Tunisia should achieve a GDP growth of 2.3% in 2023 assuming the adoption of “sufficiently” ambitious structural reforms, the World Bank (WB) said in a business cycle report on Tunisia published on Thursday. These forecasts assume the finalization of the agreement with the International Monetary Fund (IMF) during the first half of 2023 and the mobilization of sufficient financing to cover external and budgetary needs, the WB underlined in its report entitled “Reforming Energy Subsidies for a More Sustainable Tunisia” (Spring 2023).
It also assumes the implementation of fiscal reforms in the 2023 budget law, including those related to subsidies and the removal of barriers to competition. According to the Bank, these forecasts are based on the growth rate of the last two quarters of 2022, a period with similar conditions to those likely to prevail in 2023, in terms of commodity prices and uncertainty around financing conditions.
The projected growth rate for 2023 is also in line with the long-term pre-COVID-19 (2011-2019). In its report, the international financial institution estimated that these forecasts remain exposed to “significant downside risks related to the pace of implementation of structural reforms and the evolution of financing conditions”.
Without reforms, projections would be much lower
These growth projections would be significantly lower should Tunisia not implement decisive fiscal and pro-competition reforms and/or should available financing not be sufficient to cover Tunisia’s external needs, including as a result of protracted delays in finalizing the IMF agreement. The World Bank said these “difficult” conditions could generate a shortage of foreign exchange in the economy, a rationing of imports, and potentially lead to a depreciation of the dinar, thus aggravating existing inflationary pressures. Besides, Tunisia would also face challenges to fulfill elevated external debt repayments in the second half of 2023. As a result, economic activity and employment could be severely affected.
Nevertheless, the relatively more benign course of commodity prices along with some expenditure reforms are expected to reduce the current account deficit, which would remain difficult to finance without reforms. According to the same source, the trade deficit is expected to drop slightly from 15 percent of GDP to 14.8 percent, with the moderation of global commodity prices.
More benign commodity prices along with some rationalization of public expenditures could also help reduce the fiscal deficit to 4.6 percent of GDP (from 6.6 percent in 2022), as forecasted by the 2023 Budget Law. In conclusion, the World Bank stressed the need to finalize the agreement with the IMF, which could act as a “catalyst” for several donors, making it possible to cover external financing needs. For the Bank, the implementation of an “ambitious” reform program aimed at improving the fiscal balance and increasing competitiveness remains “crucial” for the sustainable financing of the deficit.
Medium-term prospects conditional on maintaining pace of reforms
If the pace of reforms and the level of financing remain “sufficient”, Tunisia should experience a slight acceleration in growth and a stabilization of its macroeconomic and fiscal imbalances in the medium term, according to the WB. Despite subsidy reforms, the WB also expects a slight decline in inflation due to the relatively large output gap following the reform.
These conditions, together with continued subsidy reforms, should help Tunisia reduce its current account and budget deficits, which would ease financing conditions, the WB said. In addition, the slight increase in economic growth should lead to a reduction in the poverty rate below pre-COVID levels by 2025. However, these medium-term prospects remain conditional on the continuation of an ambitious pace of reforms and sufficient financing conditions.