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Economic growth on a roller coaster ride

After an expected 9.2 percent contraction in 2020, growth is temporarily expected to accelerate to 5.9 percent as the pandemic’s effects on exports begin to abate and

domestic demand begins to recover, projected the World Bank report Tunisia Economic Monitor, Fall 2020 published Tuesday.

While noting that the uptick is, however, not large enough to return output to pre-pandemic levels of 2019, the World Bank expects growth to return to a more subdued trajectory, expanding by around 2 percent, reflecting pre-existing structural weaknesses

and a gradual global recovery from the pandemic.

As 2020 draws to a close, the depth of the pandemic’s impact on the Tunisian economy is becoming more apparent, the World Bank pointed out.

Tunisia is expecting a sharper decline in growth than most of its regional peers, having entered this crisis whilst already experiencing slow growth and rising debt levels.

With this, some of the past gains in job creation and poverty reduction will be lost as unemployment edges up and the share of the population vulnerable to falling into poverty increases.

A 15 percent reduction in exports by September 2020 (YoY) contributed to the downturn as weak global demand depressed industrial and tourism exports.

Despite this, the current account deficit is expected to shrink to 7 percent of GDP in 2020, against 8.8 percent of GDP in 2019, as remittances picked up and imports dropped faster than exports.

With a lower current account deficit, the external position showed some

resilience to the economic shock. At USD 7.8 billion as of end-October, foreign exchange reserves increased to the equivalent of 147 days of import (against 103 days a year earlier), strengthening a much-needed external buffer at this time of heightened risk.

The World Bank estimated that the policy response, in this challenging context, has been broadly adequate. Declining inflation set the stage for interest rate cuts in 2020, supporting

moderate growth in credit to the economy. Fiscal policy has also been accommodating.

The authorities responded to the pandemic with a package of fiscal measures to support households and businesses.

These measures, along with revenue losses due to the downturn, were behind 82 percent in the fiscal deficit to 10.5 percent of GDP (up from around 3 percent of GDP in the original 2020 budget).

As expected, the increase in financing needs has worsened debt vulnerabilities.

Public debt is forecast to rise from 72 percent of GDP in 2019 to around 89 percent of GDP in 2020.

Challenging and uncertain outlook

It is clear that the pandemic’s impact on the economy has been severe and that the costs of mitigating its effects have worsened Tunisia’s already weak public finances.

The outlook is also challenging and uncertain. Downside risks to this outlook are significant given the extent of the ongoing second wave of the pandemic and its impact on Tunisia’s

main trading partners. In line with this, the current account deficit is expected to narrow to 6.3 by 2022 as export industries begin to recover, but at a sluggish and uncertain pace.

The fiscal outlook points to a tight budgetary setting and limited room for stimulus as the

impact of the pandemic spills into 2021.

The fiscal outlook points to a tight budgetary setting and limited room for stimulus as the

impact of the pandemic spills into 2021.

Risks from a still growing wage bill, subsidies, pensions and underperforming state-owned enterprises may compromise recovery efforts if not managed proactively.

Restoring credibility of macroeconomic framework

Restoring the credibility of the macroeconomic framework will lay the foundation for

a more durable recovery in growth. In particular, this requires emphasis on financing the recovery more sustainably going forward to manage debt levels.

The first priority is to save lives by controlling the pandemic and preparing to make COVID-19 vaccines available to the population. The authorities handled the first wave of the pandemic well, avoiding a large outbreak through an early and strictly enforced lockdown.

A second round of infections is now far exceeding the first and a set of new, albeit less

stringent, containment measures are in place.

Work is also underway to prepare for the rollout of vaccines as Tunisia participates in the World Bank initiative to finance the purchase and distribution of COVID-19

vaccines, tests, and treatments.

Restoring the credibility of the macroeconomic framework will also lay the foundation for

a more durable recovery in growth.

In particular, this requires emphasis on financing the recovery more sustainably going forward to manage debt levels. This means restructuring public finances by reducing the

size of the wage bill, shifting social assistance from subsidies to more targeted transfers and addressing fiscal risks from SOEs to free up resources for public investment and the recovery.

with limited fiscal space and a fragile external position, structural reforms to boost private

sector performance must form the backbone of the recovery effort. The pace of the recovery will be stunted in the absence of an ambitious program to restart growth at the firm level.

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