Key Questions on Tunisia

Last Updated: April 10, 2020

Read the key questions regarding the IMF agreement with Tunisia

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What is the IMF’s assessment of the impact of covid-19 on Tunisia?

Tunisia’s economy has been severely hit by the Covid-19 outbreak. Growth in 2020 is expected to drop to -4.3 percent, the lowest level since Tunisia’s independence in 1956. The authorities have taken pro-active measures to contain the spread of Coronavirus by closing Tunisia’s borders, isolating affected individuals, and imposing confinement and a night curfew. They also acted quickly to limit the social and economic impact of the pandemic on lower-income households and small- and medium-sized firms through a series of emergency response measures.

The large tourism sector, which represents 7 percent of GDP, and exporters, who supply the European automotive and textile industries, have already felt a strong negative impact. More stress will occur, as the crisis spreads through the domestic economy. Households will have to draw down savings and cut consumption. Unemployment, already at 15 percent, will rise further, incomes will fall, and import prices will increase. Many businesses are likely to face cash flow shortages because of temporary closures and lower revenues from consumption and exports.

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How is the IMF supporting Tunisia in its fight against the covid-19 pandemic?

On April 10, less than three weeks after receiving the request from the Tunisian authorities for emergency financial assistance, the IMF Executive Board approved emergency financing of US$745 million or two percent of Tunisia’s GDP under its Rapid Financing Instrument (RFI) to help the authorities’ cope with the COVID-19 pandemic.

IMF financing will support the authorities’ pro-active efforts to contain the spread of the virus and mitigate its human, social and economic toll. The IMF resources will enable the authorities to increase health spending, strengthen social safety nets for low-income families and the unemployed, and support small- and medium-sized firms hit by the crisis. It will also help catalyze additional donor financing.

In addition, the RFI will prevent Tunisia’s reserve cover from falling to the critical threshold of 3 months of imports. This will ensure an adequate reserve buffer amidst unprecedented uncertainty and shore up confidence. Importantly, it will offer stronger protection against further shocks or in the event of a protracted recovery from the Covid-19 outbreak.

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What additional measures has Tunisia taken to improve economic resilience?

Being faced with the unanticipated shock of the virus outbreak, the government has taken steps to limit fiscal pressures and reduce financing needs through:

  • An automatic price adjustment formula for the three main fuels was applied for the first time on April 7, resulting in a 1.5 percent decline in pump prices across all covered fuel categories. This measure will align domestic prices with international fuel prices and thus remove a major structural risk to the budget going forward.
  • Emergency measures on the civil service wage bill. The authorities have reduced by about TD 150 million (or 0.1 percent of GDP) the civil service wage bill for 2020 by putting limits on hiring, promotions, and overtime hours in areas not involved in the crisis response.
  • An increase in tobacco prices. The authorities resumed the stepwise increase in administered tobacco prices in March (originally started in 2017 in line with WHO recommendations). This measure may generate additional revenue of at least TD 200 million (or 0.2 percent of GDP).
  • A temporary and targeted rescheduling of lower-priority public investment that will not have a strong impact on growth and employment. Care will be taken not to undermine the health sector in this exercise.

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    Will Tunisia’s debt increase as a result of the covid-19 shock?

    Tunisia’s debt burden will increase significantly, as the country grapples with the Covid-19 shock, reflecting the steep fall in growth and the deterioration of the primary fiscal balance as a result of lower revenues and the crisis-response measures. Public and external debt are expected to reach 89 and 110 percent of GDP in 2020, respectively. Tunisia’s debt sustainability thus depends on prudent macroeconomic policies over the medium term, and especially on continued and strong fiscal adjustment, once the virus crisis abates. This said, three factors reduce sustainability risks: first, most of the external and public debt is owed to official creditors; such loans have relatively low average interest rates and long maturities, which reduces debt service obligations. Second, the risk of large exchange rate swings, which could strongly affect debt levels, is low in comparison with other emerging market countries, as Tunisia does not allow international investments in short-term instruments that could be reversed quickly. Third, Tunisia’s banks have only limited exposure to sovereign debt and FX-denominated liabilities, which increases their resilience to unanticipated shocks. Tunisia’s external partners can help ensure debt sustainability going forward by providing financial support on concessional terms and in the form of grants.

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    What are Tunisia’s priority reforms for the medium term?

    Tunisia must do whatever it takes to protect both the lives and the livelihoods of people amidst the current COVID-19 crisis – and the Fund will do whatever is needed to support Tunisia in this effort. Looking beyond the immediate crisis, the economic priority will be to embark on a path of higher and more inclusive growth. The authorities thus remain committed to policies and reforms geared towards ensuring macroeconomic stability, preventing debt from rising further, and supporting private sector-led growth that needs to benefit all Tunisians. To this effect, once the COVID-19 crisis abates, the Tunisian government will take measures to improve Tunisia’s fiscal accounts, including through policies to further reduce energy subsidies in a socially conscious way and to contain the civil service wage bill that remains among the highest in the world. It will also be important to further improve the fairness of the tax system, including by reinforced efforts to prevent tax evasion. Continued efforts to strengthen the social safety net especially for low-income households can build on recent progress in increasing outlays on social protection during the 2016-20 arrangement under the Extended Fund Facility. In addition, the authorities are committed to reforming the large state-owned enterprise sector and to improving the overall business environment that will facilitate greater job creation in the private sector.

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    What did the 2016-20 IMF loan under the Extended Fund Facility (EFF) achieve?

    Tunisia has achieved important early gains in reducing macroeconomic vulnerabilities, especially over 2018-19. The fiscal deficit was reduced from about 6 percent of GDP in 2016-17 to 3.9 percent of GDP in 2019, mostly on the back of tax policy and administration measures. These measures allowed for doubling spending on social programs to an expected 3.2 percent of GDP in 2020 from 1.6 percent of GDP in 2016, and for higher public investment on critical infrastructure. Monetary policy tightening has been instrumental in bringing down inflation from a peak of 7.7 percent in June 2018 to 5.8 percent in February 2020, a critical step to preserving the purchasing power of Tunisians. Moreover, increased exchange rate flexibility and lower FX interventions by the Central Bank of Tunisia contributed to rebuilding international reserves, which stood at 5.2 months of next years’ imports of goods and nonfactor services in December 2019. At the same time, however, progress on structural reforms necessary to make a dent in high unemployment and poverty has remained elusive. The authorities cancelled the EFF arrangement in March 2020 under the impression of the Covid-19 outbreak. They remain committed to a successor arrangement once the crisis abates.