Tunisia is going through a serious economic crisis. Real GDP contracted again in the fourth quarter, falling by 0.2% year-on-year after a decline of0.3% in the previous quarter. Estimates suggest that full-year growth was 0.4%, its lowest level for more than a decade (barring the Covid crisis).
Hard hit by the Covid crisis and the consequences of the war in Ukraine, the Tunisian economy is now facing significant financing constraints. External accounts held up fairly well in 2023, but the macroeconomic situation remains very fragile. Debt repayments for this year are significant, and the country is not immune from another shock. In particular, the prospect of rapprochement with the IMF seems less and less likely, fuelling fears about the government's ability to cover all its financing needs. A debt crisis cannot be ruled out.
Tunisia is raising concern. The CDS premium on 5-year sovereign bonds has risen from less than 730 basis points (bps) at the end of November to 1072 bps currently. At this level, the country is joining the category of emerging issuers considered to be close to default by investors. There are many reasons for this.
Two years after the shock of the pandemic, Tunisia is now being hit hard by the consequences of the conflict in Ukraine. The rise in commodity prices is leading to a dangerous deterioration in external accounts and public finances. Inflation is at historically high levels, weighing further on economic activity, which has already been struggling to recover since the 2020 crisis. In the absence of any financial room for manoeuvre, Tunisia is hoping to obtain support from the IMF to ease macroeconomic tensions. There are pressing needs.
With real GDP contracting by 8.5% in 2020, Tunisia was one of the region’s most severely hit economies. The prospects of a recovery are highly uncertain. The economy is threatened by the resurgence of the pandemic, but the government no longer has the manoeuvring room that it had in 2020. The budget deficit and public debt have soared to alarming levels, which calls for a difficult consolidation of public finances. Although FX reserves have been stable, the country’s external vulnerability is growing. The pandemic’s shock has aggravated a structural deterioration in fundamentals. This could have lasting consequences.
Tunisia is small open economy with strong ties to Europe. Several years of political turmoil have put the country into a fragile position. Recession in 2020 was severe. The pandemic has exacerbated structural weaknesses, in particular low investment and job creation, high unemployment and informality. The policy room to manoeuvre is limited (huge government debt and wage bill, significant external imbalances). Reviving the economy will prove to be challenging despite a well-educated labour force and a relatively diversified manufacturing base.
