Tunisia - OECD Economic Outlook June 2020

2

Tunisia The COVID-19 crisis is hitting the economy hard, with adverse consequences on activity, jobs and incomes.

Lower revenues from tourism and worker remittances and collapsing export demand are adding to the impact of strict containment measures on domestic demand and activity. The large fiscal package aimed at protecting people and jobs, coupled with emergency funding from multilateral institutions, the formation of a new government which reduces political uncertainty, the fall in oil prices and the start of the Nawara gas field all support growth and reduce social costs. In the double-hit scenario, which assumes a second virus outbreak later in the year, GDP is projected to fall by 8.2% in 2020. In the more benign single-hit scenario, where a renewed outbreak is avoided, GDP would fall by 6%.

Monetary policy could be loosened further as inflation is moderating. Short-term fiscal emergency measures should continue to support crisis-affected people and firms. To strengthen economic growth and put the public finances on a more sustainable path, the authorities and social partners should commit now to a structural reform agenda to be implemented over the medium term. It would include scrapping energy subsidies, as oil prices are low, and containing the public wage bill to leave room for more targeted household support. Administrative procedures and business regulations should be simplified further to support a revival in investment, putting the economy in a better position to benefit from the relocation of global factories and create more and better jobs.

Tunisia Tourism has a large weight in the Tunisian economy

Industrial exports and imports are plummeting

Tourism revenues¹

% of GDP 9

Industrial exports

Y-o-y % changes 30

Industrial imports

8

20

7

10

6

0

5

-10

4

-20

3

-30

2

-40

1

-50

0

ITA

FRA

EGY

TUN

MAR

0

Mar 19

Jun 19

Sep 19

Dec 19

Mar 20

-60

1. Data refer to 2018.

Source: World Bank, World Development Indicators database; and Agence de Promotion de l'Industrie et de l'Innovation, March 2020 Bulletin de Conjoncture.

StatLink 2 https://doi.org/10.1787/

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

3

Tunisia: Demand, output and prices (double-hit scenario) 2016

Tunisia: double-hit scenario

2017

Current prices TND billion

GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Exports of goods and services Imports of goods and services Memorandum items GDP deflator Consumer price index Unemployment rate (% of labour force) Central government financial balance (% of GDP) Current account balance (% of GDP)

_ _ _ _ _

2019

2020

2021

Percentage changes, volume (2010 prices)

89.8 64.5 18.4 17.4 100.3 35.9 45.6 - 9.6

Net exports1

2018

2.0 2.4 0.3 0.3 1.6 4.6 3.5 0.1

2.7 2.1 0.2 2.0 1.7 4.1 1.6 0.9

1.0 1.5 0.3 -2.8 0.6 -0.9 -7.3 4.1

-8.2 -6.3 3.5 -35.3 -9.1 -14.0 -17.0 3.3

5.1 1.9 -0.1 23.7 4.0 12.5 9.2 0.7

5.1 5.3 15.4 -5.9 -10.3

6.4 7.3 15.5 -4.8 -11.2

6.9 6.7 15.1 -4.1 -8.8

5.9 5.8 18.0 -6.8 -7.7

4.8 4.7 17.3 -5.0 -7.2

1. Contributions to changes in real GDP, actual amount in the first column.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/

Tunisia Inflation was on a downward path before the crisis

The economy is expected to be hit hard Real GDP

Y-o-y % changes 9.0

Headline inflation

Single-hit scenario

Index 2019Q4 = 100,s.a.

