IMF calls for reforms in Tunisia to reduce fiscal deficit

North African country must control its wage bill, energy subsidies and transfers to state-owned enterprises, Washington-based lender says

Women walk on Habib Bourguiba avenue in Tunis. Tunisia's fiscal deficit is estimated to have widened to 11.5 per cent of GDP in 2020. Photo: EPA

Tunisia’s economy is estimated to have contracted by 8.2 per cent in 2020, resulting in higher poverty and unemployment, the International Monetary Fund said.

The North African country’s fiscal deficit is also estimated to have widened to 11.5 per cent of GDP because of lower revenue, a higher wage bill and transfers to state-owned enterprises, according to the latest report from the Washington-based lender on the country.

Although the IMF expects Tunisia’s GDP growth to rebound to 3.8 per cent this year as the effects of the pandemic-induced economic crisis begin to wane, it said considerable downside risks remain because of the uncertainty surrounding the duration and intensity of the pandemic and the timing of vaccination rollouts.

“Tunisia currently faces the dual challenge of saving lives and livelihoods until the pandemic wanes, while starting to bring fiscal and external imbalances back to a sustainable trajectory,” according to the statement from an IMF staff following a remote Article IV consultation mission.

“It is essential to strictly prioritise spending on health and social protection, while exerting control over the wage bill, ill-targeted energy subsidies and transfers to state-owned enterprises.”

The fund expects Tunisia’s fiscal deficit to narrow to 6.6 per cent of its GDP this year, based on its 2021 budget. IMF staff encouraged the government to continue to strengthen social safety nets and enhance public investment.

Tunisia’s economy, which is largely reliant on tourism, has taken a hit in the wake of the Covid-19 crisis. Moody’s expects its GDP to have contracted 6.5 per cent in 2020 and forecasts growth of 4 per cent this year as it recovers from the pandemic shock. The ratings agency expects growth to average 2-3 per cent per year thereafter.

The IMF in April approved a $745 million emergency loan for Tunisia to help the country mitigate the impact of the Covid-19 crisis on its economy.

It added that a credible reform plan backed by Tunisian society and international development partners is critical to help achieve durable and inclusive growth over the medium term. These reforms should cover Tunisia’s civil service wage bill, “currently among the highest in the world”, subsidy reforms, the role of state-owned enterprises in the economy, the informal sector, tax equity, anti-corruption reforms and the business environment, according to the release.

The IMF also called on the Central Bank of Tunisia to avoid future monetary financing of the government because it risks reversing gains achieved in terms of lowering inflation and could weaken the country's exchange rate and its foreign currency reserves, undermining financial stability. It added that monetary policy should continue its focus on inflation by steering policy rates and preserving exchange rate flexibility.

“Raising potential and inclusive growth will require more private sector initiative and competition, including by removing monopolies and other distortions,” the IMF said, welcoming the government’s aim to cover at least 30 per cent of the nation’s energy needs through renewables by 2030.