Long-viewed as an open economy with a unique geographic position at the centre of the Mediterranean, Tunisia has had difficulty in managing the macroeconomic situation following the 2011 revolution. Budgetary pressures, combined with a strong devaluation of the dinar and a rise in the level of business informality, have made the current environment a challenging one. However, a host of structural reforms is being implemented and improved performance in some of the country’s key sectors are helping to bring some relief to the economy, albeit at a slow pace. Demands to fulfil the promises that stemmed from the 2011 uprising continue to be balanced against the need to reform the economy and reduce the budget deficit.
A stronger sense of stability has come about after Prime Minister Youssef Chahed was appointed to lead a new national unity government in August 2016. Although the government’s decisions have been contested at times, especially when new austerity measures were adopted in 2018 as part of state attempts at structural reform, relative stability and recovery in key indicators are helping bring the economy back on a surer footing.
Walking the Line
Still, like most of its predecessors in recent times, the current government is up against multiple forces that are impacting the Tunisian economy at large. In 2016 the authorities signed an agreement with the IMF for a $2.6bn loan to be disbursed over a four-year period. As of March 2019 a total $1.4bn had been paid in four instalments. However, the disbursement of loan tranches by the IMF has at times been delayed over the speed of reform that the financial institution is requiring of Tunisia. This has led authorities to tread a difficult path between demands for restructuring that ask even more sacrifices from Tunisians and securing the foreign financial support needed that has become critical to the country’s budget. Reining in public current expenditure to help reduce the deficit has become a primary reform objective, but this has contrasted with demands to create more jobs, attract new foreign investors and help reboot critical sectors such as tourism, manufacturing and phosphate production. “Government investment projects are delayed and there is a low level of execution because of bureaucratic slowness. This contributes to public discontent because the population do not see projects advancing at the desired pace,” Kamel Ghazouani, professor of economics at business school IHEC Carthage, told OBG.
Despite the challenges, annual GDP growth has accelerated in recent years, expanding by 1.1% in 2016, 2% in 2017 and 2.5% in 2018. The economy is predicted to grow by roughly 3% for the whole of 2019, according to mid-2018 government estimates. Nominal GDP rose from TD84.6bn ($29.4bn) in 2015 to an estimated TD106.2bn ($36.9bn) in 2018, according to figures from the IMF, and economic output is expected to reach TD116.9bn ($40.6bn) in 2019.
One positive indicator in recent years has been the gradual expansion of Tunisian goods and services exports. After growing a mere 0.2% in 2016, exports rose by 4.2% and 5.2% in 2017 and 2018, respectively, per World Bank data. Economic growth in 2018 was also driven in part by performance improvements in key sectors. Agriculture grew by 9.4%, due to a large extent by increased exports of olive oil and dates, while the tourism sector and its associated services expanded by 8.9%.
Tunisia has traditionally been a major manufacturing hub in the Mediterranean, with years of investment in education and training. However, the macroeconomic imbalances brought about by the swift political changes of 2011 have resulted in shifts to GDP composition. According to the “African Economic Outlook 2018” report by the African Development Bank, the weight of extractive industries in the economy fell from 8.5% in 2008 to 3.3% in 2017. This was led by a significant weakening of the phosphates segment, as well as a slowdown in natural gas and oil production. The manufacturing sector, meanwhile, dipped from 19.5% of GDP in 2008 to 16.4% in 2017. This was partially caused by a reduction in industrial investment stemming from economic uncertainty.
Specific factors, such as the rise of the informal sector (see analysis), have been challenging for long-term industrial projects that can require heavy financial backing. “Informal economy competition has exploded over the past eight years. Now there is competition between manufacturers that pay salaries and taxes, and traders that bring containers full of merchandise from abroad and do not have to deal with the same overhead costs. As it is critical for private investment to restart in Tunisia, it is urgent to give comfort to medium and small enterprise that fair competition will be fostered to protect their investments,” Rafik Mzah, chief legal officer at capital market group AfricInvest, told OBG.
The private sector has also been affected by disturbances in neighbouring Libya and Algeria, two of Tunisia’s major trade markets. “Libya was a natural market for Tunisian manufactures and small and medium-sized firms, so the problems there have really affected Tunisian companies,” Mzah told OBG.
Changes in the public sector, for its part, have come from strengthening target areas. Public administration and defence spending accounted for 21.6% of GDP in 2017, up from 15.5% a decade earlier, reflecting rising expenditure related to public salaries and social needs, as well as increased investment in the military. The latter has helped Tunisia combat the threat of terrorism and improve security during its ongoing democratic transition.
