Tunisia: Pressing reform needed to help stabilize public finances

The slow economic recovery from COVID-19 and a delay in carrying out key reforms, including of subsidies, is likely to further strain Tunisia’s public finances and deepen budget and trade deficits, according to the World Bank’s latest Tunisia Economic Monitor.

Issued in French under the title Gérer la crise en temps d’incertitudes (Managing the crisis in times of uncertainty), the report forecasts economic growth of 2.7%  in 2022, largely due to the post-COVID recovery of tourism and trade, plus the solid performance of the mining and light manufacturing sectors. This growth rate is slightly lower than earlier World Bank forecasts, a reflection of the impact of the war in Ukraine. As a result, the economy is expected in 2022 to remain well below the pre-pandemic period. 

“Just as its economy started to recover from the COVID-19 crisis, Tunisia faced the double challenge of rising commodity prices and the war in Ukraine, which has put huge pressure on global wheat and energy supplies.” said Alexandre Arrobbio, World Bank Country Manager for Tunisia. “Cognizant of these unprecedented challenges, at the end of June, the World Bank granted a $130 million loan to Tunisia to help mitigate the impact of the war in Ukraine on food security. This will allow the government to finance grain purchases while initiating announced reforms,” added Arrobbio.

The first chapter of the report highlights how the war in Ukraine and rising global commodity and manufacturing prices exacerbated existing vulnerabilities of the Tunisian economy in the first months of 2022. Inflation rose from 6.7% in January 2022 to 8.1% in June 2022, prompting the Central Bank to raise its policy rate, the first increase since 2020. The trade deficit widened by 56% in the first semester of 2022, reaching 8.1% of GDP; and the budget deficit – pushed by mounting energy and food subsidies – is forecast to reach 9.1% in 2022, compared to 7.4% in 2021. 

The second chapter covers the food subsidy system – one of the key drivers of rising trade and budget deficits. In the case of wheat, the report shows that while this subsidy system kept prices stable for consumers, it put significant pressure on the state’s finances, penalized farmers and food processors, and generated over-consumption, with significant leakages and waste. The report stresses that replacing subsidized food prices with compensatory cash transfers to vulnerable households would make the system more efficient, reduce fiscal and import costs, and strengthen food security in the face of future shocks.