Is Tunisia’s economic revival on the brink?

Tunisia is plagued with high unemployment, strikes, and a paralysed manufacturing industry. Add to the mix the increased prospect of violence as radical Islamists flex their muscles, the result is that 18 months since the start of the revolution, Tunisia’s future is far from assured
Is Tunisia’s economic revival on the brink?
By Massoud A. Derhally
Sun 24 Jun 2012 08:56 AM

It took eighteen days for Mohamed Bouazizi to die after setting himself on fire, on 17 December 2010. But more than eighteen months later, the country that set in motion the Arab Spring might well be wondering whether it somehow got left behind in the winds of change that swept the region. The 23-year rule of Zine Al Abidine Ben Ali is over; in place is a coalition government led by the Islamist Ennahda party. A change in leadership has done little to change structural imbalances in its economy, create jobs for the youth, revive a tourism industry crippled by the revolution, and find alternative markets for its exports that reduce its vulnerability to Europe’s debt crisis. The very grievances that fuelled the revolt have slowly made their way back to the top of the agenda.

“Economic grievances are churning right below the surface,” the International Crisis Group said in a report this month. “They could once again reach full boil. The economic and social causes that sparked the uprising a year and a half ago are far from resolved or even adequately addressed or discussed.”

The tourism industry accounts for six percent of Tunisia’s gross domestic product. Last year’s turmoil led to a 31 percent decline in the number of visitors to the country. Tourism revenue, which accounts for about fifteen percent of the country’s foreign currency earnings, slumped 46 percent last year and foreign investment declined by 17.8 percent, according to the African Development Bank (AfDB). During the turmoil, as much as $8bn, or about four percent of GDP, was lost.

In addition to its own instability, the economic slowdown in the euro zone and the revolt against Muammar Gaddafi in neighbouring Libya also didn’t help. Tunisia’s economy contracted 1.8 percent in 2011 in the wake of political instability. Agriculture, which accounts for eleven percent of gross domestic product, the manufacturing industry at 16.7 percent, services 45.5 percent, and tourism for 6.3 percent, were all impacted by the turmoil.

Unemployment, already high, touched about eighteen percent in 2011. In some of the interior regions — which witnessed growth disparity especially in the south and west, compared to the north and east which are closer to Tunisia’s EU export market — unemployment is as high as 40 percent among the youth, according to Ayesha Sabavala, an analyst at the Economist Intelligence Unit.

“There is no question that the unemployment factor will continue to cause domestic unrest for sure,” Sabavala says. “With concerns about a possible Greek exit, plus problems with Spanish bonds looming in the horizon, the growth possibilities for Tunisia in 2012 don’t look very promising.”

Faced with trade and fiscal deficits, and a restless population looking for immediate results, the new government is trying to spend its way out of a difficult political transition and socio-economic instability. The government is currently in negotiations with Saudi Arabia for $750m in assistance, finance minister Houcine Dimassi tells Arabian Business.

“We have a loan from Qatar and we are in negotiations still with Saudi Arabia for about $750m,” Dimassi says. “The UAE has given us $200m — most of it was used for the health sector.”

“We are in touch with our brothers in the Gulf and, if needed, we will seek the assistance of the International Monetary Fund,” he says, adding that Tunisia was not seeking the organisation's assistance at the moment.

In April, Qatar gave Tunisia a $1bn low-interest loan, half of which is at an annual interest rate of 2.5 percent and will go to the central bank. The North African country is likely to issue $300m in bonds guaranteed by the US government in July, though the date may change, Dimassi says, in large part due to market conditions and investor appetite.

The US guarantee of the bond will enable the Tunisian government to access market financing, reducing the government’s borrowing costs, especially as it becomes more expensive for many emerging market countries to take on debt. The money will help Tunisia tackle its fiscal deficit, estimated this year at 6.6 percent of gross domestic product, Dimassi says.

The country’s economy grew 4.8 percent in the first three months of the year compared to the same period in 2011, while GDP growth is projected at 3.5 percent this year, he says. The International Monetary Fund forecasts a lower expansion rate of 2.2 percent, while the Economist Intelligence Unit estimates a rate of 2.8 percent. Growth might be lower if contraction in the euro zone is lower than estimated 0.7 percent, according to the EIU.

Unemployment, fighting corruption, have to be at the top of the government's agenda, Sabavala of the EIU says.

“It’s the only way for Tunisia to get out of the recession and back to growth. The challenge moving forward is going to be the fiscal and current-account deficits preventing the government from tapping into markets to borrow at a time when they need to fund the deficits and borrowing costs have increased,” she says. “What’s needed is capital spending on infrastructure projects. If the foreign aid doesn't come in fast enough it’s going to present massive problems in terms of being able to undertake all this development to create the jobs necessary and to get the economy out of its decline in 2011.”