In an attempt to mitigate the difficult environment, the government has been improving the competitiveness of the economy. According to the World Bank’s 2019 “Doing Business” report, a yearly measurement of the environment companies face in economies across the globe, Tunisia ranked 80th out of 190 countries. This represents an eight-spot improvement over its 2018 classification. Tunisia found itself below regional neighbours Turkey and Morocco, ranked 43rd and 60th, respectively, but above South Africa (82nd), Egypt (120th) and Algeria (157th). Tunisia’s highest scores were in the categories of getting electricity and starting a business, where the country placed 51st and 63rd, respectively.
Tunisia’s ease of doing business score is likely to rise in the report’s 2020 edition as well, on the back of the successful passage of the Transversal Law in April 2019 (see analysis). This large package of legislation builds on previous moves to further improve the business environment across multiple facets, including access to credit, starting a business and executing public-private partnerships (PPPs).
The law also furthers the country’s digitalisation drive to do away with large cash payments to help improve efficiencies while reducing corruption and tax evasion. After reforming public procurement laws in 2013, Tunisia launched the Tuneps platform, which moved government tenders online. In the years since then officials’ efforts have garnered international support. In February 2019 the German government gave Tunisia a €40m grant to continue digitalising state procedures.
Two years after overhauling the public procurement system, an updated PPP Law was adopted in November 2015 with a parliamentary vote. The regulation established a general PPP framework to ensure the same model is implemented across different sectors of the economy (see analysis).
A landmark piece of legislation in 2018 was the Start-up Act, approved in April of that year, which detailed 20 regulatory measures to clear a path for entrepreneurs to enter the formal economy. Included in the act were benefits such as exempting start-ups from corporate tax for up to eight years and capital gains tax exemptions for investors who finance start-ups.
Encouraging start-ups is critical to revitalising certain sectors of the economy that have remained closed to competition. “Family conglomerates are present in several protected sectors, meaning they are not necessarily motivated to invest and innovate,” Gérald Audaz, section chief for economic development at the EU Delegation in Tunisia, told OBG. This reality is perpetuated by an insufficiently active banking sector. Although 26 banks operate in the Tunisian financial system, their impact in the real economy is limited at times, as banking institutions are integrated in specific industrial and economic business groups. Complementing the Start-up Act, business creation was streamlined with the May 2018 publication of decree 2018-417 on economic activities, which listed every type of business activity requiring a government licence and those that are exempt, the public office where the licence needs to be procured and the maximum time frame for the licence to be provided. By clarifying the steps private operators need to take with the government, as well as eliminating 27 authorisations, strides have been made to remove obstacles for entrepreneurs.
Efforts to support the business environment are being coupled with borrowing and cost-saving moves to improve Tunisia’s overall budgetary situation. According to the Ministry of Finance, 66.3% of financial resources in the 2019 budget are expected to come from taxes, non-tax resources will amount to 8.9% and the remaining 24.8% is due to come from borrowing.
Since 2010 the country’s outstanding public debt has increased considerably, from 40.7% of GDP that year to 72% in 2018. While the authorities project the debt-to-GDP ratio to drop to 70.9% in 2019, Tunisia still faces a long road ahead in terms of effectively reducing the debt burden. The goal is to lower the budget deficit from 5% in 2018 to 3.9% in 2019. However, with figures for the first quarter of 2019 showing a slower GDP increase of 1.1% year-on-year (y-o-y) compared to 2.7% y-o-y in the same period of 2018, there is still progress to be made.
The need to shore up its finances has also propelled the government to take steps to improve tax collection. These will include measures to combat tax evasion and reduce the weight of the informal sector (see analysis). Tax revenues are expected to tick up from 21.8% of GDP to 24% between 2015 and 2023. The government is also aiming to reduce spending by restricting the replacement rate for departing and retiring public sector workers. “Part of the budget problems stem from the high weight of public employee salaries, but also from public companies that are in difficulty. There is a lot of resistance to reforming these firms and this greatly affects the budget,” Ghazouani told OBG.
Tunisia stated that up to $2.5bn worth of external financing would be required to cover the 2019 budget. Indeed, in late May 2019 Tunisia launched an $800m eurobond to raise needed funds. A similar bond had been initially rejected by the parliament’s Financial Commission earlier that month in an attempt to limit the debt instrument to $500m.
Despite the financial challenges, the positive performance of important sectors is helping to relaunch the economy. The tourism sector, for its part, has traditionally been an important source of foreign currency. Furthermore, through its impact on associated services, it also acts as a vital source of employment. However, the sector was badly affected by the post-2011 instability, especially in 2015, when a series of terrorist attacks targeted tourists. Government efforts to improve security, though, have already translated into an improvement in tourism activity. In 2018 nearly 8m tourists visited Tunisia, bringing in TD4bn ($1.4bn) for the sector. The last year the country had attracted that volume of visitors was 2010, prompting optimism about the sector’s recovery among stakeholders. For 2019 the Ministry of Tourism set a goal of attracting as many as 9m visitors to the country. “Tourism has a great impact on the Tunisian economy. It accounts for 6.7% of GDP, but its associated impact is about 13.8% because of its indirect impacts on transport, construction and other activities,” Mongi Safra, director at KPMG Tunisia, told OBG.
