Russia-Ukraine war deepens Tunisia's economic woes, IMF says

Russia's military offensive in Ukraine is deepening Tunisia's economic crisis and posing "important challenges" for the North African country just as it emerges from the Covid-19 pandemic, according to the International Monetary Fund.

The team of IMF staff that visited Tunisia between March 23 to 25 held "constructive discussions" with Tunisian government officials on the authorities' reform programme and also covered the impact of the war in Ukraine, the Washington-based lender said in a statement on Wednesday.

"Tunisia is facing major structural challenges that result in deep macroeconomic disequilibria, a weak growth in spite of its strong potential, a high unemployment rate, weak investment and social inequality," the IMF said. "The impact of the pandemic and the war in Ukraine are now adding to these structural challenges." Tunisia, North Africa's fourth largest economy and the continent's 14th biggest, remains in talks with the fund for a $4 billion loan tied to a restructuring programme amid rising concerns of a debt default. The country is facing its worst economic crisis in history that has been aggravated by the impact of the pandemic and the Ukraine crisis.

However, an entrenched social opposition and ongoing friction with labour unions over further austerity measures, such as scaling down subsidies, are limiting the government's ability to enact strong fiscal consolidation measures, complicating efforts to secure the IMF programme, according to Fitch Ratings.

The credit rating agency downgraded Tunisia's sovereign debt rating to CCC from B-, pushing it deeper into junk territory, citing "heightened fiscal and external liquidity risks" amid delays in agreeing on a new programme with the IMF. A CCC rating indicates a country is a substantial credit risk and default is a real possibility.

Tunisia's outstanding public debt reached nearly 102.2bn dinars ($35bn), or 81.5 per cent of gross domestic product at the end of October 2021, 12 per cent higher than the same period a year earlier. Fitch forecasts debt to GDP to reach 84 per cent in 2022 and 84.7 per cent in 2023.

The Russia-Ukraine war is exacerbating the country's economic woes due to a rise in food and energy prices. The two warring countries are major suppliers of wheat and other grains to North African nations who are rushing to find new sources to help keep rising food prices in check.

To overcome the economy's structural challenges, the Tunisian authorities have proposed a reform programme. "The authorities’ programme aims to overcome these challenges in a durable and equitable way," the IMF said following the team's visit to the country.

In the short term, the reform agenda aims to mitigate the impact of the war in Ukraine, while in the medium term, to assure stronger, durable inclusive growth and social protection. "In that context, the programme seeks to create fiscal space for public investment and increase social protection," the IMF said.

The fund said that a "conscientious reduction" of the fiscal deficit through equitable taxation reform, strict control over the public sector wage bill, better targeted subsidies and deep reforms of state-owned enterprises were necessary to restore macroeconomic stability.

Such measures will also help in improving the efficiency of state-owned enterprises and the competitiveness of the Tunisian economy, it said.

Initiatives aimed at improving business conditions are also critical to unlock the country’s potential growth and job creation, the IMF said. "At this moment we continue to stand by the side of the Tunisian authorities in their efforts to advance economic and social reforms to the benefit of the population.

"In this context, the mission has made further progress in the technical discussions with the Tunisian authorities."