106

8.5

Food inflation¹

Double-hit scenario

103

8.0 7.5

100

7.0

97

6.5 94 6.0 5.5

91

5.0

88

4.5 85

4.0 3.5

Mar 18 Jul 18 Nov 18 Mar 19 Jul 19 Nov 19 Mar 20

0

0

2019

2020

2021

82

1. Includes food and non-alcoholic beverages.

Source: National Statistics Institute; and OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

4ď ź

Tunisia: Demand, output and prices (single-hit scenario) 2016

Tunisia: single-hit scenario GDP at market prices Private consumption Government consumption Gross fixed capital formation Final domestic demand Exports of goods and services Imports of goods and services Net exports1

2017

Current prices TND billion

89.8 64.5 18.4 17.4 100.3 35.9 45.6 - 9.6

Memorandum items GDP deflator Consumer price index Unemployment rate (% of labour force) Central government financial balance (% of GDP) Current account balance (% of GDP)

_ _ _ _ _

2018

2019

2020

2021

Percentage changes, volume (2010 prices)

2.0 2.4 0.3 0.3 1.6 4.6 3.5 0.1

2.7 2.1 0.2 2.0 1.7 4.1 1.6 0.9

1.0 1.5 0.3 -2.8 0.6 -0.9 -7.3 4.1

-6.0 -5.5 3.4 -26.0 -7.1 -12.5 -15.7 3.3

7.2 4.8 0.1 27.5 6.7 11.6 10.0 -0.1

5.1 5.3 15.4 -5.9 -10.3

6.4 7.3 15.5 -4.8 -11.2

6.9 6.7 15.1 -4.1 -8.8

6.0 5.9 17.9 -6.3 -7.4

4.8 4.8 16.9 -4.2 -6.8

1. Contributions to changes in real GDP, actual amount in the first column.

Source: OECD Economic Outlook 107 database.

StatLink 2 https://doi.org/10.1787/

The government reacted swiftly to prevent the propagation of the virus With a large diaspora and many tourists visiting the country, Tunisia was highly vulnerable to the COVID19 virus outbreak. The first confirmed case was detected on 2 March. The swift introduction of border measures and a strict confinement have helped flatten the infection curve, with less than 10 new cases per day since early May, and mitigated pressures on the health-care system. COVID-cases have been identified in every region (gouvernorat), but most cases are in the capital. Public health-care spending relative to GDP and the number of hospital beds per capita are higher than in peers. Virtually all citizens are covered by health insurance. Still, the health-care sector has suffered from a lack of medical equipment, including testing kits and protective equipment, especially in remote regions.

As a quick response to avoid transmission of the virus from abroad, the government closed its land, sea and air borders in mid-March. A short-time work scheme was introduced for public sector workers.

Businesses were required to obtain a special authorisation to continue operating at reduced capacity. To limit further the propagation of the virus, the government implemented a strict lockdown, including a night curfew, on 22 March. The government banned traffic between regions in April to limit transmission across regions. The exit strategy has been implemented from 4 May, with a gradual re-opening of activities while maintaining strict sanitary and social distancing measures.

The tourism, industrial and export sectors are deeply affected The COVID-19 crisis has taken a toll on tourism, industrial and export activity since March. Tourism receipts have collapsed after a period of sustained growth. Exports of goods have fallen, despite the good performance of the agri-food sector (in particular olive oil and tomatoes). Investment in the industrial and service sectors, including foreign direct investment, has plummeted. Job creation has come to a standstill; the unemployment rate has risen despite the introduction of the short-time work scheme and government subsidies to cover part of the wage bill of private firms and avoid layoffs in the formal sector. Physical

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020

5 distancing and containment measures have weighed on household consumption, which typically spikes during the Ramadan month (that started on 23 April this year). Food inflation surged in the spring, largely reflecting disruptions in food supply chains.

The government is supporting people and businesses The government introduced a series of support measures totalling TND 3 billion (around 2.6% of GDP) to mitigate the social and economic consequences of the COVID-19 crisis. The first set aims at ramping up health care resources, including hospital equipment, testing kits and protective equipment, to cope with current cases and prepare for the future. The second component aims at supporting income for the most vulnerable groups, including low-income people, families and old-age persons. To protect jobs, the government committed to pay part of the wage bill of employees registered in the social security system.

