Tunisia’s Importuning Immolation Pact
Tunisian stocks were ambivalent as a 2-year $1.75 billion IMF standby was reached by the Islamic party-led government just prior to full-fledged elections which will also determine backing for a new constitution, as immediate actions are unlikely to retrieve the lost investment-grade rating or redress 35 percent youth employment which continues to stoke security and social tensions. Religious-secular divisions have worsened since the killing of an opposition political figures= and a militant influx from Libya with the Kaddafi regime’s overthrow, as 4 percent GDP growth expected this year has not met the pre-revolution norm on food-driven inflation at 6.5 percent in Q1 with persistent budget and current account deficits. Public debt is 45 percent of GDP as US and Japanese loan guarantees enabled international capital markets access and central bank refinancing jumped 50 percent in 2012. Non-performing loans especially at key state lenders are around one-fifth the total and deposits have been flat despite a 12 percent average capital adequacy ratio. With Eurozone pickup and resumed mining exports the balance of payments should improve, while bank recapitalization and overdue payment clearance are domestic priorities. On monetary policy the recent tightening course should continue on lower local bond issuance as the additional consumer exposure reserve requirement will be cut from 50 percent to 30 percent. The three main public banks will undergo strategic and operational audits as a separate asset management company is created for bad tourism-related debt transfer. Wage and subsidy reductions are designed to curb spending as consumption taxes and stamp duties introduced several months ago raise revenue. The two decade-old investment code, which has attracted minimal value-added assembly operations, will be overhauled with World Bank technical assistance amid a general review of competition law and customs regulation. With the Fund infusion reserves will cover over 4 months’ imports, and year end sukuk placements could bring further long-term resources alongside official partners with legislative passage.
Pakistan securities have rallied in contrast as Nawaz Sharif takes the helm for the third time with close IMF and Gulf ties to secure emergency lines to meet import and foreign repayment needs. The sovereign rating is in the distressed “C” category on 3 percent GDP growth and inflation double that level. Tens of millions of citizens live in poverty and malnutrition and lack electricity also unavailable in the commercial hub Karachi. Saudi Arabia which has been a major donor has been approached for a $5 billion concessional credit for budget and power support pending resumption of a Fund arrangement which previously lapsed on failure to raise tax revenue-GDP from the 10 percent range. On the diplomatic front, the administration also hopes to slash the defense burden with assignment of “most favored nation” status to India to boost instead the meager $2 billion in bilateral commerce as the nuclear rivals otherwise skirt self-destruction.
