HomeFeatured NewsTunisia: World Bank projects short-lived growth of 4% in 2021

Tunisia: World Bank projects short-lived growth of 4% in 2021

Growth is temporarily expected to accelerate to 4 percent in 2021 as the pandemic’s effects on exports begin to abate and domestic demand begins to recover.

A projection that the World Bank, in a recent update, blunts by asserting that this uptick is, however, not large enough to return output to pre-pandemic levels of 2019.

Indeed, after this short-term rise, growth is expected to return to a more subdued

trajectory, expanding by around 2 percent by 2023, reflecting pre-existing structural

weaknesses and a gradual global recovery from the pandemic. These estimates

are presented with significant downside risks.

The pace of the recovery will depend on the extent of the pandemic in 2021, vaccine rollout in Tunisia and among key trading partners as well as measures to mitigate the pandemic’s impact on households and firms.

Extreme poverty – measured using the international poverty line of US$1.9 PPP –

is projected to remain below 1 percent through 2023 but poverty measured using

the US$3.2 PPP line will only slightly decline compared to 2020 and will not return to pre-crisis levels of 2.9 percent (2019). It was 3.7 in 2020 and it will decline to 3.4 percent in 2021.

Also, the percentage of the population “vulnerable” to falling into poverty is not expected to

recover to pre-crisis levels in 2021. Using an expenditure threshold of US$5.5 PPP, the

number of poor and of those vulnerable to poverty is expected to decline from 20.2

percent to 19.2 percent of the population.

The current account deficit is expected to widen to 9.2 percent of GDP in 2021 as

imports begin to recover and oil prices increase. As the effects of the pandemic

ease and trade flows recover, manufactured exports and tourism arrivals are

expected to pick up gradually, supporting a gradual decline to 8.9 percent of GDP

by 2023.

But risks to the external outlook remain high, including a sluggish recovery in exports, given the heavy impact of the pandemic on firm capacity and the pace of recovery amongst Tunisia’s main trading partners.

Financing needs will continue to be high in the medium-term given the extent of

the pandemic’s impact on the economy.

Public finances will be particularly challenging in 2021, with an expected fiscal

deficit in the range of 8-9 percent of GDP, as the authorities deal with the

pandemic and maintain support to households, but with depleted fiscal buffers.

In particular, meeting the 2021 budget’s external financing needs will be

challenging given the deterioration of the fiscal setting, the recent sovereign

credit rating downgrade and in the absence of an IMF program.

Persistent political instability

Tunisia finds itself on a weak economic footing and a renewed wave of

social unrest. With persistent political instability over the past ten years, the

economy struggled to garner investor confidence such that GDP growth averaged just 1.5 percent between 2011 and 2019.

Growth now relies increasingly on consumption while investment and exports remain significantly below prerevolution levels.

As growth stagnated, a social contract that sees the public sector as a source of jobs and a guarantor of affordability has seen the fiscal context deteriorate under the weight of a large public sector wage bill, underperforming state-owned enterprises and consumer price subsidies.

Having handled the first wave of the COVID-19 pandemic well, a deeper and

prolonged second wave has been ongoing since September 2020, posing an even greater challenge, worsened by the increase in social protests by a strained population and renewed political instability, whilst economic conditions deteriorate and fiscal space narrows.

This offers Tunisia poor prospects unless strong national leadership begins to build

political stability and consensus to steer the country on the path to recovery.

The situation could have been worse

Real GDP contracted by 8.8 percent in 2020 as sharp declines in domestic and

external demand followed the pandemic.

With a 9.3 percent contraction, manufacturing, a mainstay of the Tunisian economy, was deeply impacted. An 80 percent decline in passenger arrivals also caused a

downturn in tourism and transport. Notably, business pulse surveys indicate that

almost a quarter of formal firms (23.6 percent), mainly in the services sector, were

either temporarily or permanently closed by the end of 2020. This has had a knockon effect on unemployment, which stood at 17.4 percent by end 2020, compared

with 14.9 percent pre-pandemic.

According to a series of telephone interviews conducted by the Institut National de

la Statistique and the World Bank, during and after confinement (March-November

2020), economic activity sharply declined for most employees, and a decline in incomes has been observed. Results show that although employment in November

2020 rebounded to pre-crisis levels among respondents, labor income among wage

workers, and particularly the self-employed, is still below pre-pandemic

levels. More than half of households report worsening living standards relative to the

pre-pandemic period, and for about 40 percent of the poorest, welfare levels have

continued to deteriorate.

Although COVID-19 has had negative effects on everyone’s welfare, poor and vulnerable

households are particularly hit because of their unequal access to basic services,

especially heath care in case of infection, as well as coping mechanisms put in

place.

However, considering the magnitude of the GDP decline, this increase

could have been much bigger if the government hadn’t reacted very fast by scaling up the existing cash transfer programs to compensate for the loss of employment and the decrease in income.

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