IMF as the Only Potential Savior of Tunisia's Fiscal Deficit


April 22, 2024

Tunisia is grappling with a challenging fiscal scenario characterized by high debt service and elevated deficits. While the country has managed to steer clear of debt distress so far, the ability to sustain current policies is diminishing. Despite some hesitancy from the government to re-engage with the IMF, we anticipate that negotiations for a new program will commence in 2025. This signals potential external financing solutions and sets the stage for necessary fiscal adjustments.

Source: Central Bank of Tunisia

In 2023, the budget deficit is estimated to hover around 7% of GDP, driven by factors such as a persistent wage bill, subsidies to maintain price controls on select consumer goods, and transfers to inefficient state-owned enterprises (SOEs). Despite the absence of an IMF program, Tunisia secured sufficient external financing from various sources in 2023. To meet immediate obligations, the government tapped into foreign reserves held by the Central Bank of Tunisia (CBT) to repay the USD 1 billion Eurobond due in February. This reliance on foreign reserves is likely to continue for upcoming external commitments.

Conversely, there is a growing reliance on domestic financing, which poses a challenge to the already burdened local banking sector. The government has sought assistance from the CBT, which monetized a portion of the fiscal deficit in 2024. While legislation permits the CBT to further monetize a portion of GDP, caution is exercised to mitigate inflationary and currency pressures.

Source: Central Bank of Tunisia

The current policy trajectory is deemed unsustainable, with significant adjustments expected after the presidential elections scheduled for later this year. Following these elections, it is anticipated that the government will resume negotiations with the IMF, leading to the initiation of a new program in 2025. This program is expected to reduce fiscal deficits and put public debt on a declining trajectory.