In May, Standard & Poor’s cut Tunisia’s sovereign credit rating to junk, downgrading it to BB, citing weaker-than-expected economic, fiscal and external debt indicators despite overall political stability.

“Despite overall stability and consensus since the removal of president Ben Ali in early 2011, we believe pronounced medium-term policy uncertainties will persist, at least until Tunisia adopts a new constitution and elects a government. We do not expect this before mid-2013,” S&P said.

Tunisia's transitional government — in office since December 2011 — is unlikely to “be able to take proactive corrective measures against a weakening economic and financial backdrop that would be consistent with an investment-grade rating,” the agency said, adding, however, that its stable outlook on Tunisia’s long-term ratings indicates a belief that “the political transition should be smooth and the country should withstand potentially considerable external shocks emanating from Europe”.

The S&P downgrade is only going to add to Tunisia’s problems. It will make it more expensive for the country to raise financing in international markets even with the help of the US. The government’s revised budget projects revenue will come from taxing companies that benefited under the old Ben Ali regime, however, about a third will come from privatisation and licence sales.

Tunisiana, Tunisia’s biggest mobile operator by subscriptions, obtained two licences from the government: one for 3G and one for fixed-line services. It paid the government about 200 million Tunisian dinars ($126.26m) but that still leaves a shortfall of 800 million dinars ($505m) of budgeted revenue from privatisation and sales of licences.

“Telecom licences are normally the easiest to sell but when you’re looking at the privatisation part of it, it’s hard to see where they will raise the rest of revenue from as most of past privatisation has tended to be mostly of banks,” Sabavala says.

The government is hoping its exports will help bring in foreign exchange and boost economic growth. Tunisia’s top export markets are France, Italy and Germany, which together constituted 55 percent of total exports in 2011. Exports have remained quite resilient and grew in the first three months of the year by 9.1 percent, according to official figures. However, if the debt crisis in Europe gets worse, and if there is a contraction that is deeper than expected it will impact EU demand for Tunisian exports.

Tunisia also depends on EU for remittances and foreign investment.

“It’s logical, as we’re not isolated as to what’s going on in the world and in Europe in particular. We expect some areas to be impacted more than others,” Dimassi says, when asked if he had concerns about the ability of his country’s economy to rebound in the wake of the debt crisis in Europe.

The government is also banking on as much as 3 billion dinars ($1.89bn) in tourism receipts this year from six million tourists. In the first five months of this year, tourism receipts increased 36 percent from the same period in 2011 and the number of tourists has so far risen as Egypt and Libya continue to be politically unstable. Growth in Libya will be important for Tunisia because many Tunisians were employed in Libya and exports of agriculture products to that country have increased.

However, if domestic unrest in Tunisia, specifically clashes between right-wing Islamist Salafists on the one hand and secular parties and the police on the other, intensifies, this could reverse the rising trend in tourism. Tunisia's deficits have been historically offset by services surpluses and as long as the country continues to experience political instability, visitors will be deterred.

“Macroeconomic stability hinges on political stability, institutional transparency, an improved business climate and a sustained public infrastructure investment policy,” AfDB said in a report.

In mid-June, tensions increased when thousands of Islamists angered by an art exhibition they believed had insulted Islam, took to the streets and clashed with police in Tunis. Tunisian police arrested 90 people on 12 June, including Islamist hardliners, over a number of attacks on government offices and clashes with security forces. Though Islamists were not a pivotal force in the revolution that overthrew Ben Ali, the role of religion in government and daily life is a contentious and divisive issue.

“Even if one segment of the population has expressed disenchantment quietly, another is mobilised and ready to fight. Because the latter comprises Islamists and secularists, professionals and labour activists as well as citizens expressing ordinary resentments, their behaviour often is marked by a spirit of every man for himself,” Brussels-based ICG says.

For the country’s new government, the drafting of the constitution by October and holding of parliamentary elections in March 2013 will be a litmus test to an extent. If political stability sets in, economic growth could rebound to 4.5 percent for the three years after the polls, according to the EIU.

Until the polls are held and the constitution drafted, however, unrest is likely to increase.

“The Salafists are going to look to impose their own ideas on Tunisian society, look to impose a stricter moral code, impose Sharia law and make their voice heard even more as date of completing the constitution draws nearer,” Sabavala says. "The government is going to really find it challenging trying to balance all these desires and demands.”

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