Economic prospects in Tunisia
Synthesis of the second panel of the 20th of January 2022 workshop day
By Victor Lachenait, Juliette Denis-Senez and Elyssa Koepp
Within the framework of the conference ”Economic prospects in Tunisia”, we were honored to welcome Mr. Abderrazzak Zouari (former Minister of Development of Tunisia) and Ms. Leila Baghdadi (professor of economics).
For Abderrazzak Zouari, Tunisia represents a textbook case in terms of economic difficulties. The 2011 revolution has changed many things, and while under the dictatorial regime of Ben Ali, the growth rate of the economy stood at 5% with low volatility, since the revolution, the average growth rate has been closer to 1%. For Mr. Zouari, this poses a problem regarding the legitimacy of the revolution and the perception people have of the achievements that have come from overthrowing the dictatorship. If the economic results do not follow, this may in time undermine the gains from the Arab Spring in terms of civil liberties and freedoms.
The instability and weakening growth performance of the Tunisian economy can be explained by low investment rates, inefficient existing investments, a lack of economic attractiveness, as well as the lack of global productivity in the factors proven to be an important source of growth. Mr. Zouari highlights several figures to illustrate this point, like a suffering Foreign Direct Investment (FDI), representing 4.2% of GDP between 2000 and 2010 and now representing only 2.3% of GDP. Coupled by a weakness in employment, there does not seem to be a correlation between growth and job creation in Tunisia. According to Mr. Zouari, it has always been said that 1% growth in Tunisia creates 15,000 jobs, so before the revolution, the 5% growth rate was enough to provide employment for 90% of the labor force. However, since the revolution, despite a low population growth which has reduced the number of people entering the labor market, the low number of employment opportunities has drastically increased the unemployment rate. Today, with the lack of job creation, the unemployment rate is currently above 18%, and the COVID crisis has only accelerated the process.
The Tunisian labor market is thus characterized by a declining labor supply with insufficient and low quality employment offers to meet the rising employment demand of a skilled labor force.
For Mr. Zouari, the decline in growth predates the revolution, as it dates back to the 2008 financial crisis. Since then, economic growth has declined to 3%. The production model of the Tunisian economy seems to have run out of fuel and failed to enact efficient reforms. Tunisia’s economy continues to be based on manufacturing industries like textiles and electrical engineering that have been proven unsuccessful for several years now. Job opportunities in these industries are also of low quality, despite the fact that the university system produces close to 70,000 higher education graduates every year. Tunisia has thus failed to transform its economy in the early 2000s to move towards innovative sectors with high added value that could absorb the high number of graduates from higher education. Hence, Mr. Zouari describes the crisis as structural in form.
Companies in Tunisia are small: with 740,000 companies officially declared, 95% are micro-enterprises with less than 5 employees. As a result, 90% of Tunisian companies generate only 12% of the jobs created. The country is facing a massive unemployment of graduates of higher education fluctuating between 30 and 35% and is simultaneously witnessing a shortage of low-skilled workers. For Mr. Zouari, Tunisia is a country of emigration of graduates of higher education, but immigration of low-skilled labor, filling many low-skilled jobs with immigrants from sub-Saharan Africa. Thus, there is a lack of innovation and a serious problem of unemployment.
Looking at these obstacles under one single angle, the country is therefore facing serious financial imbalances. In the state budget, Tunisia will need 5.5 billion dinars in domestic borrowing and 13 billion dinars in external borrowing to meet its 18.5 billion annual budget in 2022. Furthermore, the trade deficit in 2021 was close to 14.5 billion. While the inflation rate stands at 6.4%, it is felt at 29% on food products putting pressure on the purchasing power of the Tunisian population.
For Mr. Zouari, there are thus 4 billion euros that must be borrowed from outside funding. This raises the question of Tunisia’s relationship with the IMF: the country cannot borrow, even from “friendly” countries like the Gulf States, without an agreement with the IMF. Hence, an agreement with the IMF is essential, and the only way to find money is implementing the reforms requested by the IMF.
She shifts the focus of the discussion on the economic implications of the pandemic and the catalyst role this crisis played in accelerating the economic instability of Tunisia.
The Covid-19 pandemic has highlighted the vulnerabilities of the Tunisian economy. In 2020, as a result of the curfews and barriers put in place by different countries, exports fell drastically by at least 12%. There has also been a significant decrease in recorded FDI, decreasing from 2742 million dinars in 2018 to 1834 million dinars in 2020. At the sectoral level, tourism and real estate have experienced the biggest drop, with a decrease of 89% in 2020 compared to 2019. Tourism, which had already been affected negatively by the revolution in 2011, was brought to a complete halt during the pandemic. Finally, in 2020, the energy sector also witnessed a 32% drop in FDI.
According to Ms. Baghdadi, these consequences had a significant impact on the unemployment rate but impacted women more strongly than men, therefore further widening the gender gap. In fact, while the unemployment rate for men rose to 15.4%, it rose to 23.6% for women.
For Ms. Baghdadi, it is the manufacturing industry that serves as the engine of the Tunisian economy absorbing the majority of jobs and employees of the formal sector. Second, there are the services, with commerce representing 14% of jobs and then construction occupying 4% of formal jobs. In 2020, all of these sectors experienced a significant reduction in the number of jobs.
For businesses, 2020 was marked with a reduction in revenues, particularly for small and medium-sized enterprises in the service sectors which were more affected than others. It is also believed that there were a large number of business closures during the pandemic, so the issue of maintaining the industrial fabric is thus a major challenge for the future of the Tunisian economy.
Ms. Baghdadi also describes how with the pandemic, Tunisia has been confronted with the reality of its dependence on certain commodities. The most evident example here are the vaccines. According to Ms. Baghdadi, Tunisia is a vulnerable country largely dependent on Algeria for its extractive industries, leading to a sharp decline in imports in this sector during the pandemic. There are also important sectors such as equipment, machinery and electronic materials, transport or textiles, where Tunisia has integrated the global value chains since its opening in the 1970s, but which have led to an increase in imports on which Tunisia has become dependent. At the global level, Tunisia was one of the 10 countries most impacted in the world by the pandemic. However, the textile industry has been more resilient than others.
Thus, Ms. Baghdadi explains that Tunisia was vulnerable from the outset yet the pandemic exposed these difficulties emblematically, strongly impacting the country’s balance of payments. These vulnerabilities have had both direct and indirect impacts, most notably impacting the consumption of Tunisians. All sectors using the extractive industry as an intermediate consumption have been indirectly impacted. The externalities of these economic shifts during the pandemic can be felt on the rise in consumer prices. Research by Ms. Baghdadi and others shows that non-tariff measures and export restrictions by partner countries have strongly impacted both Tunisian imports and the country’s inflation rate. This has directly affected the daily lives of the Tunisian population concerned by the rising price of life, especially with regard to agricultural products and food.
Ms. Baghdadi concludes by highlighting the need for structural reforms in the Tunisian economy as soon as possible to face this continuing economic crisis worsened by the pandemic.