Tunisia - Outlook could improve if IMF deal secured

The growth outlook for Tunisia remains challenging in 2022. Negatively affected by the fallout from the Russian invasion of Ukraine, the country is dealing with accelerating inflation, tightening monetary policy, a struggling tourism sector, and industrial action as unions protest government moves towards fiscal prudence. Potential for a new IMF deal offers upside risk to our projections, but as things stand we forecast real GDP growth of 2.2% this year, down from 3.4% in 2021. Given the -8.6% contraction recorded in 2020 as the pandemic crisis took hold, this would leave the economy still -3.5% smaller than it was at the close of 2019.

Real GDP growth, % y/y

Source: Haver Analytics, Emirates NBD Research

Real GDP growth was comparatively healthy in the first quarter, coming in at 2.7% y/y, but this benefitted from base effects given the pandemic situation in Tunisia at the start of 2021, and these will fade through the remainder of the year thanks to the gradual normalisation of activity over the past 12 months – albeit with various short-term ups and downs. Hotels & restaurants was a notable gainer in the first quarter as it grew 11.2% y/y. With numbers still off the pre-pandemic norm, there remains scope for growth over the rest of the year, but the outlook in this regard has clouded since the outbreak of war in Ukraine towards the end of February. Tourism minister Mohamed Moez Belhassine has acknowledged this risk, noting that in 2019 there were 630,000 Russian and 30,000 Ukrainian visitors to Tunisia.

As a major employer, a weaker tourism sector will weigh on the recovery in employment seen in recent quarters, as the headline jobless rate has fallen back from 18.4% in Q3 2021 to 16.1% in the first quarter of 2022. Should this stall, it will have implications for private consumption in Tunisia, which is already under pressure from rising inflation. Tunisia is further exposed to the conflict in Ukraine through the spike in global commodities prices, not least in oil and wheat markets. Headline CPI inflation in Tunisia hit 7.9% y/y in May, the fastest pace since 1991. Key drivers were food (8.2% y/y but down from 8.9% in February) and transport (6.8%). Petrol prices are set to be raised every month this year as part of the economic reform plan, and so transport costs will continue to mount.

CPI inflation, % y/y

Source: Haver Analytics, Emirates NBD Research

Core inflation has also been picking up, at 7.3% y/y in May compared with 5.1% in May 2021, and the central bank has started monetary tightening with a 75bps hike to the benchmark rate at its May 17 meeting, taking it to 7.0%. While it kept the rate unchanged at the June 10 meeting, the bank noted that it was deeply concerned with regards to the effect a sharp rise in imports was having on the current account. With a deteriorating balance of payments position caused by the conflict in Ukraine, and a faster pace of monetary tightening taking place in developed markets, the dinar has been under pressure, losing around 7% against the greenback since the start of the year, which will further fuel inflation.

The pressures wrought by the Ukraine war have exacerbated existing issues in Tunisia around its twin current and fiscal account deficits, making economic reform even more important. The BCT noted in its communiqué that reserves had stabilised in June at around USD 8bn, or four months’ import cover, but went on that this ‘underlines the need to move forward quickly in implementing the national reform plan.’ To this end, President Kais Saied has been pushing through the reform programme, even in the face of concerted opposition from powerful union the UGTT. The IMF has praised the initial steps taken by the Tunisian government towards reform this year and stated on June 22 that it was ‘ready to start program negotiations in the coming weeks.’ Reforms to public spending could pose a further threat to household finances this year, while more industrial action could also prove an impediment to output. However, a successful programme could help entice greater investment, paving the way for more sustainable growth over the coming years.