finance & economy

IMF calls Tunisia to prioritise spending on health and social protection, warns of higher deficit of over 9%

January 24, 2021

(TAP) - The International Monetary Fund (IMF) on Friday, called the Tunisian authorities to strictly prioritise spending on health and social protection, while exerting control over the wage bill, ill-targeted energy subsidies, and transfers to state-owned enterprises, otherwise, the country would risk a higher deficit of over 9 percent of GDP.

This call was issued by the IMF staff team at the end of a remote mission conducted from December 9 to 18, 2020 and January 4 to 13, 2021 in the context of the 2020 Article IV consultation with Tunisia.

The fund considered that the fiscal deficit is estimated to have widened to 11.5 percent of GDP, notably because of lower revenue, a higher wage bill, and additional transfers to state-owned enterprises.

'IMF staff and the authorities agree that Tunisia currently faces the dual challenge of saving lives and livelihoods until the pandemic wanes,' head of the IMF mission team Chris Geiregat pointed out.

'IMF staff expects GDP growth to rebound to 3.8 percent in 2021 as the effects of the pandemic start to wane. However, there are considerable downside risks around this baseline projection, especially given the uncertainty from the duration and intensity of the pandemic and the timing of the vaccination.'

Need to adopt 'credible and well-communicated' reform plan to reduce public debt

Besides the challenges related to the pandemic, the IMF said that 'the medium-term outlook and public debt sustainability depend on the authorities' adoption of a credible and well-communicated reform plan that benefits from the Tunisian society and international development partners' strong buy-in.'

'To this end, it would be critical to gain support from the relevant stakeholders on issues within their remit. Such a 'social compact' could cover the civil service wage bill (currently among the highest in the world), subsidy reform, the role of state-owned enterprises in the economy, the informal sector, tax equity, anti-corruption reforms, and the business environment,' said Geiregat.

'Staff welcomes the authorities' efforts to start to disentangle and resolve some of the cross-arrears, and encourages the authorities to adopt a medium-term reform plan that: (i) 'triages' SOEs based on their financial viability, strategic importance, and nature of their activities; (ii) centralizes their oversight in a single entity; (iii) strengthens corporate governance; and (iv) improves transparency and financial reporting. Improving the financial position of the social insurance system would also reduce fiscal risks.'

'The Central Bank of Tunisia's (BCT) monetary policy has helped support credit and liquidity, while inflation continued to fall. Staff urges the authorities to avoid future monetary financing of the government, as it risks reversing the gains achieved in terms of lowering inflation, could weaken the exchange rate and international reserves, and undermine financial stability.'

'Monetary policy should continue its focus on inflation by steering policy rates, while preserving two-sided exchange rate flexibility. The BCT should closely monitor the financial sector, as the full impact of the pandemic on the financial sector is yet to be observed,' the IMF specifies.

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