Saudi loan buys Tunisia's collapsing economy time, but reforms still necessary

People across Tunisia are following the twists and turns of the story, amid worries over supplies of necessities.  The authorities are grappling with how to pay the existing national debt to avoid a confrontation with creditors, including those from the Paris Club, an organisation representing major lending nations.

As the country's financial problems reverberate and the prospect of a spiral of debt rescheduling looms, senior politicians including Minister of Foreign Affairs Nabil Ammar, have indicated that the challenges Tunisia faces cannot be met by the country on its own.

The Treasury is almost empty. And it needs $2bn, or 6bn in Tunisian dinar, in the next five months to pay debts that are due. Experts estimate the country also needs $1.3bn, or 4bn dinar, for grain imports, after prices have risen on international food markets. 

Budget blockade

The lack of a reform agreement with the IMF and Tunisia's subsequent funding problems means it does not have the financial arrangements in place envisioned in its 2023 state budget.

That includes a bigger potential loan from Saudi Arabia, of $1.3bn. The subsequent smaller arrangement with the Kingdom, nonetheless, looks like a turning point, as well as providing a glimmer of hope.

Now, it can be argued that either negotiations with the IMF will resume on the basis of a new programme or an amendment to the agreements reached last October, or friends and partners of Tunisia will help meet its debt obligations and make sure it has leeway to import essential supplies.

That could be enough to prevent an economic and financial collapse that would provoke an explosion of social unrest.

This scenario was put forward as possible during recent meetings of EU leaders in their discussions on a comprehensive memorandum of understanding signed in Tunisia about two weeks ago.

A result in Riyadh

The Saudi lifeline was agreed on the last stop of Nabil Ammar's tour of Gulf nations. The foreign minister's progress was being closely followed at home and the result came as a surprise.

A joint statement from the two countries unveiled two soft loan agreements worth around $400mn and a grant of $100mn to support Tunisia's finances.

Saudi Finance Minister Mohammed Al-Jadaan also signalled that additional support will be granted to Tunisia in the coming weeks.

The Kingdom's ambassador to Tunisia, Dr Abdulaziz bin Ali Al-Saqr, stressed that the agreement aims to "support the Tunisian economy, which will see a breakthrough and emerge from its crisis." He put his country's economic support to Tunisia amounted to a total of $2.2bn.

Until recently, most optimists didn't expect a breakthrough in funding requirements, both bilateral and via donor financial institutions. Those are conditional on full arrangements with the IMF, not just the so-called "expert-level" agreements, which are reached in principle first.

And the world's lender of last resort has a tough philosophy and tight policies over the delivery of financial aid. Priority is given to "encouraging countries in the region to undertake economic reforms."

A change in thinking

Questions are now being asked over a potential change in thinking over international loans, and the conditions they feature.

In Tunisia, the picture isn't clear — especially after the failure to transform the agreement with the IMF from an expert-level accord to a final offer. This is despite the fact that negotiations went on for about two years before they stumbled.

The problems meant, in effect, that Tunisia failed to meet some conditions, possibly over resource allocation, preventing the deal from being finalised, with a sign-off from the president.

It meant that a deadline in January for the terms of the deal to go to the IMF's board for approval was indefinitely postponed amid conflicting accounts of the hidden reasons behind the delay.

They included reports that the terms of the IMF deal were onerous enough to mean the president thought they may provoke social unrest, prompting him to suggest tax reforms to increase the contribution of the wealthy, rather than an end to subsidies.

Difficult time ahead with existing debt

In the absence of an IMF agreement, the government is facing real financial risks, which Prime Minister Najla Bouden, will have to navigate after President Saied turned away from the IMF deal.

The coming months will be the most difficult in terms of external debt repayments. According to data from the Central Bank of Tunisia, medium and long-term debt totalling about $2bn is due before the end of 2023.

The heaviest are instalments from an existing IMF loan of $412mn, the Arab Monetary Fund and Eurobonds worth €500mn, and a tranche of a Japanese-guaranteed $156mn loan from the international financial market.

It should be noted that more than 50% of Tunisia's external debt is in euros, while foreign debt in dollars is close to around 27%.

Since the beginning of this week, the dinar's exchange rate has fallen by 6% against the euro to 3.4 dinar compared to  3.21 dinars last year. A one percent increase in the euro's exchange rate means an estimated increase of 818 million dinars – or about $267mn – in debt.

Those close to decision-making circles in Tunisia say the absolute priority will be to pay off foreign debt, which threatens to disrupt the supply of basic supplies, fuel, and medicines.

It all leaves President Saied with some explaining to do on his rejection of the reforms the IMF was calling for, which were reported to centre on the lifting of subsidies.

He recalled the 1984 bread riots in Tunisia, which left 100 people dead according to disputed official figures when the reforms called for by the IMF were rejected in early June.

That uprising was triggered when the government started applying a deal with the IMF by lifting subsidies on dough and its derivatives and on bread, which more than doubled in price instantaneously.

Earlier this year in March, the Ministry of Finance revealed a year-on-year decrease in the cost of subsidies of over 89%.

Political changes

Tunisians are waiting for the president to make announcements on what is happening with the economy. Political changes are also expected, including a broad cabinet reshuffle, or even the formation of a new government.

This step has been expected for some time, at least since the collapse of the IMF talks, which included a powerful Tunisian trio – the governor of the central bank, the Minister of Economy and the Minister of Finance.

It means the country is seeking to borrow during a crisis. And one which has been described as the most serious in Tunisia's modern history.

And it could get worse, due to the absence of talks on an urgent rescue plan and possible long-term solutions, including new approaches to spur economic recovery.

Some of what will be needed in such a plan is already clear.

Points for progress

There should be action on corruption — especially those mentioned in the 2011 report of the Commission of Inquiry on Corruption and Bribery.

Economic momentum could come from restoring a key area of the country's industry: phosphate production, which was making a profit of 2bn dinars as recently as 2010.

And the private sector should be used to boost employment and lift development.

Discussions on those ideas, and others, have been going on one way or another lately. Undoubtedly, the Saudi loan represents a chance to avoid default on other, near-term foreign debt.

It may pave the way for preparations to resume negotiations with the IMF. But the government is already supposed to have prepared for that by proving its ability to allocate the necessary resources to finance the 2023 budget and any reform programme.

It could be that Tunisia's finances remain a national talking point for a good while yet.