Tarek Megerisi
Tunisia needs assistance to meet this complex set of challenges. The European Union should offer technical and financial support to the country’s government, helping it renew Tunisia’s economy and surmount the obstacles thrown up by domestic or foreign blockers.
PART (II)
Politics in the time of the coronavirus
The early part of the covid-19 pandemic in Tunisia was marked by political paralysis and economic contraction. Following the parliamentary election in October 2019, it took until February 2020 for a government to be approved – with the social democrat Elyes Fakhfakh as prime minister – only for it to collapse five months later. Meanwhile, the economy shrank by 21.6 per cent in the second quarter of 2020, driving Tunisia into its worst recession since independence, in 1956.
In a country where most people work in the informal sector, where the private sector is largely composed of small and medium-sized enterprises, and where unemployment was already rife, the economic repercussions of lockdown were devastating.
Emergency financing packages from the IMF, the EU, Italy, and the Islamic Development Bank were quickly used up, as financial assistance was directed to companies and the recently unemployed, and was used to service Tunisia’s already ballooning debt.
Ennahda and Qalb Tounes, the largest parties in parliament, tried to use the fall of the Fakhfakh government in July 2020 to increase their political influence. Saied, however, ignored parliament’s recommendations for prime minister and instead nominated Mechichi, who was his former adviser.
In doing so, Saied may have sought to provoke parliament to vote down the nomination, which would have allowed him to trigger a new parliamentary election that could have weakened the parties he sees as his adversaries. If so, his machinations went awry, as he overestimated Mechichi’s loyalty and underestimated the demands of the crisis. Mechichi reached out to the main parliamentary parties as well as the unions, aware that he would need a broad base to survive and take steps to repair the country’s dramatically deteriorating economy.
But, to Saied, this was a betrayal. Even as Mechichi was sworn into office in September 2020, the president gave a Trumpian speech claiming that his enemies were behind a treasonous conspiracy that he vowed to confound.
A growing impasse
Despite having a new government, Tunisia’s political impasse worsened as parliamentary divisions deepened and Saied grew ever more obstructive. As a result, Tunisia’s pandemic response stalled and the new government did nothing to help the economy.
Over the course of 2020, Tunisia’s economy contracted by more than 8 per cent, its fiscal deficit rose to more than 12 per cent of GDP, and public debt expanded to more than 90 per cent of GDP. Even state-owned companies, which previous governments had used to increase employment and head off discontent, were starting to suffer badly. In February 2021, a court temporarily froze the bank accounts of the national airline, Tunisair, over outstanding payments to a Franco-Turkish operator.
Similarly, the Gafsa Phosphate Company, which was formerly Tunisia’s biggest exporter, has seen its revenues steadily fall and its costs rise as local communities disrupt its activities with protests calling for greater local employment, higher salaries, and improved corporate social responsibility. Tunisia’s increasingly oppressive debt repayments, its weakening economy, and its increasing import dependency frightened capital markets and made it next to impossible for the state to borrow further to finance its budget or offer additional covid-19 assistance packages to citizens and businesses.
Price increases were triggered by the IMF-imposed depreciation of the Tunisian dinar and by the need to increase imports at a time when the main sources of foreign currency income (phosphates and tourism) were drying up. As the situation got worse, the government tried to respond by making public sector pay cuts and increasing indirect taxation. In response, Tunisians ushered in the new year with perhaps the biggest protests since the revolution.
The heavy-handed response by the interior ministry only aggravated the situation. Six months on, the demonstrations have become a back-and-forth of protest and violent state response, with the interior ministry accused of crimes as severe as murder. People are demanding their constitutional rights from a ministry that acts as if it is still the shield of a dictatorship. Mechichi tried to exploit the unrest of the first weeks of 2021 to reshuffle his cabinet and reflect his realignment towards parliament and away from the president.
Although parliament approved the reshuffle on 27 January, Saied refused to swear in the new appointees as the constitution requires. The dispute was a reminder of the costs of the failure to appoint a constitutional court, which has left the president in a position to assert his right to interpret the constitution’s provisions. The showdown also came to intersect with the protests, as supporters of the rival camps took their disagreements onto the streets.
In an echo of 2014, a national dialogue was proposed to break the impasse and create a consensual plan for much-needed economic reform. However, Saied shut this down by claiming he would not negotiate with “thieves”. Similarly, the president vetoed a political play by Rachid Ghannouchi, leader of Ennahda and the speaker of parliament, to push MPs to finally nominate judges to the constitutional court. Saied’s action was a missed opportunity.
With a less absolutist approach, he could have had a role in appointing the judges – moving Tunisia’s democracy forward and reaping political credit for ending the stalemate. Unable to finance the budget for this year without external assistance, or to pay back the $1 billion owed to international creditors by August, Mechichi was forced to go it alone: he tried to negotiate an acceptable reform proposal to take to the IMF, working quietly with unions and other key actors despite the continuing political standoff.
However, while the governor of Tunisia’s central bank and finance minister went to Washington in May to negotiate an ambitious $4 billion stimulus package, they were undermined at home. Despite their best efforts to work behind the scenes, some controversial elements of the proposal were leaked to major news outlets. Tunisia’s general labour union, the UGTT, withdrew the agreement it had given in private and said it could not support the proposal. Given the proposal’s focus on reforming subsidies, cutting the public sector payroll (which 680,000 of Tunisia’s twelve million people are on), and restructuring state-owned enterprises, it was in the political interest of UGTT secretary-general Noureddine Taboubi to take a public stance against it.
