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With large debt repayments due soon, Tunisia is facing the threat of sovereign default unless the government agrees to devalue the currency and embark on a large fiscal consolidation, meeting the conditions of a prospective IMF deal, Capital Economics said.
“Unless President [Kais] Saied and his government shift tack soon, Tunisia will struggle to get its IMF deal approved and, in turn, fail to unlock other funds being put on the table by the EU and possibly the Gulf,” Capital Economics stated in a briefing on Thursday.
“Without these funds, the threat of a disorderly sovereign default will grow – upcoming large sovereign Eurobond repayments in Q4 2023 and Q1 2024 could prove to be crunch points,” the London-based think tank said.
In October 2022, the Tunisian government had signed a staff-level agreement with the IMF to receive a $1.9 billion loan. However, an IMF executive board approval might not be inked anytime soon given the Tunisian President Kais Saied’s reluctance to embark on economic structural reforms including cuts to public spending and depreciation of the Dinar.
In April the government dismissed the terms of the assistance package as unacceptable “diktats”, and this dealt a serious blow to Tunisia’s bonds in international markets and the country’s credit rating.
In June, Fitch Ratings downgraded Tunisia's long-term foreign sovereign credit rating further to CCC- from CCC+.
The North African country has proven quite vulnerable to consecutive global economic shocks including the 2020m pandemic and the Russian war on Ukraine. The government debt has reached nearly 80 percent of the GDP with short term debt accounting for 150 percent of total foreign reserves, according to the World Bank.
“Not only is the public debt ratio high, but the composition is concerning – around 37% of the debt is denominated in foreign currency,” Capital Economics said. “The upshot is that there is a pressing need for significant fiscal consolidation,” the briefing said. “We estimate that a fiscal squeeze of at least 7% of GDP is required to stabilize the public debt-to-GDP ratio.”
Capital Economics holds that the currency is overvalued and argues that it needs to be depreciated by at least 30 percent against the Euro.
(Reporting by Noha El Hennawy; Editing by Seban Scaria)
