20 minutes
The same was true of Hichem Mechichi's previous government. Since July 25 (when President Kaïs Saied dismissed the government, froze the Parliament and assumed full executive powers) negotiations with the IMF on economic reforms/conditions have been suspended.
The visions of Kaïs Saied and the IMF are radically opposed to each other when it comes to austerity. The former aspires to rationalise imports and limit the privileges granted to senior civil servants, while the IMF stipulates that Tunisia's financing is conditional on the reduction of public spending, particularly on subsidies and wages.
However, in view of the deficit of more than 9 billion that has been forecast for the year 2021 by the supplementary finance law, decision-makers agree that the current financial situation imposes an inescapable reliance on more debt in order to cover the deficit.
As such, the conditions set by the IMF pose a significant challenge to the current government, both in terms of the need to take out further loans, and the ability to comply with these conditions, given the socio-economic impacts that such measures would have on the low-income classes.
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An unprecedented economic downturn
According to a statement published by the IMF at the end of February 2021, the Tunisian economy suffered from a GDP reduction of 9.2% in 2020, with the unemployment rate reaching 16.2% at the end of September 2020.
The organisation also confirmed the worsening socio-economic fragility of Tunisia, and stated that its directors expect the situation to continue to evolve in a negative direction, despite previous forecasts of a modest growth upturn in 2021.
Although the IMF highlights the exacerbation of social fragilities in Tunisia, their recommendations to reduce the budget deficit emphasise the need to reduce the wage bill and limit energy subsidies, whilst prioritising expenditures on public health, investments and the maintenance of targeted social spending.
Furthermore, its directors noted that Tunisia's public debt is likely to reach an unsustainable level, i.e. it would be "impossible for Tunisia to honour its commitments unless a strong, credible and broadly supported reform programme is adopted".
The IMF also called on the Tunisian government to adopt a more equitable and growth-enhancing tax system. Thus, the IMF conditions the approval of the loan to Tunisia by the implementation of the entirety of this agenda, in addition to the adoption of a plan to reduce what they consider as "the budgetary and financial risks of public enterprises, which are therefore required to strengthen their governance and improve their financial reporting and transparency", according to the terms of the statement.
A comparison between IMF debt and foreign debt stock
Source: Foreign debt stock, World Bank
Where does the Bouden government stand on the IMF's demands?
Inkyfada was informed that a committee composed of the Central Bank and several ministries (such as the Ministry of Finance, the Ministry of Foreign Affairs and the Ministry of Economy and Planning) is currently conducting a series of meetings in order to develop the plan that will be negotiated with the IMF. The discussions are centred on ten or so prioritised areas relating to the wage bill, subsidies, restructuring and the digitalisation of public enterprises.
At the same time as announcing the "integrated" programme, the Head of Government Najla Bouden also stated that the government is currently working to create an environment conducive to the adaptation of the legislative and regulatory framework relating to entrepreneurship, with the intention of simplifying administrative procedures and speeding up the abolition of administrative authorisations that obstruct investments.
The digitalisation of institutions plays an important role in the new official plan. In the same statement, Bouden indicated that the government is currently working to reform the administration in terms of organisation, working procedures and the use of digital technologies.
Bouden also spoke of launching "necessary reforms" concerning the civil service, which will include the introduction of target-based management mechanisms for financial and human resources, as well as improving the performance and governance of public enterprises.
What was the relationship between the previous government and the IMF?
As the government has taken it upon itself to develop a new plan that complies with IMF requirements, the previous government's programme (the Mechichi programme) is now obsolete. However, it still does provide information on the IMF's guideline for financing governments, as it is based on rules that the Executive Directors consider to be "economic reforms that can ensure debt sustainability". The Mechichi government's response to the IMF's demands was, in effect, to modify certain key orientations of the state's socio-economic policies, according to a programme that is articulated around five major prioritised areas.
