Summary:

On 11 June 2023, the International Monetary Fund (IMF) released a report detailing the dynamics driving fiscal risk across the Middle East and North Africa (MENA) region, including details on the risks to Tunisia’s financial system.

The report lays out several overlapping risks impacting Tunisia’s fiscal outlook including the following:

• State-owned banks (SOBs)
• State-owned enterprises (SOEs)
• Pension funds
• Political, economic, and security instability

Regarding SOBs, the report highlights the high exposure maintained by Tunisia’s banking to public sector debt. As the country’s creditworthiness has waned, the government has leaned heavily on domestic banks to finance to state budgets, creating greater “interlinkages” in loan concentration and the public sector balance sheet. The government essentially continues to borrow money from itself to finance its own operation – a cycle that cannot continue indefinitely.

Regarding SOEs, the reported highlights the other side of this issue, whereby SOEs borrow from domestic banks, leading to “complex crossclaims between the government and SOEs.” The report notes that Tunisia has made progress toward more transparency in reporting the performance and balance sheets of SOEs. However, the pandemic impacts and the global commodity price fluctuations have resulted in significant financial challenges to many of Tunisia’s SOEs.

The report also discusses the Tunisian pension system which is comprised of three funds: a public sector fund, a private sector fund, and a healthcare fund that serves both public and private sector workers. The report notes that “all three funds have suffered from systemic deficits since at least 2012, and none of them is financially sustainable.”

Lastly, the report notes the issue of political, economic and security instability, all of which amplify economic challenges. The report notes the Arab spring as a major example of how instability decreases economic productivity. The terrorist attacks of 2015 also drastically decreased economic output due to losses in the tourism sector.

Outlook:  

While the report does not appear intentionally timed to address the IMF’s ongoing loan negotiations with Tunisia, the report addresses many of the concerns and areas where reforms are necessary within the Tunisian economy as well as in other countries in the MENA region.

The previously negotiated terms of the IMF loan to which the Tunisian government agreed in late 2022 included reform objectives that would begin to address many of the challenges laid out in the report. However, repeated delays by the Tunisian government and growing criticism from President Kais Saied indicate that the future of the loan deal may be in question.

The IMF report affirms that the underlying fundamentals of the Tunisian economy are not sustainable and while delaying meaningful reforms may avoid short-term frustrations, it will not solve Tunisia’s long-term economic challenges.

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