Tunisian Central Bank projects ‘frightening’ economic outlook

The value of energy imports quadrupled and earnings from phosphate exports and tourism shrank 75% and 50%, respectively.

TUNIS - Citing figures on inflation, growth and productivity, Central Bank of Tunisia Governor Marouane El Abassi raised the alarm about the country’s economic situation.

“The figures about the economy are frightening but while I see problems, I also see solutions to resolve the economic crisis,” Abassi said.

Abassi urged Tunisians to help find solutions to the economic challenges.

“We have to work together to go through the steep slope of this year,” he said at a parliamentary hearing February 25. “It is an election year and creditors and investors are observing a wait-and-see stance.”

Tunisia’s parliament summoned Abassi after the Central Bank raised the benchmark interest rate for the third time in a year. The hike was criticised by the country’s main trade unions and employers’ groups, which expressed concern over how it could affect Tunisians’ purchasing power.

“It was not easy to take the decision of raising the interest rate. Do you think as a governor of the Central Bank I want to hurt people in their purchasing power or businesses?” asked Abassi. “The move was necessary because inflation will be the main threat to the economy if it gets out of control.”

The Central Bank increased the interest rate 100 basis points to 7.75% on February 19 to combat inflation. The move came after the government-run National Institute of Statistics released data on Tunisia’s economics performance for 2018 showing meagre growth, low productivity, high inflation and a weakening currency.

The increase was opposed by the Tunisian General Labour Union (UGTT) and the Tunisian Union of Industry, Trade and Handicrafts, which said it would hurt investment and inflict hardship on the poor.

However, Tunisian experts said the decision was necessary to fight inflation and secure funding from the International Monetary Fund (IMF) to cover the national budget and trim the deficit. Tunisia reached a $2.8 billion loan deal with the IMF in 2018 but agreed-on reforms have failed to take shape.

The UGTT staged a nationwide strike January 17, the first such work stoppage in 40 years, to protest the government’s refusal to raise the salaries of public service employees. It called off a later strike after the government agreed to wage increases. Economists estimated the salary hike would cost the country $327 million and spur inflation, ultimately hurting the poor.

Abbasi said the IMF had delayed a scheduled visit Tunisia to assess the country’s economic performance before granting a new crucial loan instalment.

“The IMF’s continuing support will enable us to convince the rest of the lenders to grant Tunisia the needed foreign funding for the 2019 budget estimated at $3.3 billion,” Abbasi said.

Tunisia’s foreign debt service repayment stands at $3 billion for 2019, data from the Central Bank indicated.

Abassi told parliament that, if the Central Bank had failed to gradually raise the benchmark interest rate, inflation could be “in the double digits now.”

“In my view, we should have raised [the rate] by 100 basis points instead of the 25 points in the previous periods of rate hikes,” he added. “Inflation would be lower now.”

Abassi warned that the most recent hike would not be the last if inflation continued to rise and growth remained stagnant.

He pointed to the steep decline of the country’s current account as a reflection of the country’s severe economic deterioration since 2011.

“Tunisia’s industry is dying slowly and imports are increasing,” Abassi said. “Even if you trim no essential imports, the problem remains as they are not the most important.”

He said the “real problems” were reflected in an energy balance that went from being in balance in 2010 to a $2 billion deficit now. Abassi also pointed to sharp declines in earnings from phosphate exports and tourism.

“The decline from such key sectors of the economy feeds the structural deficit of the current account, which causes imported increase of the inflation and affects the value of the dinar with rising inflation at the end,” he said.

The current account deficit swelled from $985 million in 2010 to $3.9 billion in 2018, accounting for 11.2% of the country’s GDP, data from the Central Bank showed.

The current account balance is a key measure of a country’s foreign trade. A deficit indicates the level at which imports exceed exports.

Tunisia’s net foreign currency outflow to finance imports grew six-fold from 2010 to 2017, equalling $2 billion. The value of energy imports quadrupled and earnings from phosphate exports and tourism shrank 75% and 50%, respectively, the World Bank said.

“All of us must cooperate in solutions, including as consumers,” urged Abassi. “We have to consider that, if we buy imported goods or goods from the parallel market, we hurt our foreign currency reserves and the jobs in the real economy.”

He stressed that it was critical for the Central Bank to maintain its neutrality and “relative independence,” staying outside the fray of political infighting to bolster Tunisia’s credibility abroad.

Lamine Ghanmi is a veteran Reuters journalist. He has covered North Africa for decades and is based in Tunis.

This article was originally published in The Arab Weekly.