Other sectors have faced a more difficult road to recovery. Phosphate extraction and processing used to play a critical role in the economy, but as of 2018 phosphate represented just 4% of all exports, compared to 10% in 2011, according to the Ministry of Industry and Energy. Although the country produced over 8m tonnes of phosphate before 2011, it has not been able to surpass the 4m-tonne mark in any of the subsequent years; phosphate output was 3m tonnes in 2018. Part of the industry’s current situation grew from excessive hiring and repeated labour instability that has disrupted phosphate-producing areas in recent years.
Sector authorities have said there is potential to double 2018 production figures in the short term, but this would depend on being able to face worker protests at production and transport facilities. The first quarter of 2019 saw some positive developments, however, with the production of raw phosphates almost doubling to 933,700 tonnes from 468,600 tonnes in the same period of 2018.
Taking advantage of its geographic position in the Mediterranean basin, as well as having accessibility to a pool of well-trained human resources, Tunisia has developed a large part of its economic model on the back of manufacturing capacity and exports. This has led to a close commercial relationship with EU countries. Indeed, according to figures from the Tunisian Observatory for the Economy, the EU accounted for 75% of Tunisia’s foreign trade between 1995 and 2005. However, by the close of 2018 trade between Tunisia and the economic bloc had reduced to 62% of all of the North African country’s international exchanges.
Exacerbated by the dinar’s decreasing value, the government has had to with a persistent trade deficit, which expanded to TD3.97bn ($1.4bn) in the first quarter of 2019, up from TD3.66bn ($1.3bn) in the same period of 2018. As of April 2019 imports had reached TD15.81bn ($5.5bn), a 14.3% increase relative to the prior year, according to the National Institute of Statistics. Further expanding the volume of the country’s exports is critical to strengthening foreign exchange reserves, which had dwindled to approximately $4.36bn in April 2019, an 7.1% decrease when compared to the previous month.
More broadly, the Tunisian economy continues to be challenged by a structural lack of investment. The investment rate – which includes investment by companies, the state and households – was around 18% in early 2019, down from 25% at the beginning of the 2000s, according to the EU Delegation in Tunisia. “When comparing Tunisia to neighbouring economies like Morocco, Algeria and Turkey, one will see that they have investment rates of about 30%,” Audaz told OBG. One way that the government has been trying to make up for its reduced investment space is by utilising the PPP mechanism, which is likely to accelerate over the coming years as the economic and political environment is expected to become more stable.
Foreign direct investment (FDI) already saw an increase of 28.6% in 2018 to TD2.87bn ($996.8m), according to the Foreign Investment Promotion Agency. A large proportion of FDI went into the industrial sector, which attracted TD1.13bn ($392.5m), a 15.9% improvement on 2017 figures. The energy sector also experienced 12% higher FDI inflows, at TD910m ($316.1m). Services activities brought in TD626.1m ($217.5m), up 95%, while agriculture attracted TD76.5m ($26.6m), up 199%.
When it comes to the labour force, the country faced relatively high unemployment rates even before the 2011 revolution, especially among young graduates and in the interior regions. As of mid-2018 the overall unemployment rate stood at 15.4%, but was as high as 29.4% among new graduates, according to the World Bank. Additionally, 22.8% of Tunisian women were unemployed, as were 35% of Tunisians between 15 and 24 years of age.
Another problem is the mismatch between the type of work currently on offer and the expectations of prospective workers. “Besides unemployment, there is a resistance to work by some youngsters who do not find the available work and salaries appealing,” Ghazouani told OBG. The Start-up Act can be crucial in this regard, allowing young people to create the type of work they are interested in.
While Tunisia remains a country with a number of strong assets on which to base future development, challenges of the last few years have slowed policymakers’ drive to adequately plan and execute necessary reforms to make the economy more competitive. However, several measures implemented by the government in 2018 and 2019 are helping to clear a path for Tunisian entrepreneurs, which is hoped to help reduce informality.
Still, to successfully implement a new growth dynamic over the medium term, Tunisia will need to establish a clear consensus about economic reforms. Issues like the governance of key state companies, regional development and the establishment of industrial clusters are likely to command the country’s development agenda for the coming years. Public sector reform, although unpopular under the current environment, is also still seen as critical to reverse Tunisia’s unfavourable budgetary position.
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