Tunisia

Although external liquidity remains at manageable levels, Tunisia’s rising external financing gap has increased its external solvability risk. Tunisia received an allocation of special drawing rights (SDR) from the IMF of around USD740mn (SDR 522.550mn) at end-2021. As a result, official foreign exchange reserves increased to USD8.2bn, covering four months of exports. However, in the current global context of rising commodity and food prices, we expect a rapid erosion of reserves via imports. In addition, the war in Ukraine is further delaying the recovery in tourism activity, which had been seriously hampered in the past two years due to Covid-19. The confidence shock in Europe, Tunisia’s main export partner, is also likely to weigh on export revenues.

At USD40bn, Tunisia’s total external debt (public + private) stands at over 100% of GDP. Around 50% of government debt is in foreign currency, and the country’s financings needs are estimated at EUR5bn per year for its external debt payments. The refinancing of maturing external debt represents a significant risk as Tunisia has been cut off from international capital markets since 2019. In addition, the IMF Extended Fund Facility arrangement (signed in May 2016) was cancelled in March 2020 following poor implementation results.

After the Arab spring, Tunisia’s public debt has increased dramatically from 39% of GDP in 2010 to 77% of GDP in 2018. The IMF projects the debt-to-GDP ratio at 94%, stating that public debt  “would become unsustainable unless a strong and credible reform program were adopted with broad support".

Government funding needs will be as high as 9% of GDP in 2022 and 2023 due to the widening fiscal deficit and debt-amortization burden. Wages and interest payments already absorb close to two-thirds of government revenues. With the economic shockwaves from the war in Ukraine, fuel, cooking gas and cereal price subsidies will continue to widen the deficit in 2022 (-9% of GDP). After the end of the previous IMF program in 2020, the Tunisian government has been increasingly relying on domestic sources, mainly commercial banks, for short-term financing. This comes with a great cost in terms of rising inflation and worsening financial stability risk as commercial banks are highly exposed to the sovereign.

Indirect financing operations from the central bank may delay a sovereign default further in 2022. Nevertheless, we expect the government to face increasing liquidity shortages to cover its administrative expenses and exports. The public sector’s cash-flow difficulties have already manifested since end-2021, with payment delays on cereal imports and public wages.

Amid  rising sovereign default concerns, government bond spreads rose above 2000bps in April 2022, well above the recommended upper bound (600bps) of debt sustainability by the IMF. Two out of the three main rating agencies have already downgraded Tunisia’s sovereign rating to “CCC” (in March 2022 and October 2021), indicating substantive risk of default. In the 2022 Finance Law, the government foresees a USD4bn loan from the IMF. However, such a financial support program would require a clear roadmap to return to a democratic parliamentary system, together with a fiscal consolidation agenda – to cut public subsidies and diminish the public sector wage bill. Such consolidation measures are unpopular and have been rejected by the main trade union (UGTT). Moreover, the dissolution of the Parliament by the president (30 March) and his reluctance to engage in dialogue with political parties diminishes the likelihood of an IMF deal – which would give the green light to other international donors.