Country Report Tunisia
Two political assassinations threw Tunisia in a crisis and hurt economic growth in 2013. In 2014, the political and security environment improved, as a new technocratic government fostered progress on the transition to democracy.
Strengths (+) and weaknesses (-)
(+) 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).
(+) Broad economic and export base
All 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.
(-) 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, higher among graduates, fosters an environment prone to social upheaval. An ideological sectarian divide makes matters worse.
(-) External imbalances
Being a net importer of fuels and other commodities, Tunisia has a history of trade and – thereby – current account deficits. Tunisia’s external financing needs make it highly vulnerable to market sentiment and external economic conditions.
1. Political environment improves
Two political assassinations threw Tunisia into a major crisis in 2013, but the instalment of a technocratic government and significant progress on the transition to democracy pave the way for increased stability, though there are still downside risks. On 25 July 2013, a secular member of parliament was murdered, representing the second political assassination in 2013. The country was thrown into a major crisis, as the event was linked to the failure of the ruling party, al-Nahda, to act on increasing sectarian violence by Salafists. In mass protests, al-Nahda was called upon to relinquish power. At the end of 2013, an agreement between al-Nahda and the opposition ended half a year of political stalemate. January was a break through month, when a new caretaking technocratic government was installed, a new constitution was approved and an electoral council was elected. Parliamentary and presidential elections, scheduled for the last quarter of 2014, represent an important milestone for completing the transition to democracy. Recent opinion polls indicate that the results will be tight. Therefore, it is expected that the elections will lead to the formation of a unity government that will increase political stability. However, stability could still be threatened by several downside risks: a less stable coalition due to political infighting, an escalation of social unrest within the economically marginalized rural interior and spill over and refugee problems caused by the unrest in Libya.
2. Higher security threat, as government cracks down on extremism
The political murders of 2013 increased social pressure on the authorities to launch a campaign against extremist violence, which in turn led to more terrorist attacks. Following the assassinations in 2013, authorities launched a campaign against extremism. They started a military offensive against jihad activists on the Western border with Algeria, declared Ansar al-Sharia, the largest Salafist group, a terrorist organisation, arrested suspected militants and cracked down on imams that incite violence. Some progress was reported, but the campaign also led to more terrorist attacks, including a failed suicide bombing of tourist targets, the first since 2002.
3. The economy slows down
The Tunisian economy slowed down in 2013, on the back of a weak grain harvest, domestic instability and increasing security risks. The latter will also constrain growth prospects in 2014. In 2013, the economy slowed down to 2.8%, from 3.6% in 2012. The slowdown was broad-based across sectors, as labour unrest hurt growth in manufacturing and mining, while political instability and deterioration in security hurt the tourism sector. The agricultural sector performed particularly bad, contracting by 4%, on the back of a 47% drop in the cereal harvest. The adverse impact of political instability and work disruptions was also visible on the expenditure side, especially a significant drop in gross fixed investments. Data concerning the first quarter of 2014 pointed towards a recovery in agriculture and a deceleration in all other sectors. The unstable political and security environment is expected to constrain economic growth in 2014 to a moderate 2.5%, as tourism and investments will need some time to recover. Besides, disturbances of the transition process or further deterioration of security pose downside risks to this scenario.
4. A persistently high twin deficit could strain financing capacity
A persistently high twin deficit might lead to financing difficulties, since funding relies on concessional borrowing, which is conditional on the implementation of reforms. Moreover, as FX reserves are very low, the risk of a balance of payments crisis has increased. Despite record low capital spending in 2013, the budget deficit soared from 2.7% of GDP in 2012 to 4.6% of GDP, on the back of a high wage and subsidy bill. Projections for 2014 predict a doubling of the budget deficit to 8% of GDP, despite subsidy reductions and efforts to contain wage expenditure. Despite the sharp increases, public debt remains fairly stable at 46% of GDP in 2013 and a forecast of 51% of GDP in 2014. On top of that, domestic financing remains readily available, which provides comfort. Changes in the external position, however, are more worrisome. Though the current account deficit was almost unchanged at 8.5% of GDP in 2013, stable net FDI flows only covered 29% of it, compared to 41% a year earlier. For 2014, the deficit is forecast at 8.3% of GDP and FDI coverage at 25%. Consequently, Tunisia has become increasingly reliant on external borrowing, especially concessional, to fund the gap. We find comfort in the fact that the IMF expects Tunisia to receive USD 4.1bn in external funding, most of it concessional, which roughly covers the current account deficit. However, considering the low level of FX reserves, slightly above the critical 3 month import cover, and the fact that most of the funding is contingent on reform implementation, Tunisia is not out of the woods yet and the risk of a balance of payments crisis has increased.
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 middle class. 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. The EU accounts for more than 70% of exports, and 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 recent years. Furthermore, the large Tunisian diaspora provides a stable flow of remittances, maintaining the transfer balance at a steady 4 - 5% of GDP surplus, 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. Nonetheless, the Arab Spring sprung from Tunisia, as after two long autocratic leaderships, the failure of economic development to include the educated young population burst into the social unrest. The current political landscape is very fragmented and therefore fairly unstable.