Tunisia country note: OECD Economic Outlook December 2020

2

Tunisia The COVID-19 crisis is set to leave a serious mark on the economic and social fabric. GDP is expected to fall by almost 9% in 2020, followed by only a partial recovery as growth is estimated to be below 6% in 2021 and 3% in 2022. Private consumption will not return to its pre-crisis level before the end of 2022, and investment will not have recovered by that time. Difficulties in access to health care are exacerbating the risks. The recession is affecting all sectors, and tourism in particular, with the partial exception of agriculture.

Consumer prices have slowed, thus curbing the erosion of household purchasing power. The current account deficit will narrow in the second half of 2020, but will widen again as domestic demand picks up.

Monetary policy should remain accommodative, and easing would be appropriate if inflation remains moderate. The government needs to generate fiscal space to provide more support to individuals and businesses. This could be done through wage moderation in the public sector and overhauling the system of energy subsidies. An extensive reform aimed at simplifying the regulatory framework would help boost investment and create sustainable, quality jobs.

Tunisia Industrial activity and exports have recovered to pre-crisis levels Index 2010 = 100 160

The abrupt halt of tourism has deteriorated the current account deficit

Y-o-y % changes 60

← Industrial output index Goods exports →

140

40

Goods

Services

Revenues

Current transfers

20

100

0

20 15

Current balance

120

% of GDP 25

10 5 0

80

-20

-5 -10

-40

60

-15 40

2018

2019

2020

-60

0

2018

2019

-20 2020

Source: INS; Central Bank of Tunisia.

StatLink 2 https://doi.org/10.1787/888934219774

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION © OECD 2020

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Tunisia: Demand, output and prices 2017

2018

Current prices TND billion

Tunisia 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

96.3 69.5 20.1 18.1 107.8 42.2 54.1 - 11.9

Net exports1 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

2022

Percentage changes, volume (2010 prices)

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

-8.9 -8.3 2.1 -29.5 -9.8 -19.3 -19.7 2.3

5.7 6.1 1.1 5.4 5.0 8.6 6.4 0.3

3.0 3.3 0.3 9.6 3.5 5.1 5.7 -0.7

6.4 7.3 15.5 -4.8 -11.2

6.9 6.7 15.1 -4.1 -8.5

6.3 5.7 16.4 -12.0 -7.7

5.3 5.1 16.5 -8.2 -7.5

5.8 5.8 15.9 -6.0 -7.7

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

Source: OECD Economic Outlook 108 database.

StatLink 2 https://doi.org/10.1787/888934219793

Tunisia 2 Lack of tourists has contributed to higher unemployment 1000s of people 3000

Inflation has slowed but health care prices have risen sharply

% of the working population 30

2500

25

2000

20

Y-o-y % changes 10

8

6 1500

15

1000

10

4 ← Arrivals of foreign tourists Unemployment →

500

Consumer prices

5

2

Food products Health care

0

2018

2019

0 2020

0

2019

2020

0

Source: INS. StatLink 2 https://doi.org/10.1787/888934219812

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION © OECD 2020

4ď ź

The second wave of the pandemic is stronger than the first The first wave of the pandemic in the spring was relatively mild. Since the end of August, however, the number of COVID-19 cases and related deaths has increased sharply, against a backdrop of difficulties in accessing health care. In October, the authorities imposed a curfew in several governorates, including the capital, and banned public and private gatherings and travel between regions. The working hours of civil servants have been reduced and hospital bed capacity increased. Facemasks are obligatory in public spaces, although in October only 40% of Tunisians were wearing them. The number of tests per capita remains low, owing mainly to their cost, which was set at TND 209 (USD 77) compared to a minimum wage of TND 350-400 a month.

The economic recovery is threatened Industrial output returned to its pre-crisis level in July, driven mainly by the good performance of the agrifood sector. Similarly, in September merchandise exports outstripped their level in 2019, on the back of exports of agricultural products including olive oil. Recent restrictions following the resurgence in the number of COVID-19 cases are weighing on economic activity, and this is expected to delay the economic recovery and declines in unemployment. The unemployment rate increased by almost three percentage points between the first and second quarters of 2020, to 18% of the working population. It subsequently fell by two percentage points in the third quarter, due to the recovery in the informal sector, while the unemployment rate among the 15-24 age group remains very high (35.7%). The tourism sector, which accounts for 5% of GDP and a significant share of employment, has been particularly affected, with an unprecedented decline in visitor numbers since April, and worrisome prospects going forward. The crisis is also prompting a resurgence of migration to Europe. Consumer price inflation has slowed, to 5.4% (YoY) in September, compared to over 7% at the beginning of 2019. The health crisis, however, has led to a sharp increase in health care prices.

