Event

In the last week violent protests have erupted in Tunisia. The protests were directed towards the government’s austerity measures which went into effect on 1 January and increased the price of petrol and taxes on a number of items and services. The protests started in Tunis in early January and have since then spread to more than 20 cities. The protests of this weekend were organised by the opposition parties on the seventh anniversary of the day that Tunisia’s former dictator Zine el-Abidine Ben Ali fled the country. The government has arrested more than 500 people involved in the protests but has also responded by increasing social benefits for the poorest. While the immediate cause of the protests have been the government-imposed price and tax rises, the underlying cause is the deteriorated socioeconomic situation in the country since the revolution started in 2011.

Impact on country risk

Since the ousting of former president Zine el-Abidine Ben Ali in January 2011, Tunisia has gone through a fundamental political transition. Nevertheless, while the country has made a significant transition towards democracy, the economic transition has been weak and the political situation remains fragile. Since 2011 Tunisia has had seven prime ministers and the successive weak coalition governments have favoured short-term consensuses which have slowed and even prevented the implementation of a number of much-needed structural reforms. Additionally, the country has suffered from the multiple terrorist attacks which occurred in 2015 and severely impacted the tourism industry –Tunisia’s second most important source of hard currency after remittances.

While the recent protests were more violent than previous ones and have received more international media coverage, it was definitely not the first time that protests erupted. Already in the last three to four years there has been an increase of protests all over the country. This is due to economic and social factors such as the high rate of unemployment, corruption and the fact that the population feels alienated from the political elite. These are largely the same factors that have triggered the 2011 revolution and have not been addressed since. Instead, a number of these factors have even worsened.

Growth has been subdued since the revolution. While real GDP growth averaged 4.4% in the five years before the revolution, it was only 1.6% in the period 2011-2017. The growth slowdown and increased political uncertainty after the revolution have led to a sharp increase in unemployment (see graph 1). While the unemployment rate was at 13.1% in 2010, it increased to 18.3% in 2011. Since then, it has reduced slowly but is currently still at 12.5%. Unemployment is especially high among women and youth. The economic slowdown in Tunisia has also led to a stagnation of the real income in the country since 2011 and even to a decrease in the real income over the period 2014-2016.

The weak political and economic situation in the country has also led to an increase in corruption, which is reflected in the country dropping 16 places on the Corruption Perception Index of Transparency International since the 2011 revolution.

It is difficult for the country to turn this negative trend around. In 2016, Tunisia signed up for an Extended Fund Facility programme with the IMF of USD 2.8 bn. Initially the implementation of reforms was slow, but has accelerated since the beginning of 2017.

One of the focus points of the IMF programme is to limit future fiscal deficits, given that public finances have deteriorated significantly in the last seven years. The fiscal deficit peaked in 2013 – reaching 7.4% of GDP – and was still at 5.9% in 2017. Due to the increase in public deficits, the gross public debt to GDP ratio increased from around 40% before the revolution to 62.9% in 2016, which is a high level. For 2018 the Tunisian government is planning to reduce the budget deficit to 5% of GDP and it is in light of this plan that the recent tax increases and subsidy cuts were introduced.

The government will also have to deal with the large public-sector wage bill. Since the Arab Spring, subsequent governments have responded to the rise in unemployment by increasing public-sector employment. However,
this is becoming unsustainable as government finances are under severe pressure due to the high public-sector wage bill. The public-sector wage bill has risen from 10.7% of GDP in 2010 to 14.6% of GDP in 2016. This means that it accounts for around half of total government expenditure and for around two thirds of total tax revenues in 2016 (see graph 2). These are unsustainable levels, especially since the quality of service remains low, primarily in the inner regions. Besides increased public-sector employment, the increased wage bill is also driven by a number of publicsector wage increases that were negotiated with the public-sector labour union. The government plans to limit the wage bill in the future through strict limits on new hiring, by not giving any additional wage increases on top of those already agreed upon with the labour unions and through voluntary departure programmes. This should reduce the public-sector wage bill in the medium term. But in order to implement this, the government will have to resist the opposition from the powerful public-sector labour unions and it remains to be seen whether it will be able to do this.

The issue at hand is that the fiscal austerity measures and economic reforms need to be implemented at a time when the population has already suffered due to high unemployment, a stagnation of real income and the reforms implemented in the past – such as previous reductions in energy subsidies. Nevertheless the government seems to remain committed to the reforms. In response to the protests, the government has not decided to postpone the measures but instead has decided to increase welfare payments and proposed other measures directed towards the poorest in the country. The future implementation of the reforms will determine whether the country is able to turn around the negative economic trend that the country got caught up in since the revolution of 2011. In the meantime the short-term political risk outlook of Tunisia remains stable in category 4.

Analyst: Jan-Pieter Laleman – jp.laleman@credendo.com