Tunisia’s sovereign bond index spread hovered at 3000 basis points among the worst distressed credits, with the frontier stock gauge flat through May, as President Kais Saied neared two years in office in July with a political and economic track record wreaking unmitigated havoc.

The former constitutional law professor, a highly esteemed occupation in the North African country, was first given the benefit of the doubt at home and abroad when he dissolved parliament for self-edict until an improved governance system was in place a decade after the Arab Spring, but his anti-democratic bent has since been on full display.

Constitution revisions and fresh legislative elections were rammed through with mere a one-tenth the voting population turnout, and security forces routinely round up opposition party, media, and business figures. The most prominent arrest was longtime Islamic Party leader Rached Ghannouchi, whose year prison term for alleged terrorism met widespread Western government and human rights group condemnation. Said has also turned his fire on Sub-Sahara African migrants, blaming them for economic and cultural damage and urging expulsion in thinly veiled racism.

The feint is also designed to divert attention from his citizens’ own mass exodus to Europe on dangerous Mediterranean boat crossings often ending in tragedy. Through May, some 50,000 arrivals (mainly in Italy) were half Tunisian, prompting an emergency EU delegation to meet with Said to press him to accept an IMF rescue for the 90% debt/GDP calamity.

The burden is not just his fault with the ratio doubling in the past decade, so that they could readily attach their own $1bn in bilateral aid to curb migration as well. A $1.9bn IMF staff agreement reached more than nine months ago predicated on food/fuel subsidy and state enterprise cuts to reduce the chronic 5% of GDP budget deficit, with 90% of spending for the state payroll and debt service. These provisions were a mainstay of two previous Fund programmes the past decade where targets were missed with scant consequence since the international community backed the fledgling democratic transition after the dictator Ben Ali’s ouster. That rationale no longer applies with Saied’s authoritarian swerve, and the influential labour federation continues to resist public sector cutbacks and promised mass disruption with package implementation.

The Finance Minister and central bank head attended the IMF spring meetings attempting to negotiate a compromise, while Said undercut them with a pledge against “foreign dictate,” and to craft his own original alternative focused on taxing the wealthy and phosphate export revival among other ad hoc features.

Beyond the broad strokes, no detailed Plan B has emerged, and the clock is ticking with an October $500mn Eurobond payment due, while foreign exchange reserves are in the danger zone at around $8bn, only covering three months' imports. The sovereign credit rating was further downgraded into CCC near default territory without concrete parallel financing and reform initiatives, as the President improvises a backstop with the same fanciful vision as his political project. He declared candidacy for BRICS membership as if admission could trigger a separate rescue pool, which remains on the club drawing board. Gulf allies for their part indicated willingness to chip in, but only after a Fund arrangement is in place.

According to Fitch Ratings, government financing needs at 15% of GDP or $7.5bn this year and next exceed peers, with the portion doubling the past five years on the embedded fiscal deficit and spiking domestic and foreign debt maturities. In 2024 another $850mn in Eurobonds is due at over 10% of international reserves, the steepest hump among frontier markets Moody’s points out. The IMF itself is owed over $1.5bn through 2027 from previous arrangements, with EU members led by former colonial power France next in line.

Tunis’ original plan from last year envisioned $5bn in external inflows, but that scenario is now remote even with a second half turnaround with a Fund agreement. Consensus is for at least a $1bn shortfall, with domestic refinancing also 25% higher than the past 3 years at around $4bn, all placed with the central bank and loss-making commercial banks already overexposed to government securities.

The current account will equal the budget hole at 5% of GDP or $3bn in 2023, and foreign direct investment has been flat at an average $700mn the past five years. Without the Fund and its partners at least $2.5bn must be raised, and short-term debt as a fraction of reserves is 150%. Algeria has come forward with an $800mn central bank deposit in return for diplomatic realignment, with an embrace of the rebel Polisario Front and refusal to recognize Morocco sovereignty over the Western Sahara. The cross-border relationship also tightened with royalties from the state company Sonantrach gas pipeline through to Europe, as a post war replacement for sanctioned Russia. The Egypt-based Afreximank separately will extend a $500mn loan at a hefty 10% interest rate.

Growth has been stuck in a 2% range for the past half-decade, and inflation touched 10% in May amid widespread shortages of family table staples for the national dish couscous which rely on pricy imports or were devastated by drought leading to water rationing. The central bank rate is 8%, and its nominal monetary policy independence is now under siege under proposed legislation that would invite political interference in retaliation for the governor’s previous comments that Venezuela style collapse was on the horizon without the IMF.  

The trade deficit rose almost 30% in April, but tourism was up 55% to 1.7 billion dinar, and remittances 5% to 3bn dinar for the Jan-May period. In the first quarter foreign investment increased 15% to 70omn dinar, with a slight 35mn dinar portfolio injection into a cardboard company equity capital. Agriculture slumped noticeably 3% in the first quarter without water, as citrus and date export operations consume over half the nation’s supply, and one-third of capacity is lost from bad pipeline maintenance.

The US previously joined Japan in guaranteeing sovereign bonds, and also launched a private equity fund modelled after post-communist East Europe startup vehicles in the Arab Spring aftermath. Since Saied’s usurpation such efforts have been abandoned, and in the latest budget bilateral economic aid was sliced two-thirds to $15mn, several lawmakers urge a total cutoff, and dozens of former ambassadors and government officials also recommend a veto of any IMF loan, although US Secretary of State Antony Blinken recently reiterated that it was the only global offer on the table.

Defence considerations tend to hold sway in the relationship with regular joint anti-terror exercises, in recognition that Tunisia was a hotbed for ISIS recruitment in the group’s heyday, and that it has been a target for tourist site attacks at beach resorts and museums, and last month at a famous synagogue on the island of Djerba. Military assistance in the budget remains constant at around $65mn, despite security force deployment in the President’s opponent crackdowns and diplomatic thaw with Mideast enemy Syria.

The State Department has hosted annual meetings of a public-private sector US-Tunisia Economic Council where big picture reform attempts like state bank and enterprise privatization were sidetracked and legal rather than on the ground changes dominated the agenda. One prominent example was the US Agency for International Development prodding for a new collateralization statute for the financial sector that in theory would incentivize small business lending, but failed to account for the elite family, big corporation natural preference of risk averse traditional intermediaries.

Future debt rollover or resolution will be inextricably linked to substantive not cosmetic strides, and overdue competitive and currency shifts promised over past decades donor engagement. Neighbouring Egypt has a strongman at the helm, and tentative exchange rate flexibility and government firm selloff, to offer a precedent under its own modest IMF successor agreement.

However, Tunisia must first find a predictable political and economic equilibrium outside immediate sovereign debt default and repressive regime threats. An exit ramp could be a no credit staff monitored rather than full-fledged IMF connection that catalyses partner lines sufficient for near term muddling through, while allowing for a true home-grown overhaul outside the historic clutches of de facto dictators and business-banking elites. 

Gary Kleiman, senior partner, Kleiman International Consultants, Inc.