Macro Update / Tunisie Valeurs’ Equity Research Team tv_user October 13, 2022
Macro Update / Tunisie Valeurs’ Equity Research Team

With the world economy still carrying along the same negative effects from the covid-19 pandemic and now the war in Ukraine, with the Chinese economy slowing down more than expected because of the covid-19 resurgence, and with inflation holding its grip firmly on the world economy provoking a series of painful monetary measures, the prospects for global recovery are slowly fading away. The IMF expects the world economy to make a steep fall from 6.1% growth in 2021 to 3.2% in 2022 which means 0.4% more than the initial forecasts in April 2022 . Tunisia was, obviously, no exception. The weak world economy and the war in Ukraine have added to the country’s woes: a feeble GDP growth, a rising inflation, a widening trade deficit, shrinking foreign currency reserves and rising indebtedness. Financing the state budget is increasingly challenging, with foreign funding drying up the government is unable to find the necessary resources which poses a big hurdle in the short to intermediate term. The negotiations with the IMF for a fresh financial package are currently happening under a strict confidential code of conduct although the fund remains optimistic about the outcome with a fresh line of credit under the Extended Credit Facility to support Tunisia’s reform plan. The IMF looks at the reform plan as the corner stone for an inclusive growth plan. The Tunisian government is committed to use the IMF money to invest in new projects, provide jobs for the youth and build trust with the local and foreign investors

For 2022, the weaknesses of the Tunisian economy will stay the same while the GDP growth is expected to weaken further due to the structural deficiencies inherent to the economy and its obsolete model. The international crisis set to get even more complicated in the coming months or possibly years, will cast more doubt on the country’s potential for rebound in the absence of reforms. Raw material prices, food and energy prices are set to rise more in the coming months which means that inflation is likely to reach a new peak soon. The Tunisian Central Bank has recently adopted a strict monetary policy by raising interest rates to address the inflationary pressures. The Central bank has recently raised the base rate (TMM rate) 75 basis points, one shot, to reach 7%. At the same time the central bank has raised interest on savings account from 5% to 6%.

The IMF deal will help Tunisia raise between 3 billion and 4 billion US Dollars. It will open doors for other bilateral deals mainly with Japan and the gulf countries. A fresh package that will give the country a breather for some moment, but without a thorough going reform plan, Tunisia will plunge again in the same macro imbalance with devastating effects on the economy this time.

 We see four challenges ahead!

  • Imposing a fair tax treatment to all including the informal economy which continue to benefit from the tax impunity. The same should be done with the “liberal professionals” (Doctors, Chemists, Lawyers…etc) who pay low taxes compared to the rest of the population
  • Reducing government spending: The pay packages for government employees have reached an irrational level. Reducing salaries is the only option to curb the spiraling state expenses. The government subsidies to food and energy must be completely reviewed. On Energy specifically, the government should fully pass on the rise of oil prices to the consumer. The program has already started when the government lifted its subsidies on the Tunisian corporates and lifted gas prices on a monthly basis.
  • Lifting subsidies on food prices while providing a safety net program for the poor class. The subsidies system as it is today allows the poor class and the rich class to benefit from the subsidized prices. The safety net program will exclude the middle class, the rich and the tourists from the subsidies program
  • Reforming the State-Owned Enterprises: with SOEs turning massively from profitable to loss making, it has become clear that state governance has completely failed. The old model of the state being involved in the competitive sectors (banks, telecom, cement, tobacco, oil distribution, air carrier.etc) is simply outdated. Some of these companies should be completely restructured, others simply need to be privatized

By Imen Yahia, senior financial analyst (Tunisie Valeurs’ Equity Research Department)

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