Tunisia and IMF deal: Which way will the pendulum swing?

While numbers don't lie, the devil is in the details.

This is typically the case when claims of economic success are made. Exaggerating numbers was a common practice in Youssef Chahed's 2019 government, in the run-up to elections. This resulted in suspending the remaining tranches of the $2.9bn loan granted by the IMF.

Politics or finance?

The current context is not much different.

With the 2024 presidential election campaigning already underway, politicians are eager to please voters. 

This can involve obstructing the implementation of structural economic reforms or endorsing popular measures that coincide with the election period, which could deepen the country's financial crisis. These factors make it highly unlikely for Saied to reach a deal with the IMF.

And even if a deal is reached, it is likely to be the subject of political posturing. The minister of foreign affairs implied that any arrangement would be based on conditions enforced by the government on the IMF, not the other way round, in an interview he gave to Russia's Sputnik news agency.

Delay persists

Whatever may lie ahead, in October last year, Tunisia reached an agreement at the expert level for a 3-year Extended Fund Facility loan worth $1.9bn. It was scheduled for approval by the IMF's Board of Directors at its December 19, 2022, meeting. But it was withdrawn a few days before the meeting due to the Tunisian authorities' failure to comply with the conditions set by the IMF.

Therefore, according to Tunisia's chief negotiator and central bank governor, Marouane Abbassi, the loan was "not ready for final approval."

Abbassi said the conditions that had not been met included the passage of the general budget for 2023 and required amendments to the Public Enterprises Act. These were shocking revelations, since bills covering both measures were on the president's desk at the time, and only needed his signature to take effect.

The need for the IMF loan was urgent, and the 2023 budget was built around it. Remaining external financial arrangements were also being made on the basis that it would come.

Abbassi's account of why the loan was not approved left out the most important reason: The IMF's request to the president to sign a "letter of intent" would entail the state cutting subsidies and implementing other economic reforms.

Instead, Nourreddine Taboubi, Secretary-General of the General Labour Union, was the one to reveal it, quoting former Prime Minister Najla Bouden.

No official denied Abbasi's version of events, and Saied's subsequent actions confirmed them. It was also reinforced by a visit from a high-ranking United States official, who met with activists and journalists in Tunisia and shed light on the delay.

Only Saied was authorised to sign the letter of intent, which could include cutting the salaries of public sector employees and reducing the number of public servants, which is over 600,000. It also possibly includes cutting out fuel and goods subsidies entirely, reducing state spending and privatising state-owned companies.

Saied's signing of the letter would effectively reduce the government's role in the economy which has played an especially dominant role, especially in light of the past decade of political and economic turmoil.

The letter would also mean Saied would have to renege on his promise to secure jobs, in a country where 70% of university graduates are unemployed, according to Minister of Social Affairs Malik al-Zahi.

Four million Tunisians live below the poverty line out of a total population of 12 million, and Saied has made creating jobs his top priority. 

Additionally, the cutting of state subsidies is highly unrealistic. The government had already agreed to cut subsidies by 26% in the current budget. This unprecedented reduction marked the beginning of the implementation of the IMF agreement before it was outright rejected by Saied later.

But with time this rejection of IMF conditions evolved into something much bigger — it developed into an overarching protest of the IMF and its policies.

Since then Saied has stepped up his criticisms, even calling for a new global financial institution to replace the IMF, and restore funds stolen from the developing world by former colonial rulers.

His call for a more just and humanitarian institution came as Tunisia's public debt is expected to reach $39.2bn by the end of this year.

Read more: Why the world needs a more just and inclusive monetary system

The politics of debt

As debts continue to escalate, discussions have resumed over whether some of Tunisia's so-called "bad debt" could be waved. Last December, Saied called on Washington to cancel the debts of African countries, including Tunisia, emphasising that they had accumulated for decades.

The chairman of the parliament's finance committee, Usman Shoushan, revealed in August of last year that the volume of loans and grants received by the country between 2011 and 2021 amounted to $36.6bn, amid some suspicions of corruption.

The source of this information was an "investigative" report that President Saied tasked Finance Minister Sihem Nemsia with preparing in August 2021. The minister herself warned in parliament that failure to repay a loan would lead to the declaration of state bankruptcy.

Until now, Tunisia has been known throughout its history for its credibility in international financial markets. It has always been committed to repaying its debts on time and has never defaulted.

But Saied wants to make Tunisia less reliant on the international debt markets – and the IMF – by stopping the corruption that is estimated to have taken around $20bn out of the country and making better use of its own resources.

The issue has become so crucial that the state budget was included in the National Security Agenda for the first time in Tunisian history. Saied's message to the world was that Tunisia's national sovereignty was not for sale.

No alternative to the IMF

This signified the break with the IMF but with no alternative to borrowing, it remains unclear what Saied plans to do.

Tunisia has been unable to secure the external loans the 2023 national budget said it would need.

According to the Ministry of Finance figures on the first half of the year, loans of $853.5mn were agreed. The Ministry of Planning and Economic Development estimates the external borrowing requirement for the year at $4.47bn.

This failure can be attributed to the inability to reach an agreement with the IMF, which would have opened the door to around $3bn in external loans, and the near impossibility of accessing international debt markets now.

According to a report published in August by Germany's Rosa Luxemburg Foundation, a policy lobbyist, interest rates demanded on new loans for Tunisia in this political climate will not be lower than 50%. That means Tunisia has no choice, in effect, but to borrow from the IMF.

It is also necessary to go through the IMF to fulfil the promises of Gulf donors, who demand reforms and an agreement with the IMF as conditions for their assistance.

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

So is the European Union, which has pledged to provide €900mn in support, but only if an agreement is reached with the IMF, whose officials warn that Tunisia could collapse financially and economically if the country does not commit to the reforms.

Migration and the economic crisis

Europe is also pressuring Tunisia to reach a deal with the IMF because of the increase of illegal migration across the Mediterranean Sea of people seeking employment opportunities. 

Rome made overtures to Washington on behalf of Tunisia, but there was no breakthrough as behind-the-scenes talks are reportedly only on pushing back the timeline for reform.

The US Secretary of State said that if the Tunisian government presents a modified reform plan, the IMF could work on it.

Reuters has also reported the potential for amendments, citing a "high-level official" whose identity was not disclosed. Marwan Abbasi, head of the negotiating delegation, hinted that Tunisia is working on a fair programme with the IMF. But complete amendments were never submitted for consideration and were not even the subject of discussions.

This is despite the fact that the country sent a high-profile delegation. It included the central bank governor, the minister of finance, and the minister economy. They all agreed that the new proposals were led by Tunisia, and that 400 experts from the Tunisian administration oversaw its preparation.

Economic and financial experts warn of the danger of ambiguity, conflicting positions, and lack of harmony between the government and the presidency in negotiations with the IMF.

Ultimately, this could hurt Tunisia's credibility and standing with other international financial institutions and donors.

Failure to reach a deal with the IMF could effectively mean a complete divorce from the IMF. And with Tunisian elections nearing, the pendulum is seemingly swinging towards the latter.