced the head of the constitution drafting committee Sadok Belaïd’s chapter on the economy with the creation of a hyper-localized “Council of Regions” that would serve as a second legislature. As a result of Saïed’s failure to bring positive change, the vast majority of Tunisians express pessimism over the state of the economy.
That pessimism is borne out in the data. In 2021, Tunisia’s national debt reached nearly 80% of its GDP. In the first quarter of 2022, the trade deficit increased to $1.41 billion, while unemployment has held steady at 16.1%, with youth unemployment close to 40%. Inflation is at an all time high, standing at 8.1%. To add fuel to the fire, the pandemic nearly destroyed the tourism sector, which is only now beginning to recover, up 56% in June 2022 compared to June 2021.
The international community is watching Tunisia with trepidation. A Bloomberg Economics’ report found Tunisia among the least likely countries to pay its external debts, while other rating agencies have also lost confidence in its government. In October 2021, Moody’s downgraded Tunisia from B3 to Caa1, with Fitch following suit in March 2022 lowering its rating from B- to CCC.
The Impact of the War in Ukraine
Some of Tunisia’s economic challenges, including a rise in food and fuel prices, have been exacerbated by the war in Ukraine. The country imports a significant portion of its grain (60% of its soft wheat and 66% of its barley) from Russia and Ukraine. Though it produces durum wheat used for domestic pasta consumption, it only makes about 10-30% of its bread flour. As a result of shortages caused by the conflict in Eastern Europe, grain prices have increased dramatically, with several bakeries forced to shut down due to scarcity of flour and staple foods disappearing from shelves.
Petroleum shortfalls have also created problems, forcing the government to tap into its strategic oil reserves. The country currently consumes around 90,000 barrels of petroleum products per day but can only refine approximately 32,000. In addition, Tunisia is being squeezed by Algeria, which supplies over half of its gas imports. The price of Algerian gas has nearly doubled over the past year, and the war in Ukraine has led to a demand increase from Algeria’s European customers, whom Algeria has prioritized over its next-door neighbour.
Tunisia’s Energy Minister, Naila Noura, recently claimed that the war has caused an additional $1.3 billion budget loss. Besides, the 2022 budget was drafted based on an average oil price of $75 per barrel. With oil reaching $100 a barrel, the government — which subsidizes fuel costs — now finds itself in serious trouble. National authorities have raised fuel prices each month, leading to further inflation and adding to citizens’ discontent.
The IMF Deal Saïed Needs Yet Can’t Afford
Saïed’s main plan to address the growing economic crisis is a $4 billion loan from the International Monetary Fund (IMF), currently under negotiation. On July 4th, an IMF delegation began a two-week visit to Tunis to carry out negotiations for a deal, following the completion of technical talks. However, the country’s most prominent labor union, the UGTT, has the potential to act as a spoiler in the agreement. The Union, which boasts around 1 million members in a country of 12 million people, conducted a general strike on June 16th, shutting down public institutions and halting all flights, trains, and cruises. The organisation has also threatened to hold another strike in the near future.
The UGTT opposes the IMF’s conditionalities, particularly any cuts to public sector wages, reductions in subsidies, and the privatization of state-owned companies, all measures that are likely to be conditions for an IMF deal. In the past, Tunisia failed to meet its obligations set by the Bretton Woods Institution, but the IMF and the international community turned a blind eye and allowed the funds to keep flowing in out of concern over the country’s potential instability should its finances dry up. This time, however, amid Saïed’s authoritarian power grab and consolidation, the IMF deal is one of the strongest forms of leverage for the international community.
Tunisia’s traditional donors are counting on the loan to provide the budget support Tunisia needs. They have privately pushed for both political and economic conditionalities in the deal to pressure President Saïed to restore democratic rule. While the US and Europe have publicly discussed conditioning future assistance to Tunisia on positive democratic progress, donors have stepped in to address food and fuel problems directly. On June 29th, the World Bank announced a $130 million loan to handle rising cereal costs. In July, Japan donated $1 million through the World Food Program to tackle shortages of wheat products and price inflation.
Nevertheless, these donations are just band-aids on a bullet wound that will do little to unlock the foreign investment Tunisia needs to survive. Saïed is well-aware that the IMF deal is his best chance at avoiding the country’s default. The President is, therefore, in a unique and very challenging position. On the one hand, he is perhaps the best positioned Tunisian leader to push through the politically risky IMF reforms. By eliminating checks and balances and concentrating all power into his own hands, there is no one to stop him. On the other hand, by capitulating to the IMF’s demands, Saïed risks losing even more of the public support he has counted on over the past year to bolster his claims that he is doing “what the people want.” Crucially, most Tunisians do not want the reforms that the President must push through to qualify as an IMF loan candidate.