Tangled web leaves Tunisia’s IMF deal hanging in balance 

Negotiations over a $1.9 billion IMF deal that many deem to be of paramount importance to stem a spiralling economic crisis in Tunisia are protracted and almost paralysed.

Subsidised food is scarce, prices of unsubsidised food have risen, tensions over refugees from sub-Saharan Africa are widespread and the threat of further strikes by powerful public sector unions is ever-present.

Tunisia is supported only by remittances of expatriate Tunisians, limited tourism and sales of potash.

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Although the Tunisian authorities recognise the urgency of the need for financial assistance, Kais Saied, the president, has resisted what he considers to be unnecessarily harsh measures, particularly those that relate to the lifting of subsidies and reforms to the public sector, which is bloated.

Former governments have often sought to buy time in tackling an unemployment crisis by creating more administrative roles. However, the problem has been compounded as salaries have soared over the last 10 years.

Moreover, the government continues to fund subsidies on energy and food, which it considers essential in tempering discontent among the population of 12 million. State-owned companies are also mired in debt and in need of restructuring.

Sparring over subsidies

The IMF has made the lifting of subsidies, public sector reform and sale of state-owned companies a cornerstone of its negotiations with Tunisia. 

The authorities, however, insist that such an approach is short-sighted. They argue that Tunisians are already struggling with the costs and availability of basic goods. There is a limited supply of bread in local bakeries and food prices have soared.

The fear is that any lifting of subsidies will compound an already dire situation, and risk political and social upheaval that the government cannot manage.

Since 2011, Tunis has signed two agreements with the IMF. In 2013, Tunisia agreed an IMF loan of $1.74 billion amid widespread protests over economic conditions that threatened to derail a democratic transition. The loan was designed to help Tunisia provide macro-economic level stability.

In 2016, the two sides agreed another longer term $2.9 billion loan to fund wider economic reform with the aim of creating 5 percent economic growth. 

Both, however, did little to improve economic performance and the government ended up reversing many reforms in the face of protests from powerful trade unions. These have consistently strongarmed the government into public sector salary increases despite knowing that they contravened the IMF conditions. 

The trade unions have succeeded in mobilising masses on the streets and imposing crippling strikes, which the government lacks any effective leverage to resist. 

The IMF has insisted that the solution to this issue is to include the trade unions in the negotiations. The Tunisian authorities, however, believe that ultimately people will blame the government for the impact of any IMF deal, not the trade unions.

Some EU member states have demonstrated an awareness of this conundrum for the Tunisian authorities.

In June, the European Union offered a €1 billion bailout in return for heightened efforts to limit migrant flows and people smuggling. But it linked full payment to an agreement with the IMF.

For Tunisia’s president, the lifting of subsidies appears to be a red line. From the perspective of Tunis, the consequences of an IMF deal that forces the lifting of subsidies are identical to those of a scenario in which a deal is not done. 

Yet, the issue of subsidies does not appear to be a deal-breaker for the IMF, and the US has indicated a willingness to hear a counter-proposal from Tunisia.

Gulf states have also proven to be open to lending financial assistance once an IMF deal is secured.

In July, Tunisia’s foreign minister toured the Gulf states in search of funds. Saudi Arabia granted a new soft loan of $500 million. Neighbouring Algeria has granted loans for two years running.

Inequality issues

Saied believes there are other avenues to tackle the economic crisis. In June, he proposed the introduction of more taxes on the wealthiest and insisted that this would enable the country to do without an IMF loan.

He has also moved to crack down on established business interests. The most prominent objective was the business tycoon Kamel Ltaeif, a former adviser to President Ben Ali and once considered untouchable even after the Ben Ali regime fell in 2011.

However, these measures alone are unlikely to address the crux of the crisis.

There is the sweeping inequality of wealth distribution between the areas where the Arab Spring exploded – such as Sidi Bouzid, Kairouan, Kasserine, Gafsa, and other central and southern provinces – and the traditionally more prosperous areas of Sousse, Monastir, Tunis, and, to a lesser extent, Sfax. 

Any taxation and business reform must be accompanied with wider policy changes in the way wealth and investment is distributed across the country.

This does not mean that the Tunisian authorities have given up on IMF talks. The reality is that all parties remain eager to sign a deal.

But, in the meantime, Tunisia’s economy continues on a downward spiral with political and security ramifications for the Mediterranean, Europe and the Sahel regions.

Sami Hamdi is managing director of global risk and intelligence company The International Interest