The first priority of the previous government's plan was to liberate the economy from anti-competitive practices, and to improve the general business climate. To this end, the government advocated for the abolition of authorisations, the simplification of administrative procedures, the digitalisation of the various processes that investors face, as well as the generalisation of electronic transactions at all stages. It also committed to simplifying public governance of investment and optimising the performance of public agencies by reviewing the role of existing institutions.
Faced with the reforms proposed by the previous government, a collective of civil society members such as Al Bawsala, Oxfam and Lawyers Without Borders launched the "Yezzi ma Rhantouna" [roughly translated as: “Enough with mortgaging us”] campaign.
"The previous government made no critical assessment of the country's economic development model and its eroding foundations, except for a timid reference to the licensing regime. Instead, it praised the availability of skilled Tunisian labour, whilst considering its competitive cost as an advantage in the 'race to the bottom', overlooking the fact that this competitiveness alone cannot be a solution. Moreover, the praise of this situation is indicative of the total absence of socio-economic rights and the intention to improve the living conditions of citizens from the government's priorities", the group argues.
To this end, the government said it was ready to promote a tax system that would stimulate private investment and guarantee better visibility for economic operators in both the short and long term, while ensuring a more efficient tax system capable of broadening the tax base through a series of measures.
"The plan envisages an amnesty of tax penalties and the repayment of 20% of the amount of the recovery", describes Amine Bouzaiène, a tax expert and activist within the Al Bawsala association. According to him, this approach perpetuates the legislative tradition adopted since the Ben Ali era, which consists of multiplying amnesties although none of these measures have been subject to prior studies or a subsequent evaluations to determine their effects.
Furthermore, the third priority is based on reforming the subsidy policy and compensation mechanisms, given that the General Compensation Fund is "increasingly burdening the state budget". The scope of the previously announced reform will cover basic food items and liquefied petroleum gas (LPG), to be extended to electricity and liquid gas at a later stage.
The reform envisages the abolition of the subsidy over a two-year period, in four waves of price adjustments. Each time, the amount of the cash transfer will be re-evaluated, with the target of reaching zero subsidies and moving to "real prices" by 2024, as well as replacing the old price subsidy system with a household cash transfer.
The fourth priority seeks to remobilise the civil service and optimise efficiency. The people drafting the plan have recommended several approaches that are essentially based on the transition from human resources management to skills management. In the same vein, Bouden had specifically mentioned the establishment of management by objective mechanisms for financial and human resources. Other measures were also to be negotiated in order to reduce the number of civil servants and, consequently, reduce the wage bill.
Meanwhile, the Secretary General of the Tunisian General Labour Union (UGTT), Noureddine Taboubi, stated a few days later that the Bouden government is indeed planning to reduce the civil service wage bill by 10%, and to freeze salaries for the coming five years.
The government also plans to lift the existing subsidies on basic products, in addition to selling off some public sector companies, thus demonstrating that the current government, like its predecessor, is on its way to complying with the IMF's demands.
It is also considering the lifting of commodity subsidies in addition to the divestment of some public sector enterprises. This shows that the current government, like its predecessor, is on the way to complying with the Fund's demands.
As for the fifth priority of the Mechichi government's plan, it is based on the implementation of radical reforms at a public enterprise level, and a revision of their governance.
Economic reforms vs. increased pressure on the most vulnerable
While there has been very little information about the details of the current government's plan, inkyfada has tried to contact the Ministry of Finance on numerous occasions without any response, which brings us back to the previous government's plan, one that involved the Central Bank as a stakeholder in the ongoing negotiations.
The Mechichi government's plan was developed in response to the IMF's five main conditions. These conditions are based on liberating the economy from anti-competitive practices, and improving the business climate, as well as reducing the wage bill and restructuring or privatising bankrupt public enterprises. This, in addition to the adoption of a competitive fiscal policy, requires a consensus among all social stakeholders, which implies the need for the approval of the Tunisian Union of Industry, Trade and Handicrafts (UTICA) and the General Union of Tunisian Workers (UGTT).
