Financial Analysis

Analysis: How Tunisia reached financial meltdown | Business and Economy News

Tunis, Tunisia – The shock that followed the July 25 power grab by President Kais Saied is gone, and Tunisians now wake up to one of the most dangerous economic crises since independence.

Because everything is politicised in Tunisia, people like to harangue about who is responsible for the collapse of the country’s economy rather than understand its real causes and discuss the best solutions to save it.

Decades of corruption, clientelism, and the absence of any form of strategic planning are not the only symptoms of the chronic economic crisis inherited by post-revolution Tunisia. Some phenomena have been aggravated. Others were born with the revolt.

Although easily available, Tunisians hardly give importance to the real figures about their country’s finances and external debt.

Official government data show that Tunisia has about 700,000 public workers, including school and university teachers. In 2020, the total salary bill was about $5.6bn, thus absorbing nearly 70 percent of the state’s yearly resources.

Both for legitimate rights or merely for political aims, thousands of strikes and sit-ins have taken place every year since 2011.

Backed by the extremely strong Tunisian General Labour Union, or UGTT, workers in the public and private sectors have won varying amounts of salary increases after the 2011 revolution, much more than any time before.

The rates of civil servants’ absenteeism are high and industrial production is close to zero. UGTT, Tunisia’s main trade union, has played a major political and social role after 2011.

“UGTT has closely and strongly contributed to all the stages of the political process in Tunisia since 2011,” noted Adel Samaali, a Tunisian banker and financial expert.

“This organisation was represented by ministers and high officials in all the governments constituted after the revolution. Their views and decisions were always heard and taken into consideration.”

Historically controlled by Tunisia’s Marxist parties and extreme-left unionists, UGTT is often criticised for bureaucracy and corruption and blamed for hindering any plan for social and economic reforms.

The consumer goods distribution sector is controlled by powerful and corrupt intermediaries who are neither the producers nor the sellers but the ones who decide prices.

Bureaucracy, systematic corruption in the customs and public services, and decaying legislation discourage any form of investment by Tunisians or international companies. Hundreds of foreign firms that were here ended up leaving the country.

A handful of families and business groups have controlled the whole of Tunisia’s economy since 1956.

Although rich in natural resources – phosphate, oil and gas, salt – and agricultural products – wheat, olive oil, dates, fish, fruit – these sectors contribute little or nothing to the gross national product.

Added to political instability and security incidents, mainly since 2014, production and export reached their lowest rates ever.

The devaluation of the Tunisian currency has led to an increase in prices and an unprecedented inflation rate estimated at 6.2 percent today.

While Tunisia’s unemployment rate reached 17.8 percent in March, an additional 600,000 Tunisians have fallen below the poverty line following two years of the COVID-19 pandemic.

Demonstrators carry flags and banners during a protest against Tunisian President Kais Saied’s seizure of governing powers on October 10 [File: Zoubeir Souissi/Reuters]

Enormous external debt

Ideological disputes and political arrangements prevented all the elected governments, parliaments, and presidents since 2011 from tackling the real sources of the crisis.

Tunisia’s total external debt today exceeds $40bn.

In the short term, the newly appointed government has to deal with a budget hole of more than $3bn for the remaining period of 2021, said Georges Joseph Ghorra, of the International Finance Corporation (IFC).

Ghorra, IFC’s Tunisia country manager, warned this budget hole “could get bigger” because of the dinar’s fall and the rise of oil and wheat prices on international markets.

Filling this gap requires a complementary budget law and a parliament to debate and vote on it, which is not the case today in Tunisia.

Until the end of the current year, Tunisia needs to borrow 15 billion dinars ($5.3bn) for salaries and debt repayments.

Ridha Chkoundali, a financial expert and university lecturer, links the financial crisis to “the post-revolution economic situation”.

“The public sector has supported the biggest part of the social unrest while the private sector has shrunk due to investors’ fears from political and security instability,” said Chkoundali.

Samaali explained that Tunisia “inherited the biggest part of this debt, $22bn, from the Ben Ali era”.

“Debt instalment repayments and considerable par increase for public workers since 2011 have contributed to the current situation,” Samaali said.

“The different governments that followed the fall of the Ben Ali regime were compelled to regularly borrow money to pay the older debts.”

How July 25 aggravated the crisis

Since his election in 2019, President Saied has added more problems to Tunisia than he brought solutions.

Promoting populist politics and one-man rule, Saied does not believe in foreign assistance to Tunisia and rejects international cooperation.

In May 2020, while on a visit to France, Saied shocked Tunisians and others when he declared the situation in Tunisia is “not good for foreign investment”.

He even slammed the work of international institutions and rating agencies. “The rating agencies cannot give us any grades they want. We are not their students and they are not our teachers,” the Tunisian president said.

As talks with the International Monetary Fund over a third loan were suspended after Saied’s measures, Moody’s recent downgrade of Tunisia’s credit rating to “C” shed light on the present and future repercussions of Saied’s power grab last July 25.

“This downgrade did not surprise me and it means that Tunisia urgently needs deep, structural reforms,” explained Samaali.

“Without these economic reforms, Tunisia will enter an unprecedented crisis and will be soon unable to get new loans unless at very hard conditions.”

‘A clear road map’

Chkoundali noted the international rating agencies – such as Moody’s, Standard & Poor’s and Fitch Ratings – are closely watching political developments in Tunisia.

“[They] take into consideration the political aspect and use scientific data to assess and rank the countries,” he said.

“Saied’s comments about the need to change the sovereign ratings approach of international rating agencies are not based on any scientific principle. Saied has to set a deadline for exceptional measures and disclose a clear road map for the period to come.”

At the economic and financial level, Chkoundali urged new Prime Minister Najla Bouden Romdhane’s government to “do their best to convince the International Monetary Fund to relaunch negotiations with Tunisia” on new instalments.