7/29/2019 Tunisia Economic 2010

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Tunisia

The Rassemblement Constitutionnel Democratique (RCD), and President Zine el-Abidine Ben Alicontinue to dominate Tunisian politics following general and presidential elections in 2009. Ben Ali hasbeen in power for 23 years now and continues to wield a large amount of power. Tunisia is closelylinked economically to Europe (accounting for 70% of trade) and to France, in particular. In 2008, it

entered into a free trade agreement with the EU on industrial products.

Tunisia's economy has developed rapidly over the last two decades, thanks in large part to prudentmacroeconomic policies and World Bank and IMF support. This has resulted in stable growth, ahealthy export sector, a thriving tourism industry and an economy no longer reliant on agriculture butnow more focused on services and industry.

Real GDP growth was 3% in 2009, solid considering the economic downturn in Europe led to such alarge decline in exports. We forecast overall GDP growth of 3.5% in 2010, picking up to 4% in 2011.Lower agricultural output, owing to poor rains, will offset stronger industrial growth in 2010. Exports willbe higher, having been up 20% y/y in the first half of 2010. The government will increase spending, inline with its development plan for 2010-2014, which will stimulate further growth.

The governments plan is to foster a technologically-solid, knowledge-based economy. The authorities

have budgeted for a 5% increase in spending, and they forecast the creation of 16,000 newgovernment jobs. There are large infrastructure projects in the pipeline to build airports and motorwaysaround the country. This increase in spending will widen the fiscal deficit to around the 5% level, whilstpublic debt will be around 50% of GDP, the highest level in North Africa and a potential weaknessshould growth slow.

Inflation nudged down in 2009, to 3.5%, mainly as a result of steadier food and energy. We expect it torise to 4.8% this year on the back of higher commodity prices and a rise in food imports, following a fallin agricultural output. Wheat prices, in particular, are contributing to inflationary pressure. Poor rainfallearlier in the year, combined with Russia banning its wheat exports, has led to higher wheat importprices for the country. Nevertheless, we expect inflation to be stable over the coming years.

The Tunisian central bank, the BCT, has controlled monetary policy well throughout the crisis. TheBCTs aims are to keep inflation at low levels and to foster modest growth in the money supply. The

central bank intervenes in the FX markets to control the real effective exchange rate. The TunisianDinar, the TND, is managed against a basket of currencies dominated by the Euro (EUR) although theauthorities say they plan to let the currency float in the medium term.

Tunisia has differentiated itself positively from its North African neighbours in its willingness to reformeconomically and move towards international best practices. For many years now, Tunisia has beenthe top-ranked African country in the World Banks Doing Business index, achieving 69th place in themost recent report. More reform is needed, however, to further develop the financial sector and tomake the business environment even more attractive, thus attracting FDI and leading to a furtherdiversification of the economy.

So, overall, the country has a solid outlook, provided the policy backdrop remains prudent and there isno double-dip recession in Europe. Protectionist measures would be an important downside risk forTunisia, given the reliance on free industrial trade with the EU, though any such initiatives would likely

be resisted by bodies such as the G20, and would be directed more at Asia.