Tunisia Begins Debt-to-Repay Cycle

Published November 3rd, 2019 - 12:00 GMT
Tunisia Begins Debt-to-Repay Cycle
Tunisia’s debt as a proportion of its GDP widened from 35% in 2010 to an estimated 80% this year. (Shutterstock)
Tapping into foreign markets for borrowing will come with additional economic costs

Tunisia will funnel its loans to pay next year’s debt as an intensifying economic crisis pushes the country into a vicious borrowing cycle to plug its liability gap, officials said.

Tunisia has taken on increasing debt since 2011, when the Islamist Ennahda Movement and its secularist allies in government did not initiate reforms to stabilise the economy.

The country previously channelled most of its borrowing to expand the country’s capital account potential and invest in public health, education, infrastructure and local development that helped it reach an average annual GDP growth of 5%. After 2011, however, borrowing went largely to fund government salaries and subsidies.

As a result, Tunisia’s debt as a proportion of its GDP widened from 35% in 2010 to an estimated 80% this year. It is projected to reach 89% next year, official figures indicate.

“The indebtedness stems from our deficit,” said Taoufik Rajhi, the minister in charge of major reforms. “We spend more than we get in the state budget resources.

“Our spending goes mainly to pay public service salaries and subsidies,” such as electricity, gas, petroleum products, water, sugar, coffee, music festivals and television programmes.

“The country lives on state subsidies and we as Tunisians are all responsible for this debt situation even when we buy a loaf of bread,” he said.

Tunisia’s high level of debt and service repayments leave little for investment and development. This forces the government to balance the demands of a population for better public services with the risk of companies facing bankruptcy.

Tunisia’s draft 2020 budget underscored how few options the government has. It envisages spending 47 billion dinars ($16.7 billion) next year, up from 40.8 billion dinars ($14.5 billion) this year.

The amount allocated to debt servicing — $4.3 billion — exceeds the combined funds designated for development, investment and subsidies.

Rajhi said authorities will borrow the amount needed for debt servicing; some $3.2 billion will be sought from abroad while the remainder would be from the domestic market.

Tapping into foreign markets for borrowing will come with additional economic costs, experts said.

Siphoning a small domestic market to finance the budget debt would compete with private sectors for funding.

Borrowing from abroad forces the government to improve its economic indicators, which includes trimming the budget deficit to bolster its credit level.

“As a result, the economy is almost at a standstill today,” said financial expert Ezzedine Saidane. “The country produces no growth and does not invest while it is piling up deficits and debt. The reasons behind this situation are strictly political.”

The government said it reduced the budget deficit to 4.8% of GDP in 2018 from 6.1% the previous year and plans to cut it to 3.9% this year and 3% in 2020.

The government also improved some economic indicators, including inflation, the value of the local currency and foreign currency reserves. However, growth remained too weak to spur job creation and reduce a 15% unemployment rate. The unemployment rate for young people and women is 30%.

The Central Bank of Tunisia said the inflation rate was flat year-on-year at 6.7% in September while the country’s current account deficit had narrowed to 6.4% for the first nine months of the year, compared with 8% in the same period of 2018. It attributed that to a lower trade deficit, rising tourism earnings and remittances from Tunisian expatriates.

Despite the progress, the Central Bank cautioned that “economic growth remains weak.”

“The GDP rate rise should not exceed 1.4% for year 2019 mainly due to the poor performance of exporting sectors and mining activities,” it said.

The bank said net assets in foreign currencies totalled $6.6 billion on October 25, the equivalent of 104 days of imports, versus $4.9 billion in the same period in 2018.

As a result, the dinar “is continuing its improvement versus the euro and the US dollar due to the excess of liquidity on the foreign exchange market,” it said.

Tunisia’s currency has depreciated almost 50% since 2011, fuelling inflation as prices of imported goods rose, increasing the country’s debt costs.

Saidane said Tunisia’s foreign debt “jumped 70%” from 2016-18 from $22 billion to $37.3 billion.

“This massive indebtedness continues apace in 2019,” he said. “Unfortunately, all this debt was not used to fund productive investments that should enable Tunisia to repay its debts in normal conditions.”

While the country’s political elite focuses on forming a new cabinet and government that will develop an economic programme for the next five years, only new President Kais Saied and a member of parliament offered proposals to free Tunisia of (its) debts.

Saied suggested Tunisian employees could volunteer one day of their pay each month for five years “to fill the state coffers with money and end the debt burden.” Trade unions said wealthy Tunisians must contribute first and experts estimated that one-day contribution by employees would yield $177.5 million annually.

“It is possible to overcome the indebtedness if we accept austerity to share sacrifices and eat grass for 15 years, if required. The question is: Are we able to do that?” said MP Slah Bargaoui.

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