This last point constitutes a new condition and its previous absence is likely to have been one of the main reasons why Tunisia have yet to implement the necessary economic reforms during Youssef Chahed's government.
With regards to economic liberalisation and the improvement of the business climate, Amine Bouzaiène believes that the plans approved by the IMF most often benefit the rich, at the expense of the most disadvantaged social groups.
In this regard, he explains that "the previous government had suggested the abolition of the 35% corporate tax rate, notably applicable on corporate income of companies operating in the rent sectors (banks, insurance companies, telecommunications and extractive industries), and the adoption of 10% and 15% rates. This reinforces the idea that the recommended reforms have been tailored to serve the interests of big businesses and the wealthy. It is worth noting that these same reforms aim to increase the tax burden on households, notably through the value added tax (VAT).”
Tax revenues between 2010 and 2020
While the government's economic options are expected to be reflected in the 2022 finance act, the draft has not been publicly debated due to the suspension of parliamentary activities. This is against the Constitution, which states that the adoption of a finance act for the following year must take place by December 10 at the latest.
In addition to the revision of the tax provisions that will be specified by the 2022 finance act, the IMF urges the Tunisian government to reduce the civil service wage bill from 17.4% to 15% of the GDP by 2022. In this regard, Seif Ben Tili of Oxfam states that "such a reduction is too large in such a short period of time".
"Most of these measures are in reality tactics to impose precarious jobs, especially as the private sector has failed to create decent and stable jobs thus far", he says.
"This will push civil servants (victims of 'innovative measures to reduce the wage bill'), into precariousness, with all that this implies in terms of exacerbating the social impacts of new waves, health crises and other problems that Tunisia may face in the future", he adds.
This problem also concerns the IMF's conditionality of Tunisia's financing on the revision of the subsidy policy of food products and hydrocarbons. "While it is true that energy subsidies should be reduced, given that a large part of these subsidies benefit large companies and wealthy families, it is also true that their replacement by selective compensation will disproportionately affect the middle classes", says Nabil Abdo, Senior Policy Advisor at Oxfam International's Washington office, during an interview with Inkyfada.
"Adopting such a selective approach would place a greater financial burden on the middle classes for energy and food, which will undoubtedly put further strain on their purchasing power, especially in view of the other proposed measures", he adds.
Furthermore, Nabil Abdo believes that the government should replace the subsidy system with a comprehensive social protection system for those who deserve it, rather than a charitable or privileged approach. Abdo argues that this is because of the close correlation between the price of commodities and other products. He argues that it would therefore be difficult to estimate the compensation burden, as prices are subject to very erratic and impactful variables such as monopolistic situations and distribution networks, etc.
Where do human rights fit into the negotiations?
The civil society collective criticised the way the IMF dealt with the Mechichi government, highlighting the impact of external debt and international financial commitments to uphold human rights. A report submitted to the UN General Assembly in July 2019 states that "international financial institutions can be held accountable for complicity with economic reforms that violate human rights".
"The government [Mechichi] that submitted the reform plan to the IMF was the one under which civil society organisations witnessed a violation of human rights. These violations often took the form of police violence against demonstrators, disadvantaged youth and human rights defenders; the same attitude adopted by the current government which has just resumed negotiations against the backdrop of repression against the demonstrating inhabitants of Agareb, the harassment of activists and the stifling of any protesting voice", says Lamine Benghazi, a lawyer and activist with Lawyers Without Borders.
"The absence of the participatory aspect weakens the structuring of the rule of law in Tunisia. It is also likely that the human rights situation will deteriorate significantly throughout the country as the reform plan stipulated in the future agreement between Tunisia and the IMF is implemented", he continues.
Tunisia and the IMF
Tunisia's indebtedness to the IMF dates back to 1964. Nevertheless, the rate of indebtedness rapidly accelerated after 2011, with two loans obtained within merely three years. The first one was under Ali Larayedh's government in 2013, obtaining 1.7 billion dollars from the IMF. The second loan was obtained in 2016 under the Habib Essid government. At the time, this loan was for $2.9 billion, which was paid out, following IMF approval, in nine instalments: the first $319.5 million in 2016, and the eight remaining portions in half-yearly instalments.
