The central bank of Tunisia has kept the key interest rate on hold at 7% for another year, as it’s worried about the ongoing war in Ukraine, which could have devastating consequences for the country’s finances and cause inflationary pressures. However, it’s not all bad news for Tunisia. Inflation is still high in the country, and food shortages have already triggered social unrest.
The country’s banking system remains dominated by banks. Government debt is not re-traded on a formal secondary market, making it difficult for Tunisians to access credit. Tunisia’s banking system is also underdeveloped, with equity capitalization relatively small and a lack of growth potential. The stock market in Tunisia provides only 13.2% of corporate financing. Microfinance and bonds are largely underdeveloped.
The government has been proactive in combating corruption. It has seized assets owned by former President Ben Ali and his family, and improved access to public information. The government has also introduced special laws to encourage individuals with public trust roles to disclose their assets. The recent government has also pushed for an easing of economic regulations. There have been a number of measures aimed at combating corruption, including the establishment of a Minister in Charge of Public Service.
Although the Tunisian economy is stable and the economy is showing signs of growth, there are significant barriers to foreign investment. The country’s economy is dominated by state-owned enterprises, and many sectors remain closed to foreign investment. In addition, the informal sector makes up 40-60% of the economy, and legitimate businesses have to compete against smuggled goods. To overcome these challenges, the government has provided more than USD 500 million in economic assistance since 2011. Moreover, it has also provided loan guarantees in 2012 and 2014, which enabled the GOT to borrow USD 1.5 billion at low interest rates.
While Tunisia has an incredibly high level of unemployment, low economic growth, and a persistently high unemployment rate, there are other issues that have exacerbated discontent among the public. Public opinion surveys show that corruption and a lack of jobs are major causes of discontent. Although there have been some positive developments in Tunisia’s civil society, the economic disparity between the interior and coastal areas continues to be the main source of frequent protests.
The rising interest rate is likely to affect the recovery. It will raise the costs of debt service for public sector entities, and will increase government pressure to tighten fiscal policy. The US Fed is expected to tighten its policy earlier in 2022, which may lead the BCU to raise its key rate even faster. Assuming this happens, the peso will weaken further and inflation will increase.