Many public sector workers feel their interests have been sacrificed to the concerns of a narrow elite that has continued to protect its privileges despite the revolution. Indeed, given prior failures to reform the economy, increases in regressive taxation such as VAT – which have hit the poor hardest – and the population’s dependence on subsidies, any reform programme that cuts the safety net without trying to create a gentler landing will likely provoke extreme social unrest.
Tunisia finds itself in a perilous situation. Soft loans from Libya and Qatar have held off a default, but the governor of the central bank, the finance minister, and other senior figures warn that Tunisia could face a financial crisis similar to those of Venezuela, Argentina, or Lebanon if it does not reach a deal with the IMF. A consensus position is currently in the process of being forged with the main unions and political parties – the goal of which is to agree on a deal and reform package by the end of summer 2021. However, there is a risk that key groups will renege on their support under public pressure once the details of the deal become public.
There is also a risk that Saied will refuse to sign off on the deal, as a final attempt to create conditions to allow him to force through his desired constitutional changes. To avoid this, Mechichi’s alliance will have to improve how it communicates developments to the public and create a plan to quickly develop other parts of the economy to compensate for cuts to the public sector budget.
The common denominator of the demands of Tunisia’s 2011 revolution was economic. After all, the tipping point for the revolution was the self-immolation of a street seller exasperated by an oppressive state and economy. Economic transformation was a central focus of the revolution but, while Tunisia’s political democratic transition stalled, its economic transformation never even got off the ground.
Instead, the country has faced ten years of distractions generated by the soap opera among the political elite. Political leaders have paid very little attention to the economy other than negotiating with the IMF, giving pay rises to public sector workers, and hiring heavily on the public payroll to appease the unions. This meant that by 2019 – before the steady slide towards default began – unemployment stood at 15 per cent, slightly higher than it had been before the revolution.
Tunisia’s current fiscal crisis is rooted in structural factors stretching back over a decade. The debt that Tunisia was forced to take on immediately after the revolution initiated a vicious cycle by hindering the country’s access to capital markets. An inability to raise capital makes reforms harder, which feeds popular discontent and, in turn, drives political dysfunction and power games.
On 19 January 2011, in the immediate aftermath of the revolution, Moody’s downgraded Tunisia’s credit rating to Baa3 – just one grade above junk status. Despite recognising that Tunisia’s economic fundamentals looked significantly healthier than when the rating had been upgraded in its last move in 2003, the agency applied a negative outlook merely because of the regime change. This effectively punished Tunisia for its revolution and hamstrung the nascent democracy.
The downgrade drove Tunisia towards the Deauville Partnership with Arab Countries in Transition – a framework to provide transitioning countries with loans that sits under the G7 and includes the World Bank, the IMF, Turkey, and Gulf countries. The conditions attached to the loans meant that Tunisia’s policymaking bandwidth was taken up with institutional reforms such as liberalising the central bank and ensured that any economic planning would be in line with the IMF’s neoliberal orthodoxy, which was at odds with protesters’ demands.
The loan sent Tunisia’s public debt soaring from 41 per cent of GDP in 2010 to 71 per cent in 2018 – yet the country has still had to repeatedly turn to the IMF in search of additional funds. Today, Tunisia is ensnared in a debt trap. The country needs to borrow $7.2 billion to finance its 2021 budget, which includes $5.8 billion in debt repayments alone.
Tunisia’s dependence on funding from the IMF has allowed the organisation to dominate Tunisia’s reform agenda even as the country’s economic situation worsens. Although Tunisia has stalled on, or even ignored, some IMF conditions, such as clamping down on public sector spending, they have still had an impact.
The focus on these austerity-orientated demands has prevented Tunisia from exploring reform options that might have grown the economy or fixed administrative blockages, as governments navigated between the IMF’s conditions and the limits imposed by Tunisia’s street and unions. When Tunisia has met IMF terms, this has come at a high cost. Chief among these was a demand for the government and central bank to introduce a more flexible exchange rate, which caused the Tunisian dinar to lose almost 20 per cent of its value against the euro in the course of 2017.
Although the economic logic employed by the IMF was intended to promote exports, it overlooked Tunisia’s dependence on imports as well as the structure of Tunisia’s export sector.
The result was an increase in Tunisia’s trade deficit. A further package of IMF reforms was pushed through in a 2018 finance law that sought to reduce the budget deficit by freezing public sector recruitment and wages, introducing early retirement, and increasing indirect taxes. These were a double blow to Tunisians dependent on public sector employment, who also saw the price of their everyday goods rise even more.
The impact of IMF reforms on Tunisia’s ability to control monetary policy also left it unable to prevent price inflation during the economic slowdown caused by the pandemic. Although Tunisia’s most immediate problem today is debt, the economic drivers of 2011 remain unaddressed. If Tunisia is to satisfy the demands of its people and prevent a spiral of austerity and debt repayments, it will need to upgrade its infrastructure and develop new industries – both of which are capital-intensive processes.
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Tarek Megerisi is a senior policy fellow with the Middle East and North Africa programme at the European Council on Foreign Relations. He has worked with a range of stakeholders over the past ten years, assisting with state transitions following the Arab uprisings.
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