Tunisia’s Overdue Aid Revolution

Since instigating the Arab Spring in 2011, Tunisia has been held up by the international community, which plowed in billions of dollars in aid under standard bilateral and multilateral programs, as a rare political model of competitive democratic elections even though economically it has been stuck in a lost decade of stagflation. That disconnect helped explain the runaway 70% victory of a total outsider, retired professor Kais Saied in the October presidential election after his predecessor died in office. He had no party and limited campaign appearances, and his vague platform called for Tunis to devolve more power to localities and later for a popular shift “from frustration to work” in the inaugural speech. Voters rejected a business executive as savior as opponent Nabil Karoui spent time in jail on corruption and money-laundering charges and could not expand his personality-driven movement beyond parliamentary seat gains.

 The legislative polls around the same time, with ministries and state largesse to be handed out, will more decisively drive the economic and financial system agenda, but the Islamic-leaning coalition Ennahda did not win a majority as the main secular rival Nidaa Tounes was shellacked. Negotiations on a working government arrangement could be prolonged and a recipe for gridlock, as another International Monetary Fund adjustment program disappoints and public debt exceeds 70% of gross domestic product. After attempting coordinated “Marshall Plans” targeting fiscal and banking overhaul and corporate and official governance in the early post-Arab Spring period, the US, EU and Asia have slashed commitments and gone their separate ways. With Tunisia supplying ISIS fighters and facing its own terrorist challenge after bloody tourist attacks, money and focus were diverted to security issues. No new initiatives will accompany the latest election round, as opinion surveys show longing for the last decade’s dictatorship when growth was double and unemployment half current trends. In the vacuum the global business and financial communities can step up, and offer to act as standing advisers to help avoid looming crisis and pave the way for mainstream emerging market entry.

The IMF predicts 1.5% growth this year, half the original forecast, and 2.5% in 2020 on estimated 30% youth unemployment. The second quarter showed a broad-based output drop across agriculture, construction, textiles, and mining despite tourism recovery. Inflation is almost 7% and the benchmark interest rate is 1% above that level. The budget deficit is due to come in at the lowest since 2011 at 3.5% of GDP, with debt-servicing one-fifth and the public sector and enterprise payroll 40% of the budget. The government took out a $3 billion Fund loan in 2016, with another $500 million disbursement scheduled soon. The powerful labor union federation extracted wage increases from its leverage over the political process and continues to lead widespread strikes. Its hiring demands and sit-downs have brought the state-owned phosphates producer in Gafsa, accounting for 10% of exports, to the brink of collapse. The group fights partial privatization on ideological grounds dating from the post-independence era from France, despite desperate plant modernization and fiscal revenue needs.

International financial institutions have long criticized the inefficient and unproductive official sector and thin private competitive and capital base, as first half debt principal repayment jumped 50% to $1.2 billion, according to the Finance Ministry. Poverty is stuck at 15% despite higher social spending, and $1 billion will be borrowed domestically and $3 billion externally next year, including another planned $750 million-plus Eurobond after one in July at a 6.5% yield. On the brighter side the currency stabilized against the dollar and euro heading into elections, and foreign direct investment rose 15% to $400 million in the first half as the government promotion agency unveiled a digital platform. In contrast portfolio inflows were down one-third as Tunisia’s MSCI index frontier stock market component was slightly negative through September.

Stock exchange capitalization is a paltry 20% of GDP versus 70% in neighboring Morocco, and former Finance Minister Jaloul Ayed is among critics of the lack of capital market deepening and reform, including development of secondary Treasury bond trading. Officials came to  Washington several years ago under a regular US-Tunisia Economic Council meeting intending to tap global banks and fund managers for long overdue internal modernization and cross-border integration, but the agenda was overwhelmed by State Department counterterrorism concerns, and gatherings have since been shelved. In additional financial sector areas, from bank privatization to anti-money laundering after the country was recently removed from an international watch list, reimagined assistance can again lift revolutionary spirits and tangibly raise trust in improved living standards. According to studies only 30% of the population still believes in that promise, and market progress after years of neglect could boost investor and citizen confidence.  

Posted in