Tunis struggles to create jobs

14 July 2015

Tunisia is still a long way from seeing an economic transition to accompany its political change, and the population is growing increasingly impatient

Tunisia is witnessing a spring of discontent, following elections that saw the Nidaa Tounes party’s founder, Beji Caid Essebsi, sworn into office on 31 December 2014 as the country’s first elected ruler.

There have been numerous public sector strikes, and sit-ins stopped production temporarily at the local Gafsa Phosphates Company and at UK-based Petrofac’s Kerkennah gas field. Despite a fall in the unemployment rate from 16.5 per cent at the beginning of 2013 to 15.2 per cent in early 2014, the lack of jobs to absorb Tunisia’s growing work force is a core complaint.

The Washington-based IMF predicts GDP growth will rise from 2.4 per cent in 2014 to 3 per cent in 2015 and 3.8 per cent in 2016. However, growth has not returned to the levels seen before the 2011 revolution that ousted former president Zine el-Abidine Ben Ali.

Security worries

The risk of destabilisation was highlighted by the Bardo Museum attack on 18 March 2015, in which 21 foreign tourists and a Tunisian were killed. Dozens of alleged terrorists have been arrested, but it is unclear how effective Tunisian security forces are. The country’s borders with Algeria and Libya are porous, and violence in Libya threatens to spread.

A proposed anti-terrorism bill has met with both internal and external criticism for threatening Tunisians’ hard-won rights to freedom of speech. The new government is walking a fine line between security and human rights, and  between reforms that will stimulate the economy and protecting the most vulnerable sectors of the population.

Observers, however, are hopeful. “The success of the democratic transition is a visible achievement,” says Elisa Parisi-Capone, associate vice-president and analyst at US-based ratings agency Moody’s Investors Service. “The new government can take ownership of the reform process; previous governments had a temporary aspect that prevented long-term visibility.”

In May 2015, Moody’s improved its outlook for Tunisian bonds from negative to stable to reflect the improved political situation, but has not changed its Ba3 rating.

Prime Minister Habib Essid, who took office in January, vowed to the World Bank on 16 May 2015 that he would reform Tunisia’s economy. He plans to overhaul banking and finance, investment and public-private partnership (PPP) laws, and training and health.

Tunisia urgently needs a consistent regulatory investment framework to attract both local and foreign direct investment (FDI) and create confidence. FDI inflows contracted by 21 per cent a year on average from 2010 to 2014, and only began to recover in the first quarter of 2015, expanding by 24 per cent compared with the same quarter in 2014, according to Moody’s.

Reforms and the five-year plan that sets out investment priorities until 2020 need to be completed before an investment forum in November. Tunisia hopes the event will replicate the success of the Egypt Economic Development Forum held in March, albeit on a smaller scale. “The government has a November deadline to present a coherent investment framework,” says Parisi-Capone. “Investors are still in wait-and-see mode.”

The government’s strategy relies heavily on foreign aid and investment, and Tunisia must keep the goodwill of donor countries.

Non-performing loans

Tunisian banks were notorious for giving loans to politically connected individuals during the Ben Ali era, and few, if any, were repaid. IMF figures suggest that 16 per cent of loans are non-performing, with no expectation that these will be recouped. Banks are also undercapitalised, and the lack of available credit prevents businesses from expanding. Three public banks are to be restructured.

Fiscal reforms to improve the government’s tax base and cut down on endemic tax evasion are another priority.

Since Tunisia cannot afford the investment needed to reduce economic disparities, private investment in infrastructure could provide a new strategic model for growth, and PPP legislation is under discussion.

A massive infrastructure drive is required, especially in the country’s interior regions. Areas away from the coast have been neglected by successive governments, a contributing factor in the 2011 revolution. The interior continues to have massive unemployment and high educational drop-out rates, with few economic opportunities. A 39 per cent fall in phosphate production in Gafsa to 604,000 tonnes in Q1 2015, compared with 983,000 tonnes in Q1 2014, has exacerbated the situation.

Vital schemes include the upgrade of hundreds of kilometres of roads and bridges, as well as housing, school and hospital projects, and water desalination facilities in the south. Two power plants have been tendered in Mornaguia and Rades, and the country’s solar programme has been restarted. Rail projects worth $400m are under way with financing from various European development banks.

Hydrocarbon imports have been a main driver of Tunisia’s increasing external imbalance over the past four years. Subsidy reform has helped to rein this in and, with lower oil prices, the situation is less critical. Austrian OMV’s $679m Nawara gas project should both bolster gas exploitation and contribute to the country’s energy sufficiency.

One of Tunisia’s main challenges is funding this investment while controlling its growing external debt. Net government debt has reached 47.5 per cent of GDP, and is set to increase to 55.5 per cent by the end of 2016, according to the IMF. “Tunisia still relies on external funding, and they will keep borrowing until FDI starts coming in again,” says Parisi-Capone. “There are no unsustainable dynamics at the moment, but it is important that growth picks up again.”

The resurgence of the eurozone would help investment and trade balances, as it remains Tunisia’s main trading partner. The broad international support that followed Tunisia’s democratic transition will also be important in getting the country back on track.

An external $1bn bond issuance at 5.9 per cent, which was received with strong investor appetite in January, was positive as it showed Tunisia had regained market access.

The broad international support that has followed democratic transition is also important. Close cooperation with the IMF and the World Bank, which is set to lend Tunisia $4bn for projects over the next five years, can facilitate other financing.

However, the IMF has extended Tunisia’s $1.75bn standby agreement on the condition that Tunisia carries out its promised reforms. The seven-month delay has been seen as a warning.


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