Country Report Tunisia
Securing stability is Tunisia’s main challenge, as political polarization and an upsurge in the radicalization of the population pose significant threats, while its realization is essential for a recovery of the economy and for restoring the increasing external and fiscal imbalances.
Strengths and weaknesses
Broad economic and export base
Al three sectors of the economy are strongly developed, and are further diversified across several industries. This is also reflected in the export basket composition and provides Tunisia with a strong base for weathering problems in any one industry.
High development and western values foster strong ties with the west
Decades of emphasis on social development have formed a highly educated society where liberal social norms prevail. These characteristics facilitated strong ties with the international community that provides financing for the current account deficit (FDI in good times, assistance in bad times).
Economic disparities and religious divide
The flipside of the high education medal is a structural skills mismatch, as demand for low-skilled workers predominates. The high level of unemployment (40% among the young in 2013) fosters an environment prone to social upheaval. An ideological sectarian divide makes matters worse.
Being a net importer of fuels and other commodities, Tunisia has a history of trade and – thereby – current account deficits. These deficits are mainly financed from FDI, rendering Tunisia highly vulnerable to market sentiment and external economic conditions.
1. Soaring twin deficits a matter of concern
The Arab spring caused a sharp deterioration of the current account deficit, as the domestic situation kept tourists away and the services balance plummeted. FDI also stayed away. In 2012 the government drew on the FX reserves to cover for the shortfall. The current account deficit grew to a historic high of 8.3% of GDP in 2012, partially driven by a weak demand from Europe. A slight improvement in FDI and much needed assistance from the international community provided the financing for the current account deficit and for building up the FX reserves to USD 8.4bn. Nevertheless, the import cover deteriorated to 3.4 months. 2012 saw another record being broken, as the fiscal deficit soared to 7% of GDP from a 2% of GDP average in the decade before and 2.8% of GDP in 2011, driven by significant increases in the public wage bill, and subsidies and transfers. The subsidies and transfers accounted for 7% of GDP and increased by 28% yoy in 2012. The large budget deficit was expected as the government had embarked on a fiscal spending spree to ‘buy stability’ in the aftermath of the Arab spring. However, both the fiscal and the current account deficits are expected to remain elevated, amid weak EU demand, a sluggish economic recovery and high recurrent expenditure, since radical subsidy cuts could lead to a social backlash. This means that Tunisia will remain highly dependent on external inflows, namely assistance from official creditors until market sentiment and consequently investments recover.
2. Donor assistance provides some risk mitigation, IMF agreement important milestone
The small steps taken to reduce energy subsidies in recent months and the reform plans of the government, geared at fostering inclusive economic growth and creating the fiscal space for capital investments, gained support with the IMF which agreed to provide a USD 1.75bn loan (executive board approval expected in May). An important vote of confidence for the Tunisian government. However, despite pledges from various members of the international community, disbursements are performance based and could be endangered by slow reforms or political uncertainty.
3. Population prone to radicalization, especially the young
The well-educated Tunisian youth is highly exposed to Western consumption patterns through television and the large diaspora. This awareness exacerbates the frustrations about the high unemployment among graduates and the low living standards in Tunisia, making the young population feel marginalized. The failure of the expected revolution dividend to materialize makes matters worse, rendering the young prone to radicalization. Meanwhile, the security vacuum caused by the Arab spring provides the environment for militancy to flourish. An increase in extremism is observable both on the domestic front where there is an upsurge in Salafism and related violence, and the international one, where Tunisians are increasingly recorded in terrorist activities abroad. Fearing the alienation of its more religiously conservative constituency, the ruling party failed to act on the increasing radical violence, which aggravated the domestic situation. The tensions culminated in the assassination of a secular opposition leader in February 2013, throwing the country in a major political crisis which undermined economic activity (in 1Q2013 tourism revenue and foreign investment dropped by around 10% yoy, while FDI in tourism and manufacturing was roughly halved). The harder line adopted by the government after the crisis could lead to a vicious circle between repression and radicalization, especially among the young, and poses a serious threat to stability.
4. Political tensions keep the country in limbo
The religious/ ideological divide in Tunisia has led to a highly polarized and fragmented political landscape. The ruling Al-Nahda party found itself trapped between the seculars (including coalition partners) and the Salafists. There is also an internal struggle between the moderates and the hardliners. Against this backdrop, Al-Nahda avoided defining its (religious) identity, fuelling mistrust on all sides. The high level of polarization, combined with Al-Nahda’s efforts to defend its dominance, held the constitution drafting in limbo. Social unrest after the assassination of a politician in February precipitated a cabinet reshuffle. The current more balanced composition (more independents) indicates the party is now willing to compromise. This bodes well for future collaboration and consensus. A final draft of the constitution was ready at the end of April, paving the way for elections in 2013. Political stability is crucial for implementing much needed reforms, attracting foreign investments and tourists, and securing donor assistance. However, despite breaking ground progress in the past month, political stability remains fragile.
Decades of emphasis on social development has turned Tunisia into one of the most modern countries in the region, characterized by a high level of education, remarkable gender equality, prevalent liberal social norms and a sizeable middleclass, despite lagging on political freedom. This can easily be noted from the social indicators above. Furthermore, focus on market-based policies created one of the most diversified economies in the region.
The inclination towards western values has also fostered close economic ties with European countries. France, Italy and Germany account for 55% of the export market, while the EU in general accounts for more than 70%. The EU also represents the main source of tourist receipts (75%), remittances (90%) and foreign investment. Consequently, Tunisia is highly susceptible to developments in the EU. Weak EU demand in recent years has rendered economic growth sluggish, and hindered the recovery of the convalescent Tunisian economy.
The macroeconomic indicators reveal several structural characteristics of the Tunisian economy. The country has a track record of prudent fiscal management, enabling it to maintain debt at manageable levels (below 50% of GDP) even in times of large fiscal imbalances such as in 2012. Furthermore, the large Tunisian diaspora provides a stable flow of remittances, maintaining the transfer balance at a steady 4 - 5% of GDP, and showed resilience to the economic turmoil in the EU.
Relative to its peers, decades of focus on social development brought Tunisia a good reputation for having fostered a modern society. After two long autocratic leaderships, the failure of economic development to include the educated young population burst into the social unrest called the Jasmine Revolution. The current political landscape is very fragmented and therefore fairly unstable.