Tunisia IMF talks in limbo as economic pressure builds

The International Monetary Fund (IMF) signalled last week that discussions with Tunisia over a $1.9 billion rescue package would continue, even after President Kais Saied publicly rejected the terms of the loan.

Pointing to “initial progress” made by the country in implementing the economic reform programme, a spokesperson for the IMF said its board will set a new date to examine the Tunisian file in consultation with the authorities.

Just two weeks ago, President Saied said in a statement that he would not accept “foreign diktats” that “cause only more impoverishment”, and stressed that his country "is not for sale". He also suggested that the required subsidy cuts could lead to unrest.

Asked about the alternative to an IMF loan, he insisted that “Tunisians must count on themselves”. Members of his government, however, have said multiple times that there is no alternative to an agreement with the international lender.

"Struggling with an estimated $40 billion external debt, Tunisia could face a balance of payments crisis within months without an IMF deal"

“Rhetorically, engaging with the IMF is extremely difficult for Kais Saied,” Max Gallien, a political scientist focusing on North African political economy, told The New Arab, explaining that this is not just due to the needed reforms that may be unpopular or difficult to execute but also because it would be a “capitulation” of his own promise to take a new approach.

“The IMF is such a symbol of return to the same economic patterns that we’ve seen in the last decade,” he continued.

A Tunisian delegation attended the IMF and World Bank Spring Meetings in Washington DC from 10 to 16 April in a new attempt to revive the financial agreement.

On the sidelines of the Spring Meetings, the director of the IMF’s Middle East and Central Asia department Jihad Azour said the lender had not received a request from the North African nation to re-examine reforms and denied it had imposed a diktat as claimed by the Tunisian head of state.

Talks with the IMF over a bailout plan have been stalled for months. Although the Tunisian government reached a staff-level agreement in October, the deal has yet to be reviewed for approval by the lender’s board, which is a key step for unlocking support from other international creditors.

The IMF demands real guarantees to implement a reform package before disbursing the first loan tranche, including cutting state subsidies on food and energy and reducing public spending, namely the public sector wage bill.

Based on its 2023 budget, the heavily indebted country envisages reducing subsidy expenditure by 26 percent to 8.8 billion dinars ($2.9 billion). But the government has not raised fuel prices this year, presumably to avoid public anger as citizens grapple with inflation at 10.3 percent and recurring shortages of basic goods

Conditions related to the removal of fuel subsidies and the reform of state enterprise, in particular, have been met with reluctance by the Tunisian public.

After Saied indicated he would refuse bailout orders from the IMF, the country’s international bonds lost 4.6 cents of their value, trading at their lowest level in the last six months, adding to fears that Tunisia could be headed toward default in the midst of an already dire social and economic crisis.

Saied’s hostile stance also raises concerns among foreign donors that, in the event talks with the IMF lead to an agreement, the Tunisian chief of state may reverse reforms after the money comes.

This comes at a time when Tunisia is expected to convince international economic players of its commitment to enact a reform programme to secure much-needed external funding.

The Tunisian leader’s rejectionist statement comes in spite of mounting pressure from the United States and the European Union for Tunisia to finalise a deal with the Fund. The US, France, along with other international partners are demanding sweeping reforms from the country’s leadership to unblock cash, linking any additional funding to the IMF deal.

"Saied's hostile stance raises concerns among foreign donors that, in the event talks with the IMF lead to an agreement, the Tunisian chief of state may reverse reforms after the money comes"

Italy, a main entry point for migrants arriving from North Africa, is pressing Europe to quickly support Tunisia to prevent a potential financial collapse that will drive more migration flows toward Europe. Italian PM Giorgia Meloni warned last month that Europe risks seeing a surge in irregular migration if help does not come to Tunisia.

Last Thursday, Italy’s Foreign Minister Antonio Tajani pledged a host of investments to Tunisia and help to negotiate an IMF bailout during a meeting with his Tunisian counterpart, Nabil Ammar, in Rome.

Rebuffing the EU’s conditionality on the conclusion of the reform process, he reiterated his country’s proposal that the loan be delivered in two tranches as the reforms proceed.

Tarak Bouacida, a Tunisian economist and consultant who specialises in infrastructure funding, said that Tunisia is trying throughout its discussions with the IMF to “lower the bar” in terms of set requirements, knowing that it will be difficult to meet them.

“The government is playing with time in order to obtain a little less conditioned financial assistance,” he told The New Arab. “Such procrastination results in stirring up fear in Europe over the threat of a migration crisis”.

On the other hand, Bouacida pointed out, lowering the conditions means that the structural deficit will be carried over into the next period and the North African country will need another bailout in the years ahead.

“The reforms will certainly be painful, but Tunisia will have to pass through this process one way or another,” he stressed and suggested that lifting subsidies on fuel and electricity, for example, would be a more feasible step than doing the same for “symbolic goods” like flour, sugar, wheat or bread.

The economist argued that the readiness of partners such as Italy, France, and Algeria to help Tunisia is a decisive factor that can “reassure” the IMF about approving a bailout package.

In his view, if these countries unite to step in with financial aid, it will add leverage to the negotiations and enable them to demand further reforms or adopt retaliatory measures if Tunisia does not comply.

Struggling with an estimated $40 billion external debt, Tunisia could face a balance of payments crisis within months without an IMF deal, economic analysts say. While most debt is domestic, the country is due to cover its foreign loan repayments later this year.

In February, the World Bank, the IMF's sister lender, suspended a high-level meeting key to agreeing on a new support programme for Tunisia following Saied’s racist statements against migrants from sub-Saharan Africa, which could also complicate the country’s search for a loan.

An official from the World Bank, however, said last week that it is planning to revive discussions soon.

As for alternatives to IMF financing, Gallien made it clear that any viable option should start with a “comprehensive, administratively actionable and politically feasible plan”.

He also highlighted how time is valuable in coming up with a plan for Tunisia, keeping in mind the lag between the enactment of a reform agenda and its implementation before any real change is reflected in Tunisian lives. Until then, any additional delay will only make the situation worse for the ordinary citizen.

Tunisians have endured years of growing economic hardship, compounded by the coronavirus pandemic and the fallout from Russia's invasion of Ukraine, pushing more people to take risky journeys across the Mediterranean to Europe.

Alessandra Bajec is a freelance journalist currently based in Tunis.

Follow her on Twitter: @AlessandraBajec