- Going it alone: Default à la Lebanon, bond issuance and monetary financing
So what should Tunisia do? It could default on its debt, as Lebanon did last year. But that seems unlikely—Lebanon’s economic depression is one of the most profound in modern history and not really comparable to Tunisia’s. Moreover, weak investor sentiment (bond prices have plunged and Moody’s downgraded the country’s credit rating in October) makes a bond issuance without financial assistance in place an unfeasible option. Then there is the possibility of monetary financing, with the government having already mandated the Central Bank to lend it TND 2.81 billion last year—but such a move would be met with rising inflation, on top of pre-existing price pressures that have pummeled the living standards of an already restless populace.
- A helping hand from the Gulf
Recently, news outlets reported that talks with Saudi Arabia and the UAE for financial aid had reached an “advanced” stage, which could provide some relief. Both Gulf nations are supportive of the Saied regime due to his anti-Islamist stance. However, it remains unknown whether an agreement with the two Gulf states will eventually be reached, and there are still questions over its final size and potential conditionality.
- Recourse to the IMF
The likeliest outcome seems to be some restructuring of the country’s debt alongside a deal with the IMF. The influential UGTT labor union rejected proposed reforms to secure IMF funding earlier this year, railing against “subjection to the dictates” of the Fund, in particular its perennial insistence on economic liberalization, reduction of subsidies and trimming of the public sector payroll. The UGTT continues to reiterate its rejection of subsidy cuts.
Nonetheless, the government resumed talks with the Fund in early November, with the country’s worsening economic and fiscal predicament seeming likely to eventually compel the UGTT to cede some ground and allow a deal to be done. Moreover, with economic reforms urgently necessary, IMF technical assistance could prove useful to the government in the making of new economic policies. Few meaningful measures to help the economy have been put in place thus far, with a government only being formed on 11 October. As a constitutional law professor, President Saied lacks a background in economics, as does the new PM—a former geologist.
On fiscal reforms, Emirates NBD’s MENA economist, Daniel Richards, noted:
“Fiscal reform plans […] appear to have stalled along with the IMF discussions, meaning that spending on a bloated civil service payroll, a longstanding bone of contention with the Fund, will continue. The strong language used by the BCT in its latest communiqué on 6 October, where it ‘reiterated its deep concern facing the current critical financial situation’, highlights how stark the challenges facing Tunisia have become.”
In addition, the IMF—as well as providing money and technical expertise—could potentially act as a useful scapegoat to be blamed for the temporarily painful consequences of necessary economic reforms, while the president focuses on altering the country’s constitution, one of his key objectives.
All in all, it seems that for the government and the UGTT, regardless of the merits of the IMF’s potential reform agenda, there is no alternative to an IMF deal given the country’s dire fiscal situation. Following a deal, the country could then issue bonds to further boost state coffers.
As analysts at the EIU commented:
“Tunisian authorities […] will feel compelled to agree to a reform plan that includes cutting the public-sector wage bill and reducing subsidies. Such a deal remains likely to be agreed by end-2021, as Tunisia’s outstanding foreign borrowing requirements for the year—to meet its budget shortfall—are significant, and many other bilateral and multilateral lenders need the reassurance of IMF support in order to lend to Tunisia.”