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Wednesday 26 January 2022
HomeFeatured NewsThe Dinar, stable but vulnerable to sharp falls

The Dinar, stable but vulnerable to sharp falls

Merchant peoples: “Tunisia’s external position is in a dire state and policymakers have little ammunition available to defend the dinar. We think the currency will depreciate by more than 10% against the euro by the end of next year and the risks lie heavily to the downside.”

This is at least what the economic website “Capital Economics” predicts, in an economics update based on a macroeconomic model. A static, almost robotic macroeconomic framework.

What Capital Economics believes will be

This model is stuck in time projects little on the possible developments of the economic and financial situation of Tunisia. Indeed Capital Economics does not take it into account due to the fact that the current account deficit narrowed from 11.5% of GDP in mid-2019 to 6.4% at the end of last year, it has since widened again and stood at more than 8% of GDP in Q2, imports have grown at a much stronger pace, net foreign direct investment flows are low at just 1.6 of GDP in the four quarters to Q2 2021.

Add to this the fact that Tunisia’s external debt stood at 97% of GDP in Q2 and around a quarter of this debt is due to mature within the next twelve months and that the gross external financing requirement (GXFR) – that is, the sum of the current account deficit and short-term external debt (in other words, the capital inflows required over the next year) is equal to 165% of the central bank’s FX reserves and sovereign dollar bond yields stand at more than 13%, well above the 8-9% threshold typically associated with a reluctance by EMs to borrow from international capital markets – leave the dinar vulnerable to sharp falls.

The same source anticipates saying: “we currently forecast that the currency will weaken by 12% against the euro, to 3.70/€, by the end of next year. But, if anything, the risks to this are skewed heavily to the downside – particularly if the political situation deteriorates further. Falls in the dinar would increase the cost to the government of servicing its

large external debts and cement our view that a debt restructuring will be needed.”

Current and future situation

This analysis does not seem to take into account the impact of the Dollar / Euro exchange rate on the Tunisian Dinar. It is however verified that each time the Dollar-Euro exchange rates change, the Dinar depreciates against one and appreciates against the other, in a swing effect known among traders.

Questioned by Africanmanager, an authorized source of the BCT (Central Bank of Tunisia), notes that “this is a trend scenario without reforms. The simple static analysis seems to give him reason. But if he believes that we will remain in this case arms crossed, without initiating the necessary stabilization actions … “.

Our authorized source at the BCT expects to “end the year 2021 with foreign exchange reserves around 120 days of imports, despite all the difficulties, and that all this, in a situation where Tunisia has mobilized very little from abroad, and that the diversity of the Tunisian economy has given this resilience.

The source highlighted the very significant contribution of expats and the improvement of exports by the local industrial fabric.

And these are all factors that have stabilized the situation of the Dinar. “Its situation is stable, certainly in the short term. In the medium term, it requires structural adjustments to strengthen the competitiveness of the economy and revive the engines of growth, “says our source.

The source then reassured that “all departments of the State are currently mobilized, to give the country a program that will develop economic stabilizing actions, pending the fundamental structural reforms in the context of a development plan that will create the necessary break, and boost and reinvigorate the engines of growth.

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