Monday, November 13, 2017 9:45 AM / BMI Research
BMI View: The disbursement of the second tranche of IMF loans in April 2017 will continue to keep Tunisia's public finances solvent, and will help the government move structural reforms in the country forward. That said, elevated social instability will undermine the government's ability to pass ambitious fiscal consolidation measures, which will prevent a rapid reduction of the budget deficit in the years ahead.
We maintain our view for the pace of fiscal consolidation in Tunisia to be modest over the years ahead, as progress will be constrained by the social sensitivity of cost-cutting measures. The government will continue to navigate between pressures from international donors, most prominently the IMF, to put public finances on a more sustainable footing, and socio-economic grievances making current spending cuts highly sensitive. This will result in only a gradual reduction of the fiscal deficit in the years ahead, from an estimated 6.1% of GDP in 2016 to 5.4% in 2017 and 4.9% in 2018.
Completion Of First IMF Review Positive…
In our last fiscal outlook for
Tunisia (see 'Fiscal Reform Falling Short Of Expectations Amid Social
Instability', April 12), we highlighted rising tensions with international
donors over the lack of progress on fiscal reform as a key risk for the
government, especially after the IMF delayed the second tranche of the USD2.9bn
Extended Fund Facility in December 2016. The IMF finally completed the first
review of the agreement in April 2017, which led to the
disbursement of the second tranche of the deal, amounting to USD314mn.
We had previously argued that both sides would make the required efforts to prevent the unravelling of the agreement, and we maintain our view that the deal is crucial to ensure Tunisia's financing needs, support investor confidence, and give a stronger mandate to the government's reform agenda.
… But Consolidation Will Take Time
Despite IMF pressures to increase the tax base and contain current spending, we still expect fiscal consolidation to be constrained by elevated social instability in the country. Illustrating this, the government was forced to step down on a number of fiscal reforms initially included in the 2017 draft budget, such as the introduction of new taxes on law practices and imported medicines, an increase in the value-added tax rate and a freeze on public sector wages.
The latter point is proving particularly problematic, given that public sector salaries now account for more than 50% of total government expenditure and close to 15% of GDP.
The situation will gradually improve as the economy starts to regain traction. Real GDP growth came in at 2.1% y-o-y in Q117, a notable uptick compared with estimated growth of 1.1% throughout 2016. As we expect this strengthening growth trend to continue over the coming quarters, this will make it easier for the government to raise taxes in the 2018 budget. However, with growth being insufficient to, significantly, raise living standards and to reduce the unemployment rate, which stood at 15.3% of the labour force in Q117, we maintain our view that risks of social unrest will limit the government's ability to reduce current spending, especially public sector salaries and subsidies.
Still Reliant On International Donors And Debt
As previously mentioned, maintaining support from multilateral creditors will remain crucial for Tunisia in order to finance its sizeable fiscal deficits. Deficits will remain primarily financed by multilateral concessional aid and loans, as the country continues to benefit from strong international support since its 2011 revolution and subsequent positive democratic transition.
In addition to the Extended Fund Facility with the IMF, the Tunisian government signed a USD5.0bn agreement with the World Bank in 2016, as well as several other bilateral deals. However, this will not be sufficient to finance the country's sizeable current account and fiscal deficits and, amid low levels of foreign reserves, Tunisia will continue to tap the debt markets.
The country issued a EUR850mm bond
in February 2017, and a USD1.0bn one in April. Although yields have fallen over
the past 18 months, they remain relatively high, underpinning our view for the
government to favour concessional loans.