Government actions halted the first wave of the pandemic and contained the economic impact of the crisis After the appearance of the first cases of COVID-19 in March, the government was quick in adopting significant health and containment measures, which helped limit the number of infections substantially.

Between April and June, restrictions were gradually eased in order to lessen their economic impact. A series of fiscal measures (amounting to 1.8% of GDP) were announced on 21 March, including longer delays for payments; the rescheduling of various taxes for households and businesses; more resources for hospitals; cash transfers to the lower-income groups; and temporary support for the newly unemployed.

In mid-November, in light of the persisting problems in the tourism sector, the government also announced further targeted measures, including an additional monthly payment of TND 200 for the unemployed, a training programme, and payment of the employer's share of social security contributions for three quarters. The special COVID-19 collection fund put in place by the government in March has raised over TND 200 million (USD 72 million) to bankroll efforts to stop the virus spreading.

The Central Bank of Tunisia (CBT) lowered its key policy rate by 100 basis points on 20 March, and then by 50 points on 5 October in response to the repercussions of the second wave. Moreover, the CBT asked banks to extend payment deadlines from three to six months. In October, it extended this facility for the tourism sector until September 2021. In addition, in March the government created an investment fund (0.4% of GDP), state guarantees for new loans (0.3%), and a mechanism for state financing of the difference between the key rate and the effective rate of investment loans (limited to three percentage points).

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION Š OECD 2020

ď ź5

The crisis will have a lasting socio-economic impact Despite a surge in mid-2020, economic activity will not return to its pre-crisis level before 2022, as it is constrained by health restrictions and a somewhat sluggish global economy. Growth in consumption, investment and imports will only really start to pick up again in 2022, as global confidence strengthens with the deployment of a vaccine. Exports will continue to be affected by the downturn in tourism. After improving during the second half of 2020, the current account balance will widen again as domestic demand strengthens, while foreign debt stood at almost 114% of GDP in mid-2020. Fiscal measures have increased the public deficit in 2020, which will remain high until 2022. Inflation should remain relatively moderate over the coming years.

The outlook may worsen if the economy sinks further into informality, which already accounts for about 45% of employment, due mainly to the wait-and-see attitude of investors linked to uncertainty on the implementation of reforms. The significant amount of government arrears and contingent liabilities related to state-owned enterprises could weigh on public spending, particularly investment, thus hampering the economic recovery. An increase in poverty in the wake of the crisis could lead to the long-term marginalisation of a section of the population. In addition, a less accommodative monetary policy in the event of a rise in inflation could also undermine investment momentum and growth. On the other hand, a more rapid recovery in tourism would quickly revive employment and foreign currency revenues.

An ambitious policy agenda is required The economic situation before the crisis was already difficult, with public finances in poor health, a low investment rate, and a current account balance in structural deficit. The crisis calls for renewed reforms.

In particular, better targeting of public expenditures would improve assistance to individuals and businesses in need. The payroll moderation started in 2020 must continue as its share in government spending remains too high. The corresponding budgetary savings should be combined with a reform of energy subsidies and used to improve the social safety net. A marked improvement in the business climate would help reduce the share of informal activity and boost investment. This would give renewed impetus to the agri-food industry in particular, along with the telecoms and textile sectors, which are already developed and could absorb some of the jobs lost. Simplifying customs and administrative procedures and improving port infrastructure could help boost foreign trade. As far as tourism is concerned, upgrading facilities alongside measures to enable trouble-free travel and improve passenger information could stimulate activity. In the longer term, given the good performance of Tunisians at school and university, the development of new skills would be a promising way of creating new opportunities.

OECD ECONOMIC OUTLOOK, VOLUME 2020 ISSUE 2: PRELIMINARY VERSION Š OECD 2020