Some documents matter as much for what they say as for where they come from. Working Paper No. 1-2024 of the Central Bank of Tunisia (BCT), published in its “Studies and Analytical Notes” series, belongs to that category.
Published on the BCT’s official website, the paper reaches a rare conclusion. For non-specialists in finance and economics, the takeaway is this: in Tunisia, the key interest rate no longer guides the economy; it merely accompanies a state budget it no longer controls.
Following an earlier working paper on another pressing issue, the effects of climate change on the Tunisian economy, co-authored with Hager Ben Romdhane, also a BCT official, this new study by former Dean of the Faculty of Economic Sciences and Management Rached Bouaziz and BCT economist Ramzi Salem was published in April 2024 under the title “Natural Interest Rate and Monetary Policy in Tunisia.”
As usual, the document opens with a disclaimer stating that the opinions expressed are solely those of the authors.
Nevertheless, because it is published by the BCT and hosted on its official website, the central bank effectively endorses the paper’s conclusions.
Beneath its academic appearance, the study delivers a technical demonstration of two realities the BCT has long approached cautiously: the collapse of Tunisia’s growth potential and the crowding out of the private sector by state financing needs.
The exercise consists of estimating Tunisia’s natural interest rate, the theoretical rate that would keep inflation on target while maintaining output at its potential level.
The methodology used is the internationally recognized Holston-Laubach-Williams model in its post-COVID version. The result serves as a compass for determining whether monetary policy is restrictive or accommodative.
And the conclusion is striking: the country’s monetary policy has ceased to be a guiding instrument. It has become subordinate to the budget.
The exercise may seem technical. The authors estimate the natural interest rate and compare it with the observed real interest rate to characterize monetary policy.
The technical verdict is that policy has been accommodative since 2003. However, what Bouaziz and Salem do with this conclusion in the final pages gives the paper its real significance.
The key interest rate is no longer the real steering wheel
The authors do not stop at the verdict; they reverse it. Describing policy as accommodative, they argue, means little in an economy where the state absorbs most available credit.
The BCT did raise its policy rate to curb demand and inflation. Yet at the same time, it financed the Treasury and injected liquidity into the system.
The two actions contradicted each other. The compass pointed to an accommodative stance even while the central bank was attempting to tighten conditions.
The authors summarize this with a revealing diagnosis. The gap between the real interest rate and the natural rate, they write, exposes “the limitations of using it as the sole indicator of the orientation of monetary policy, especially for an economy experiencing fiscal dominance.”
In other words, the measurement tool itself becomes distorted. In a regime where the budget dictates policy, the traditional categories of “restrictive” and “accommodative” lose meaning because the central bank is no longer fully in control of its own direction.
The implication is significant. Bouaziz and Salem are not saying that the BCT miscalibrated its interest rate. They are saying that the policy rate has ceased to be the true steering mechanism.
Tunisia has entered what they describe as a regime of fiscal dominance, a system in which public finance constraints dictate monetary policy rather than the other way around.
A Central bank forced into role of lender of last resort
The authors make no attempt to hide the mechanism behind this situation. They describe a central bank “forced into playing its role as lender of last resort,” compelled to finance the Treasury through open-market operations and through refinancing banks that purchased government bonds.
The word “forced” says everything. The BCT did not choose this position; it was driven into it. Faced with chronic deficits and shrinking external financing, it became the lender of last resort for a state with few alternatives.
The cost of this subordination has fallen on the productive sector. According to the study, the share of financial system credit allocated to the private sector declined from 86% in 2010 to 72% in 2023, while the state’s share doubled from 14% to 28%.
Meanwhile, public debt surged from 40% to 79% of GDP over the same period.
The crowding out of private investment is not the paper’s main subject, but rather its documented consequence. It illustrates what fiscal dominance does to an economy: it drains investment in order to sustain the deficit.
A growth potential in ruins
The study’s findings on growth are equally severe.
Potential GDP growth, which remained stable at around 4.5% between 1989 and 2010, fell to just 0.44% by the first quarter of 2024.
The decline occurred in stages, each corresponding to a major shock:
The 2011 revolution reduced potential growth to 2.66%.
The 2015 terrorist attacks pushed it down further to 2.10%.
The COVID-19 pandemic lowered it to 1.16%.
The deterioration then continued below the 1% threshold.
The authors do not soften their language. They describe the situation as alarming, noting that the Tunisian economy has never succeeded in restoring its growth potential.
Weak investment, limited fiscal space and shrinking external financing, they argue, make any short-term recovery difficult.
The natural interest rate followed the same downward path, with the study finding that more than 99% of its evolution is explained by potential growth. It fell from around 2.74% over the long term to just 0.74% by the end of the period studied.
In practical terms, the equilibrium return on capital in Tunisia has nearly disappeared. An economy whose natural interest rate approaches zero is an economy that has lost its capacity to generate returns on capital investment.
A trend that has since intensified
The study’s data ends in 2024, but developments since then suggest that the trend has worsened.
In its November 2025 economic note, the World Bank reported that the state’s share of total bank credit had reached one-third by August 2025, compared with 15% in 2019, a metric close, though not identical, to that used in the BCT study.
Credit to the rest of the economy grew by only 3% year-on-year.
Domestic debt as a share of public debt increased from 29.7% in 2019 to 77% in 2024.
The mechanism has become routine budget policy.
Economist Arbi Benbouhali noted in early July 2026 that commercial banks had provided more than 33 billion dinars in financing to the state during 2025 alone.
A few days earlier, Finance Minister Michket Slama Khaldi had convened banking executives to urge them to subscribe to second-half Treasury bond issuances.
The system described in the 2024 document has not been corrected. It has become entrenched.
Ultimately, the significance of the paper lies not in a decimal point or an econometric estimate. The natural interest rate is a theoretical variable and the authors themselves acknowledge that its estimation depends on assumptions.
What matters is that two economists, writing under the banner of the Central Bank of Tunisia, explicitly conclude that Tunisian monetary policy no longer steers the economy; it merely accompanies a budget it cannot control.
When such a diagnosis emerges from the central bank itself, it is no longer a methodological footnote. It is the symptom of a monetary sovereignty that has gradually yielded to the constraints of public finances.
