Political chaos threatens Tunisia’s IMF loan

Protests continued to rock the Tunisian capital, Tunis, on Thursday as citizens joined a rally organized by judges against President Kais Saied’s recent decision to dissolve the Superior Council of the Judiciary (CSM).

On Sunday, the president tried to remove the CSM, which is responsible for ensuring judicial independence, accusing the institution of siding with rivals, the Islamist-inspired party Ennahda, over politically sensitive investigations.

On Wednesday, the government backtracked on disbanding the body, with the justice minister telling Watania 1 TV that the CSM would be reformed and not abolished.

[The president] “assured the defense of the Superior Council of the Judiciary as a constitutional body that guarantees the independence of justice,” she said.

Changes will be made to the law regulating the body with an interim judicial authority set up in the meantime, she explained. No other details were given on the role and composition of the new body.

Political fireworks

In July, Tunisia’s president sacked his longtime rival Prime Minister Hichem Mechichi and suspended the government as public frustration over the country’s deteriorating economy and handling of the pandemic boiled over.

While critics called the move a coup, it raised hopes that Tunisia’s new government could break the political deadlock and pave the way for recovery and investment.

But recent events could hamper the country’s chances of consolidating its financial crisis with a much-needed bailout from the IMF, analysts say.

A 30-day state of emergency turned into 18 months as the CSM was one of the last state bodies to act independently of the government.

“The idea of ​​Tunisia as a beacon of hope, and the only democracy to emerge from the Arab Spring, has been somewhat eroded,” says James Swanston, Middle East and North Africa economist at Capital Economics. .

“The G7 has condemned the developments and it could foreshadow tensions with the IMF – which is visiting virtually on Monday – and make it even more difficult to reach a new agreement.

“This comes at a time when the external position is dire – the gross external financing requirement stands at 160% of foreign exchange reserves – and the government is locked out of the international
capital markets.

“The problem is that the government continues on the path of default.”

High stakes negotiations with the IMF

Political unrest and union opposition to tough IMF reforms further complicate the already difficult negotiations.

“We expect 2022 to be another challenging year for Tunisia,” said Yasmine Ghozzi, senior economist at IHS Markit.

“However, given Tunisia’s precarious fiscal situation, a compromise will be reached this time and an agreement with the IMF should be reached by the end of April 2022.

“Securing the loan means unlocking the country’s potential to tap into international markets and restore investor confidence by improving its credit rating.”

At the height of the pandemic, Tunisia experienced a more pronounced decline in growth than most of its regional peers, having entered the crisis with slow growth and rising debt levels.

GDP growth contracted by 8.8% in 2020, while unemployment fell from 15% before Covid-19 to 17.8% at the end of the first quarter of 2021, according to the World Bank.

Hope on the horizon?

President Saied will seek to consolidate his power by continuing to crack down on corruption and continuing to target political opponents, says Yasmine Ghozzi.

“His medium-term objective is to push through a constitutional reform approved by a popular referendum that would guarantee the changes in the country’s political framework that he introduces.

“The exclusion of major political parties from this process, however, will lead to increasingly politicized social upheaval.”

Other constitutional changes extending the president’s power are expected to be approved by referendum before the end of July 2022, IHS Markit economists predict.

The 2022 budget was set at $20 billion, 2.3% higher than the 2021 budget, bringing the budget deficit as a percentage of GDP to 6.2%.

The budget forecasts a total borrowing requirement of $6.4 billion, while authorities revealed plans to borrow an additional $7 billion from foreign lenders and domestic sources to support the economy, Ghozzi said. .

“Changes to the subsidy system, and possibly to the public sector wage structure, including a redundancy plan, will be introduced in 2023. Fuel subsidies are also expected to be reduced in 2023 with further reductions until 2025, but will not be completely removed. .”

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