To reduce a liquidity squeeze for firms, it has committed to advance the refunding of tax credits and postpone tax payments. To ease small businesses’ access to loans for their working capital and avoid company failures, it has created a support fund for small and medium-sized enterprises, including a credit guarantee scheme. The Central Bank of Tunisia cut its main policy rate by 100 basis points, to 6.75% and asked banks to postpone loan repayments by individuals and reschedule annuities on business loans maturing in the coming six months. Banks’ loan-to-deposit ratio requirements were eased.

Lower oil prices and the opening of a large gas field will cushion the drop in activity The strict official lockdown has been gradually lifted after 3 May. The speed and extent of the opening vary across sectors and regions within three phases from 4 May until 14 June. In the initial phase (4 - 25 May), services, industrial and public sectors were allowed to resume operations at 50% capacity, whereas the self-employed and retail trade sector were allowed to re-open fully. The deconfinement strategy foresees that all activities, including cultural, sporting, leisure and tourism activities, will be open by mid-June.

Besides the COVID-19 virus outbreak, four main factors are affecting economic activity. First, Tunisia is a net oil importer and thus benefits from lower international oil prices. Second, the Nawara gas field opened in March 2020; this is expected to boost GDP by about 1% by the end of 2021 and reduce energy imports.

Third, the formation of a new government in February, after a long period of political uncertainty, is strengthening investors’ confidence. Fourth, the European Commission’s decision to take Tunisia out of its anti-money laundering and counter terrorist financing blacklist will also contribute to an investment revival.

The industrial sector will suffer from a decline in export demand from its main European trading partners (France, Germany and Italy account for about 60% of Tunisia’s exports). The COVID-19 crisis will significantly hit the tourism sector, which contributes around 5% to GDP and accounts for a significant share of total employment. The slow opening of international travel by European countries, which account for a large share of tourism receipts, and a possible second wave of the virus later in 2020 would increase unemployment and the current account deficit. Private consumption and investment will also suffer from the likely drop in worker remittances, which amounted to 5% of GDP in 2019. In the double-hit scenario, GDP is projected to fall by 8.2% in 2020, while it would fall by 6% in the more benign scenario of no recurrence of the virus outbreak. The already high fiscal deficit will balloon, reflecting the government’s fiscal package and the decline in tax revenue as activity drops, and will keep the central government debt to GDP ratio above 70%. Emergency funding commitments from multilateral institutions amount to more than 5% of GDP and are accompanied by support from bilateral donors. This financing often comes with concessional terms. The increase in debt-servicing costs will thus be limited. The Tunisian Dinar has

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 1: PRELIMINARY VERSION © OECD 2020

6ď ź remained relatively stable since the beginning of the year. As external debt stood at 90% of GDP at end2019, with a large share denominated in foreign currencies, external vulnerability might however rise.

Structural reforms are needed to reboot inclusive growth in the medium run The short-term priority is to support income for the most vulnerable groups and keep companies alive.

Promoting access to finance for small businesses, which account for a large share of employment and often have to borrow to fund their working capital needs, is vital. The government should ensure that the designated fund and related guarantee scheme work well, and adjust conditions if needed. To protect employment, the government could consider going beyond the postponement of taxes for businesses and temporarily cut payroll taxes, which are very high compared to peers. In the medium term, removing existing barriers to growth should be the priority. Reinvigorating investment and containing the rise of the already-high public debt-to-GDP ratio will require a new pact between the government and social partners, including public enterprise reform, a reduction in the public wage bill, and the replacement of energy subsidies by fairer income support. Monetary policy could be loosened further, as inflation has been on a clear downward path since 2018, to reduce the cost of investment. Measures to improve the ease of doing business would help seize opportunities from the likely relocation of global factories and create more jobs.

Tunisia is already active in several global value chains, including pharmaceuticals and automobiles. Its proximity to European and African markets, together with relatively good infrastructure and education levels, are comparative advantages that could be better exploited.

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 1: PRELIMINARY VERSION Š OECD 2020