“To escape the debt trap, Tunisia must change its economic engine”

Heavily indebted, Tunisia is in the midst of negotiations with the International Monetary Fund (IMF) for a loan of 4 billion dollars. This is the fourth time in a decade that the country has requested financial assistance from the institution, while the effects of the Covid-19 pandemic weigh heavily on an economy already weakened by years of gloom.

Fadhel Kaboub is Associate Professor of Economics at Denison University in Ohio, USA, and Chairman of the Global Institute for Sustainable Prosperity think tank. This specialist in monetary and budgetary policies in the Arab world believes that the Tunisian debt problem is structural and that recourse to the IMF only offers short-term solutions.

Tunisia is negotiating an aid program with the IMF. Is the country at risk of default?

Fadhel Kaboub Yes. It is our external debt, denominated in foreign currencies – that is to say $ 30 billion – that is causing us problems. To repay it, we have to draw on our foreign exchange reserves, supplied via export, tourism, foreign investment or the diaspora with “remittances”. [transferts de fonds des travailleurs à l’étranger].

We have already tried to capitalize on these revenues and the observation is simple: we do not have enough, hence the incessant recourse to borrowing, which ultimately serves in part to repay other loans. It’s a vicious circle. We can no longer even rely on some once flourishing sectors such as tourism. They have shown their limit during a pandemic.

Today the public debt exceeds 100% of the GDP and this is the fourth time in ten years that Tunisia has requested IMF assistance. Why is the country unable to curb its debt?

We have to import a lot of food products for lack of sovereignty in this area. It’s the same with energy, and we also import a lot of high-value-added products to run our industries, as well as high-tech equipment like smartphones and computers.

In return, we export products with low added value such as olive oil, textiles, electric cables or phosphate. All of this creates a structural imbalance in the trade balance and puts pressure on the value of the currency. However, the more the value of the dinar falls against the euro and the dollar, the more we import at a high cost and the more inflation increases. The rise in prices is also weighing on the purchasing power of Tunisians.

Unfortunately, in the current negotiations between the IMF and the Tunisian government, there is no real proposal to resolve these structural issues. We are rather in short-term solutions.

What have the loans taken by Tunisia been used for so far?

Let’s start by clearing up a misunderstanding, which I think is very problematic. We often hear that we have to borrow from the IMF in order to finance the government budget. In other words, according to some policies, to be able to pay the salaries of civil servants. However, these salaries are not paid in dollars, but in Tunisian dinars.

The loans contracted with the IMF are therefore not used for this. Above all, they allow the Ministry of Finance and the Central Bank to effectively defend the value of the dinar, under pressure, due to the massive imports of food, energy and the structural trade deficit I mentioned.

A delicate element of this negotiation with the donors concerns precisely the wage bill of the public service. Today it represents nearly 17% of the GDP …

A climate of great gloom has reigned over the Tunisian economy for the past ten years. The decline in foreign direct investment, the loss of foreign currency tourist receipts and export receipts in general, weighed heavily on the country.

After the revolution, the private sector was simply not able to absorb the new entrants to the labor market, especially this frustrated youth who rose up in 2011. One can understand the growing pressure that was then exerted. on government to create jobs. Unfortunately, this solution was used as a short-term remedy, without a strategic vision.

Today, the IMF is calling for restraint on the public sector wage bill, but such a measure risks being socially untenable, especially if it comes at the same time as the removal of food and energy subsidies and other public spending on food and fuel. social services, mentioned in the government plan [proposé au FMI en échange du prêt].

Is there an alternative to external debt in Tunisia?

Even if we return to the same level of tourism, to the same level of direct investment as in our best years, it will not be enough. To escape the debt trap and strengthen resilience to external shocks, Tunisia must not restart the same engine, but change it completely. We must invest in food security through sustainable agriculture, renewable energies and specialize in industries producing high added value goods.

Are not the incessant political tensions since the revolution one of the explanations for the crisis?

We have had some gains with the revolution. But the great weakness of our country, of the government, of political parties and of civil society, is that it has not rethought an economic model that has been synonymous with corruption, inequality and mass unemployment.

Inflation, for example, is largely linked to the monopolies held by certain players on imports in the food, construction or consumer products sectors. They fix the prices without necessarily aligning with world prices when they go down.

We are here facing a problem of corruption and abuse of power, little sanctioned by the Tunisian government. Our economy has not been sufficiently democratized in ten years to allow more domestic competition, especially in certain strategic areas.

Until today, we have not had a debate on our economic model and going to the IMF is proof of that. This means that we will keep repeating the same mistakes. The country is at the bottom of the hole. In such a situation, the first thing to do is to stop digging. However, in Tunisia, instead of thinking about how to get out of it, we dig faster.