"Apart from subsidy reform, no specific targets or measures have been mentioned. This proves that the plan lacks seriousness on this point, especially since the reforms aim to cut public spending and implement tax measures that could ease the burden on the rich at the expense of households", says Mehdi Barhoumi of the organisation International Alert, as well as a member of "Yezzi Ma Rhantouna".
Barhoumi also believes that "any reform plan that does not include the improvement of public services, especially health and education, and a significant increase in social spending, will not provide fertile ground for an overall economic recovery, but will, on the contrary, pave the way for tensions and social outbursts in the future".
Moreover, it should be noted that the global crisis has not been without heavy repercussions on the Tunisian economy, which experienced an unprecedented recession following the outbreak of the Covid-19 pandemic. As a result, the IMF Executive Board approved the disbursement of 745 million dollars to Tunisia under the Rapid Financing Instrument (RFI) in April 2020. These resources were supposed to meet the urgent needs for budget and balance of payments financing caused by the pandemic.
Since 2011, economic aggregates have continued to deteriorate despite the reforms announced by successive governments. Thus, the outstanding public debt has quadrupled in 10 years, while the debt ratio has doubled from 40.7% to 84.3% of the GDP between 2010 and 2020. In 2020, the country's external debt increased to 55.6% of the GDP.
The evolution of public debt between 1986 and 2021
This continued deterioration of the economic situation led to the downgrading of Tunisia's sovereign credit rating from B2 to B3, with a negative outlook, according to a report dated February 23, 2021, by the credit rating agency "Moody's". This rating was further downgraded to Caa1 while maintaining the "negative outlook", as of October 14, 2021. According to Moody's, this rating reflects the weakening of the country's position and the increased risks regarding its ability to honour its commitments.
While successive government leaders have attributed the causes of the economic crisis to social and terrorism related unrest, the Covid-19 health crisis has since been regularly used to justify the continued deterioration of the economic situation, despite the fact that even before this, Tunisians were taking to the streets to protest against increasing prices, widespread poverty and rising unemployment, according to monthly reports by the Tunisian Forum for Economic and Social Rights (FTDES).
According to a report published by the social equity organisation Oxfam, the contribution of businesses to total tax revenues decreased by 37% between 2010 and 2018, while household contributions increased by 10% during the same period. Despite these findings, the proposed reform package continues to put more pressure on low-income social groups.
Furthermore, data relating to the structure of external debt between 2017 and 2020 shows an increase in shares of multilateral and bilateral debt from 49.8% and 14.3% to 53% and 16.3%, respectively, compared with a decline in loan shares on international financial markets from 35.9% to 30.7%. These numbers reflect the growing difficulties in accessing financing on these markets due to the excessive interest rates applied to these loans following successive downgrades of the country's sovereign credit rating.
In addition, the figures show that foreign borrowing for budget support was mostly mobilised from seven international donors in 2019. At the head of the list is Saudi Arabia with 1,495 million dinars, followed by the European Union with 800 million dinars. It should be noted that although the IMF's demands are mentioned, no information has been released on the conditions imposed by, for example, Saudi Arabia.
This is probably due to the fact that the IMF is part of the United Nations system, which means that its approval of loans to any country constitutes a sort of green light for donor countries to provide financial assistance. It therefore appears imperative that the current government go through the IMF to convince the rest of the potential international donors.
Given the continued vagueness of the current government's plan, the general economic orientations do not seem to differ from the ones previously adopted. The latter remains dependent on the policy of indebtedness in order to fill the growing budget deficit and the increasing pressure on the most vulnerable social classes. Even if the government were to comply with the IMF's demands, there is no guarantee that the IMF would approve the financing, especially considering the fact that one of the explicit conditions requires the development of a clear policy agenda for the coming period.
