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Tunisia: Is recession at our door?

Shortly after the release of its comprehensive report on the Tunisian economy, the Oxford Business Group is back to analyze, this time, the situation of the Tunisian economy amid  the international financial and economic crisis.

The first conclusion which emerges is that It has taken longer for Tunisia ‘s economy to feel the effects of the global financial crisis, but even the recent signs of slowing growth may hide a silver lining. The downturn in global demand – which is beginning to have an impact on Tunisia ‘s vibrant export sector – has dramatically decreased inflationary pressures, which in turn has allowed the Central Bank of Tunisia (CBT) to cut its interest rates to stimulate spending.

Although many emerging markets have been hit hard by the global slowdown, Tunisia has maintained strong levels of growth, buoyed by its banking sector and increasing levels of foreign direct investment (FDI). Growth in 2008 reached 5.1%, down from 6.5% a year earlier, but still impressive, particularly during these lean times thanks to Tunisia ‘s restrictive regulatory policies, combined with the fact that very few banks lend abroad, invest in derivatives, or participate in international currency transactions, the sector has thus far remained relatively unscathed.

Tunisia is far from immune to the downturn

Still, Tunisia is far from immune to the downturn and the signs of the slowing growth are emerging. The government had forecast growth of 6.1% in 2008, but the recession in the Eurozone has meant that there is less demand for Tunisia ‘s exports. After a record year of 20% growth in exports, the figure is expected to drop to 8.7% in 2009. Textiles and auto parts industries are particularly vulnerable, although the latter accounted for much of the growth in 2008. Because exports account for 45% of gross domestic product (GDP), their declining contribution has played a significant role in the pared down expectations for 2009.

The economy ‘s contraction will be a challenge, but there are some hidden benefits, including slowing inflation which should ease some of the strain. The latest figures indicate that inflation has been decreasing in recent months, mainly due to the drop in global commodities prices. Since its peak in April, inflationary pressures have eased, dropping to 4.5% in October and 4.3% in November last year, with the government forecasting an average of 3.5% for 2009 – almost half that of 2008.

While the government’s attempts to regulate price rises through monetary policy have contributed to the decline in inflation, the fall in bread and cereal prices, as well as fuel costs, has been the main factor. As both a traditional net energy importer and a market highly sensitive to cereal costs, elevated global commodities prices proved troublesome for Tunisia. Indeed, inflation reached a peak of 6% in April 2008 and although it was scaled back to 4.9% by June, it rebounded to 5.2% in July. This level of inflation is particularly troublesome for Tunisia because it subsidises both oil and cereals, the combined direct and indirect fuel and food subsidies accounted for 7.3% of the GDP in 2008, some TD1.048bn ($744.8m). Some of the costs of the bill were offset by revenue from oil and gas royalties, which rose to TD357.6m ($254.1m) in 2008 from TD290.7m ($206.6m) in 2007, but the subsidies remain a drain on the government’s finances.

With inflation dropping, however, the government will not have to spend as much on subsidies, relieving a significant burden of the country ‘s account balance sheet and freeing up funds for other spending and stimulus programmes.

Drop in export demand is still a source of worry

However, while the slowdown does offer some economic benefits to Tunisia ‘s consumers, the drop in export demand is still a source of worry and the government has begun taking a number of steps to boost growth. On February 17 the CBT agreed to reduce its key interest rates by 75 basis points, from 5.25% to 4.50% to stimulate spending. Since the second half of 2007, the CBT began tightening its monetary policy, raising the required reserve ratio from 3.5% to 5% in late November and again to 7.5% in late April 2008 in an effort to tamp down rising inflation. According to a communiqué from the CBT ‘s Executive Board, the drop of the CPI from 4.1% in December to 3.5% in January prompted the CBT to relax its policies to encourage spending.

By adapting its monetary policy to the current financial realities, the Tunisian government has shown that it is working to sustain the economy during the downturn. Overall numbers may not grow as significantly in 2009 as they have in recent years, but the CBT ‘s efforts will help shore-up the economy so that it will be ready for business once global markets rebound, adds the report..


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