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Tunisia has been facing significant economic challenges for several years, exacerbated by the COVID-19 pandemic and the war in Ukraine, which has led to slow economic growth, high unemployment and inflation rates, and increased public debt.

To overcome these challenges, the Tunisian government began negotiations with the International Monetary Fund (IMF) to obtain a financial loan conditional on implementing a program of economic and financial reforms.

Negotiations failed after Tunisia refused to eliminate subsidies and sell public enterprises.

Due to ongoing economic challenges and lack of agreement with the IMF, Tunisia’s growth is heading towards recession.

The World Bank’s „Tunisia Economic Monitor – Fall 2023” report forecasts GDP growth of 1.2 percent in 2023, a significant slowdown compared to 2021/22, with a slight rise to 3.0 percent in 2024.

According to the report, the 2024 growth forecast is subject to significant downside risks related to the evolution of drought, the pace of structural reforms planned by the government, and fiscal conditions.

The first part of the report focuses on the economic challenges facing Tunisia, with prolonged drought in the agricultural sector leading to limited growth and a slight increase in unemployment, reaching 15.6 percent in the second quarter of 2023 compared to 15.3 percent last year.

Tunisia’s merchandise trade deficit fell by 39 percent in the first eight months of 2023 to TD 12.2 billion (7.5 percent of 2023 GDP).

Energy shortages widened due to a fall in domestic production despite more favorable prices.

A narrowing trade deficit, tourism inflows (+47 percent year-on-year at end-August 2023) and steady performance of remittances reduced the current account deficit.

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However, Tunisia still faces challenges in securing external financing in light of the imperative schedule for short-term foreign debt repayments.

Public debt has increased from 66.9 percent of GDP to 79.4 percent between 2017 and 2022, reflecting rising public spending and the downturn in the economy during the Covid-19 crisis.

The price control system that regulates the commodity markets is a major cause of the increasing indebtedness of state-owned enterprises and hence the current deficit.

At the same time, inflation started to moderate to 10.4 percent from the February 2023 peak. It fell to 9.0 percent in September on the back of lower global prices and weaker domestic demand.

However, inflation remains high, especially for food items at 13.9 percent, as drought and import contraction have reduced supply in domestic food markets. Although inflation is stable in 2023, interest rates remain high.

– Immigration as an opportunity for economic development

The report discussed the importance of migration for Tunisia from a development perspective. It pointed out that in recent decades, immigration has become an important issue for Tunisians, especially those facing economic difficulties.

In recent decades, remittances have been the largest financial inflow for Tunisia, reaching 6.6 percent of GDP in 21/22.

In contrast, foreign immigration to Tunisia is small, 0.5 percent of the population. From the end of 2022, Tunisia has become an important transit country for irregular migration to Europe.

To improve the long-term benefits of immigration, Tunisia can focus on a range of policies, including matching migrants’ skills to the needs of destination countries, recognizing migrants’ educational and professional qualifications, and strengthening the status of regular migrants.

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As its importance as a receiving country for migrants is likely to increase, the report said, Tunisia can also improve the economic benefits of migrants while maintaining their well-being and rights.

To maximize the benefits of immigration to Tunisia, it is necessary to establish legal channels for workers in need, including low-skilled workers.

World Bank Resident Representative Alexandre Arroyo said Tunisia’s economy is showing some resilience despite ongoing challenges, with increased exports of textiles, machinery and olive oil, combined with growing tourism exports, helping to narrow the external deficit.

Strengthening competition, increasing financial space and adapting to climate change are critical to restoring economic growth and building resilience to future financial and climate shocks, Arrobio noted.

– Increased bank profitability masks risks

Meanwhile, higher profitability of banks in the first half of 2023 masks mounting liquidity and leverage risks, Fitch Ratings Agency said.

The agency said it does not expect profits to improve further in 2H23-2024 due to rising impairment charges and an additional tax on bank profits announced in October 2023.

Tunisia has been slow to reach an agreement with the IMF on a $1.9 billion support package, leaving the government increasingly reliant on banks to finance its significant financing needs.

Fitch forecasts that government financing should be 17 percent of GDP, or about $7.7 billion, in 2024.

Weak inflow of deposits limits the ability of banks to absorb the funding gap.

This leads to increased reliance on central bank funding through open market operations, which stood at 8.8 per cent of sectoral non-equity funding at the end of May 2023.

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Additionally, the agency expects banks’ funding costs to increase due to competition for scarce liquidity. Continued high state financing drives out private sector debt.

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