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Tunisia: OBG points to short-term growth prospects

As foreign direct investment (FDI) and tourism receipts begin to pick back up in Tunisia, several key economic indicators have improved over the first half of 2012, said the Oxford Business Group (OBG).

While high levels of current expenditures and investment will continue to put pressure on public finances, authorities are optimistic for a return to economic growth in 2012.

Tunisian authorities project that annual GDP growth may reach as high as 3.5% in 2012, while the IMF has released a more conservative estimate of 2.7% annual growth.

In addition to economic uncertainty surrounding the 2011 political revolution that ousted former president Zine El Abidine Ben Ali and ushered in a new government, the economy was also affected by conflict in neighboring Libya and the economic downturn in the EU, Tunisia’s largest export market. GDP contracted by 1.8% in 2011, a sharper decline than was seen in Egypt, according to the IMF.

However, activity picked up in several key industries in late 2011 and early 2012, and real GDP expanded by 4.8% year-on-year (y-o-y) in the first quarter of 2012. While the country’s economic progress remains fragile, solid gains in tourism, industrial production and FDI flows should help to buoy overall economic performance in the short term.

Tourism receipts, one of Tunisia’s key sources of foreign currency revenue, rebounded to reach TD1.8bn (€882.29m) between January and August 2012, a 35.3% increase from TD1.3bn (€637.21m) in the same period in 2011. Sector revenue was cut by one-third over the course of 2011 as political uncertainty in Tunisia and the economic downturn in Europe slowed tourist arrivals.

FDI inflow has also begun to improve, after dropping by 26% in 2011, as many investors adopted a “wait-and-see” stance. However, the IMF indicated that by June 2012 FDI had increased by 28% y-o-y, and figures published in August by Tunisia’s investment promotion agency (Agence de Promotion de l’Innovation et de l’Industrie, APII) showed that FDI had nearly regained 2010 levels.

The APII report stated that FDI in the first half of 2012 totaled TD1.12bn (€548.98m), just 3% lower than levels seen in the same period of 2010. FDI was particularly concentrated in manufacturing, and the sector expanded by 2.5% in the first quarter of 2012, according to Tunis Afrique Presse (TAP), the national press agency.

Returning foreign investment is a positive sign for economic recovery, but Tunisia must still confront the fact that its external position has weakened considerably since 2010. As economic production slowed, Tunisia’s current account deficit expanded to 7.3% of GDP in 2011 from under 5% in 2010.

Global food and fuel prices have remained high in 2012, and the IMF projects the deficit will remain at 7% of GDP this year. Tunisia’s foreign reserves dropped to €5.77bn at the end of 2011, equivalent to 3.8 months of imports, from €7.21bn in 2010. Despite increasing FDI, rising import levels have contributed to a further decline of foreign reserves to €5.16bn by the end of June 2012, equivalent to 3.1 months of imports.

However, Tunisia has maintained relatively strong fiscal policies throughout the transition, which have helped to keep the fiscal deficit and public debt at manageable levels. The government raised current budget spending to address social demands during the crisis, including public sector wage hikes, food and energy subsidies, and social programs to address critical issues, such as youth unemployment. As a result, the overall fiscal deficit expanded from 1.1% in 2010 to 3.5% of GDP in 2011.

A July 2012 IMF report recognized, however, that a temporary increase in public expenditures may be crucial to re-stimulating economic growth and will be feasible in the medium term. Public debt increased to 44.4% of GDP in 2011, up from 40% over the past decade, and may climb to the still-manageable level of 46.5% of GDP over the medium term, according to IMF estimates.

However, much of Tunisia’s economy is still linked to Europe; if the eurozone crisis worsens, decreased demand from EU countries may jeopardize Tunisia’s initial gains, particularly as its weaker external position makes the country more vulnerable to external shocks.

The July IMF assessment indicated that while its banking system is fairly well protected from the effects of the eurozone crisis, Tunisia stands to be considerably affected through decreased tourism, trade and FDI flows.

While sustained economic recovery will depend to a large extent on economic conditions in Europe and the “wait-and-see” attitudes of investors, responsible fiscal policies have kept Tunisia’s economy in a solid position into early 2012.

With increased public spending this year meant to ease social conditions, decrease unemployment and stimulate economic growth, the government will need to take measures to balance this spending elsewhere in the budget. As prices rise, the state has indicated its willingness to tighten monetary policy to contain inflationary pressures. The government has stated it expects to receive €2.46bn of external financial support by the end of the year, which will help to underwrite the 2012 budget program in hopes of seeing a stronger return to economic growth in 2013.

Source: OBG


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