Tunisia’s Nascent Neighborly Nod

Tunisian shares turned slightly positive on the MSCI Index at the half-year on the second anniversary of a bloody beachside tourist attack, as the IMF praised the new unity government’s “corrective action” intent in its first checkup on its 4-year $3 billion facility, and strengthened security internally and along the Libya border preempted further incidents. Officials traveled  to Washington to thank the US Defense and Treasury Secretaries for support, with the message that Libyan reconstruction may also be in the frame in selected areas with civil war and ISIS presence waning. At the same time the Fund report underscored the advanced political transition despite economic lethargy and social discontent, with all coalition parties including the labor-union dominated wing pledging reform  and stability to redress budget and current account deficits, state bank dysfunction and runaway youth unemployment amid high university and training qualifications. This year’s GDP growth forecast was reduced to 2.5 percent from the original 3 percent due to fiscal and monetary tightening countering better phosphate exports and tourism. The medium-term aim is to reprise the 5 percent level existing under the previous authoritarian regime, which followed competitive policies tinged with insider corruption now under investigation and subject to asset recovery efforts. A controversial amnesty law would allow reported billions of dollars to be returned at minimum penalty and separate deals have already been negotiated with business executives close to ousted President Ben Ali allowing them to resume local activities. The legislation could be a major issue in upcoming municipal elections, which will also focus on the rural-urban and interior-coast income divide. The budget gap will again be 6 percent of GDP as wage increases in the bloated public sector overtake lower energy subsidies and a one-time 7.5 percent corporate profit charge. Pension fund arrears continue to mount, and financial transactions have also been hit by a special tax.

Inflation should stay under 4 percent despite near 25 percent currency depreciation since the end of 2015 amid double digit current account holes. The benchmark interest rate was lifted 75 basis points to 5 percent, and the central bank reintroduced foreign exchange auctions to bolster market determination. Civil service cutbacks are in store, and new performance contracts should pare state enterprise contingent liabilities. The three big government banks have been recapitalized with fresh management but the bad loan ratio is still 15 percent and resolution procedures are outdated, according to the IMF. An inclusion strategy embraces micro-finance, credit bureaus, digital services and small business access, and bond markets are a priority with yield curve development. The revised investment code will create a one-stop shop for international projects and public-private partnerships, but commercial climate rankings are “poor” on the World Bank and World Economic Forum surveys. Official debt is to settle at 70 percent of GDP by end-decade, but “slippages” have already endangered the goal and “unsustainable” government spending and “inefficient” legal and regulatory regimes impede overall transformation. After a EUR 850 million Eurobond, Qatar loan rollover, and donor pledges external financing is in place until early 2018 when additional sovereign issuance is scheduled which may no longer carry a third part guarantee if revolutionary progress can be consolidated, the findings suggest.

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