In a very recent note, the Arab Institute of Business Leaders (IACE) analyzed Tunisia’s increased reliance on domestic borrowing and its effects on financing the economy.
The note highlighted a crowding-out effect, marked by a reallocation of banking resources toward financing the State at the expense of the private sector.
This is a phenomenon about which many experts and professionals had sounded the alarm as soon as proposals emerged to roll back or reshape the independence of the Central Bank of Tunisia (BCT) from the executive branch.
The analysis is based on trends in public debt, credit to the economy, and banking indicators and it puts forward recommendations to support productive investment.
Banks are now lending more to the State than to private actors of all kinds!
According to this mini-study, Tunisia has opted for massive and unprecedented domestic borrowing to finance the State budget.
While this choice reflects an adaptation to external constraints, it nevertheless raises several issues, particularly with regard to financing productive investment and the sustainability of domestic debt.
Heavy reliance on domestic budget financing tends to reduce the availability of financial resources for the private sector, a phenomenon commonly known as the crowding-out effect.
Total credit granted by the banking system to companies, professionals, and households rose from TND 98.8 billion in 2020 to TND 118.6 billion in 2024.
However, lending to companies and professionals has slowed markedly since 2023, reflecting increased caution by banks in light of economic conditions and risks linked to the financial situation of public and private enterprises.
Meanwhile, loans to households have grown at a relatively stable but moderate pace, ranging between 2% and 4% per year, in connection with tighter financing conditions and weak growth in purchasing power.
Overall, the slowdown observed since 2023 can be explained by restrictive monetary policy, higher borrowing costs and banks’ prudence in granting new loans.
Since 2019, credit growth has lagged behind growth in market GDP, confirming a slowdown in bank financing relative to the momentum of productive activities.
The “crowding-out effect”: we are there
The concept of the crowding-out effect refers to a situation in which increased public financing or spending, in a context of limited financial resources, exerts greater pressure on capital markets and reduces the availability of financing for the private sector.
This results in an insufficient supply of credit and a preference by banks for portfolio operations, particularly the acquisition of government securities, at the expense of financing the real economy.
To detect the potential presence of this effect in the Tunisian economy, several data sources were used, focusing on the breakdown of net banking income (NBI), claims on customers and claims on the State, based on the financial statements of Tunisian banks listed on the stock exchange over the 2020–2024 period.
Average net banking income of Tunisian banks recorded continuous growth between 2020 and 2024. However, NBI growth shows a downward trend between 2021 and 2024, declining from 13.15% in 2021 to 5.25% in 2024.
It is also worth noting that the downward trend in NBI growth for private banks remains higher than that of public banks, with the exception of 2021.
Continuous decline in loans to customers
According to the IACE, the results show that for all banks, investments in Treasury bills increased between 2021 and 2024, despite a slight contraction in 2023.
For public banks, exposure to government securities rose sharply in 2022 and 2024, while loans to customers declined continuously, reflecting a refocusing of portfolios toward sovereign debt.
For private banks, customer lending deteriorated in 2023 and 2024, while investments in Treasury bills showed a gradual disengagement in 2022 and 2023.
Overall, investment in Treasury bills is growing faster than lending activity, reinforcing banks’, particularly public banks’, dependence on financing the State.
These banks thus tend to become financiers of the public sector rather than providers of productive credit.
Reduced credit to SMEs, a brake on investment and weak support for productive economy
The results confirm the existence of a crowding-out effect within the Tunisian banking sector, mainly attributable to public banks, whose NBI composition has undergone a notable transformation over the period studied.
Credit activity stagnated between 2020 and 2023, followed by a slight recovery in 2024, more pronounced among private banks.
This situation illustrates financial crowding out resulting both from the State’s increased recourse to domestic borrowing and from the restrictive monetary policy adopted by the Central Bank, notably characterized by maintaining a high policy interest rate to curb persistent inflation.
In conclusion, the IACE note stresses that this orientation reduces companies’, especially SMEs’, access to bank credit, thereby hampering investment, job creation, and economic growth.
The banking sector, heavily exposed to public debt, also sees its role in supporting the productive economy weaken. The IACE warns against the macroeconomic risks associated with this financing structure, including the weakening of the productive fabric and a decline in competitiveness.
