Chahed and the IMF: how close is too close?

After a four month delay which prompted observers to convey their concerns and suspicions about the International Monetary Fund (IMF) « lending freeze, » Tunisia is set to receive the second installment of its four-year $2.9 billion Extended Fund Facility (EFF) loan.

The Washington-based lending giant had never explicitly expressed its decision to withold the payment, though Björn Rother, IMF chief of mission to Tunisia, stated after a country visit in early February that « urgent action is necessary to protect the health of public finances, increase public investment and accelerate progress with delayed structural reforms. » Later the same month, Finance Minister Lamia Zribi announced that the forthcoming installment, the equivalent of 308 million dollars, scheduled for disbursement in December had been postponed « because of a lack of progress in reforms,» and indicated that the government would immediately set to work implementing public sector reforms.

Chahed’s unity government and the IMF get close

The IMF returned to Tunis this month, April 7-18, for a follow-up of their « close policy dialogue » with the Tunisian government. According to Rother, discussions culminated in a « staff-level agreement on the policies needed to complete the first review of Tunisia’s Extended Facilities Fund » to unlock the second loan installment. Commenting that « creating more economic opportunities for all Tunisians and protecting the health of public finance are at the heart of the government’s strategy, » Rother outlined a series of measures to be implemented, including increasing tax revenue « in an equitable way, » reducing the wage bill and energy subsidies, increasing social spending « to protect the country’s most vulnerable, » as well as reforms in pension, public banks and enterprises, and investment codes.

The overlap between IMF prescriptions for Tunisia and the government’s discourse concerning economic reform has only become more apparent over past months. Since August, Prime Minister Chahed has shown himself to be the veritable mouthpiece of the country’s most faithful loan-distributor, resting on the IMF’s agenda as the driver of its own policies. This cozy relationship has provoked tension within the national unity government since its inception, especially vis-à-vis the country’s largest worker’s union, the UGTT.

Chahed courts the IMF, Tunisian General Labor Union defiant

03/03/2017

Just days before Zribi evoked the loan freeze in February, Chahed made the unexpected decision to reshuffle the heads of several ministries. The UGTT, which has been at odds with the unity government since day one, was infuriated when, on February 25, Chahed nominated Khalil Ghariani, in charge of social affairs within the UTICA, to replace Abid Briki, former UGTT Under Secretary General, as Minister of Public Service and Governance. The UGTT denounced the decision, considering « the appointment of a businessman to the head of the Ministry of Public Service as a provocation against civil servants…and as blatant disregard for public service to meet the recommendations of the IMF. »

Over the same week, UNHRC Independent Expert on the effects of foreign debt and human rights Juan Pablo Bohoslavsky happened to be on mission in Tunisia. At the end of his visit on February 28, Bohoslavsky concluded that

« Further social consensus is necessary to ensure national ownership for the implementation of economic reforms that are being negotiated between the IMF and the Tunisian government. This includes reinforcing parliamentary participation in the design and approval of macro-economic reform packages before lending agreements are concluded. Whether austerity measures and deregulation work while the economy is weakening, is a question that needs to be answered in a national participatory process, in particular if political stability and social cohesion are at stake. »

Furthermore, he questioned « whether the conditionalities and benchmarks included in the current 2.9 billion dollar economic reform programme » are conducive to « social inclusive growth » and urged « international financial institutions and the government of Tunisia to undertake social and human right impact assessments before implementing major reforms. »

Central Bank to float the Tunisian dinar

At the end of its Tunis visit this month, the IMF was careful to mention that UGTT, UTICA and civil society representatives took part in policy discussions, in addition to the regulars—Youssef Chahed and his Ministers of Finance, Investment, Energy, as well as Chedly Ayari of the Central Bank of Tunisia. Once again it was Finance Minister Zribi who elaborated on the general terms relayed by the IMF, to specify on April 18 that « the Central Bank is going to minimize its interventions to reduce the value of the dinar  … But, » she noted, « we will avoid a brutal devaluation like that in Egypt. » Zribi’s subsequent announcement that the actual value of the national currency is somewhere around 3 dinars to the euro has since been condemned as a potentially damaging « self-fulfilling prophecy » that furthermore « renders more difficult the BCT’s work. »

Since April 2016 when parliament adopted Law n˚9-2016 revising the status of the Central Bank of Tunisia, the newly designated independence and objectives of the Bank have constituted a point of contention for different economic visions. While free-market advocates perceived the Bank’s vocation to « ensure price stability and contribute to financial stability » as a block to international lending opportunities and potential economic growth, others saw that its independence from government—the BCT must « neither solicit nor accept instructions from government nor any public or private organism »—only makes it more susceptible the private interests of international institutions. Such suspicions were fueled by the fact that Tunisia was in the midst of loan negotiations with the IMF in Washington at the same time the bank law was being examined by ARP deputies. What’s more, it is believed that the IMF, which advocates that « a tighter money policy would counteract inflationary pressures, and greater exchange rate flexibility would help narrow the large trade deficit, » was instrumental in preparing the law.

And yet for Tunisia, inflation resulting from a devaluation of the national currency seems likely, as is often the case for countries laden with hefty foreign loans that must be reimbursed in dollars and euros. Largely dependent on imports, which are also purchased in foreign currency, Tunisia is also sitting on a significantly negative trade balance (for 2015, the deficit was estimated to be -2,451.9 million dinars by the Ministry of Commerce, or -12,047.7 million dinars according to the INS). Weakening the value of the Tunisian dinar, which proponents argue will ultimately boost the competitivity of exports, will far sooner mean an increase in the prices of imported goods and therefore a shock to the purchasing power of the country’s « most vulnerable. » Such was the case last year with Egypt, which like Tunisia has gone out of its way to pursue the structural adjustments imposed by the IMF’s $12 billion EEF for the country. The Egyptian government’s decision in November 2016 to float the pound according to market demands and to reduce fuel subsidies were said to have triggered record inflation rates beginning in December. Both measures are soon to take effect in Tunisia.