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Emerging Markets

Tunisia CB chief: IMF first, capital markets later


As its debt-to-GDP ratio inflates and its public finances come under pressure, some have wondered if Tunisia will succumb to a debt restructuring process. But the governor of the Central Bank of Tunisia, Marouane El Abassi, told GlobalCapital that the country is intent on securing new IMF funding as a prerequisite to entering capital markets.

Tunisia found itself in a difficult position when the pandemic hit last year. While tourism — one of the country’s main sources of revenue — dropped, a national lockdown dented economic activity and increased pressure on public finances.

Its fiscal deficit widened from around 3.5% to 11.5% of GDP in 2020 and its debt-to-GDP ratio jumped 15 percentage points to almost 90%. With most of that debt being in foreign currencies, some market participants fear Tunisia could be in line for debt restructuring.

El Abassi disagrees. He says that the country is not looking at restructuring debt soon. Instead, the focus is on securing a new IMF package, which would improve Tunisia’s standing among fixed income investors.

Tunisia lent on the IMF last summer for a $750m Rapid Financing Instrument and representatives of the Tunisian government will travel to Washington, DC next week, in search new funding.

El Abassi also says the international community needs to do more to help Tunisia and other middle income emerging markets, echoing what Mexico's deputy finance minister told GlobalCapital earlier this month.


GlobalCapital: What is the outlook for Tunisia’s economic recovery in 2021?

Marouane El Abassi, Central Bank of Tunisia: Starting in February last year, we experienced the same problems as a result of Covid-19 that were happening across Europe. We took tough decisions from the beginning, starting with a total lockdown from March onwards. That seriously affected the economy.

Additionally, the drop in tourism, which shrunk by 80% compared to 2019, and the border closures with Libya and Algeria exacerbated our economic situation. Our economy shrunk by almost 9% last year — the worst level Tunisia has seen in more than six decades — which impacted our balance of payments position.

However, remittances have remained good and the decrease in oil prices last year helped Tunisia’s energy deficit, given that we are an oil importer.

Despite the pandemic, our foreign currency reserves strengthened in 2020, reaching five months of imports, up from 2018, which was equivalent to three months of imports. This growth in reserves has also helped to maintain the exchange rate.

We expect to reach economic growth of 3.8% in 2021, though that depends on how we manage what is left of the pandemic and our vaccination programme. The Tunisian economy is recovering this year; exports are up, thanks to a recovery in Europe.

That has helped our foreign currency reserves and the balance of our credit accounts. Additionally, stability in Libya has helped recovery too. Exports to Libya in the first quarter this year were considerably higher than last year. Those two factors, combined with the management of a vaccination campaign, will contribute to grow the recovery in Tunisia.

However, tourism is not expected to reach the pre-pandemic levels, which is a challenge for us. It is clear that, economically, we cannot do another lockdown. We were faced with the trade-off between the lockdown and the necessity to provide people with revenue and maintain economic activity. The tough decisions made last year impacted the economy very strongly.

Today, we are focusing on other important measures, such as mandatory mask wearing and social distancing. Our focus is trying to maintain economic activity to ensure we do not see the contraction levels we saw in 2020.  

Many emerging markets are beginning to reverse the monetary loosening introduced last year. What is the direction of monetary policy in Tunisia?

Between 2018 and 2019, the central bank raised the interest rate three times by 275bp. That helped to reinforce the credibility of the monetary policy, the value of the Tunisian dinar and ultimately brought down inflation by 1.6%.

However, last year during the crisis, we cut the rate twice by a total of 150bp.

As of today, inflation is at around 4.8%, which is lower than we expected. We had anticipated it might reach the two digit area. Therefore, we are not going to hike interest rates just yet. Unlike some other emerging markets, our real interest rate is positive. We are still waiting to see what will happen with inflation in the coming months.

In our initial modelling it was intended to decrease in 2021, but now we are seeing external volatility. Interest rates in the US are set to rise and inflation is growing in Europe. Because of how well connected we are to international markets, we will naturally import some of this inflation.

We did a lot of stress testing in July and we plan to conduct more. The micro testing we did last year showed that the majority of banks went through the crisis without a lot of impacts — the financial stability and other indicators for the banks were very good.

As a central bank, we are maintaining our close supervision of the banking system, especially around non-performing loans. We are receiving technical assistance from the World Bank to help with that.

We do not want to treat the interest rate like a yo-yo — stability is important.  

Debt sustainability and restructuring have become increasingly important topics for emerging markets since the crisis began. With a debt-to-GDP ratio of almost 90%, will Tunisia seek to restructure its Eurobond and bilateral debts?

Each and every country needs to better manage its debt. One of our objectives, agreed with the IMF, is to better manage our internal and external debt.

Most importantly, we are talking to the IMF about a new funding package. We have gone through Article IV [a visit from IMF economists to assess a country's economy and financial health and meetings with the government and central bank to discuss policies] and discussed it with all relevant stakeholders, including unions and private sector associations in Tunisia. We have always maintained good relations with the IMF and were part of their Exetnded Fund Facility programme from 2016 to 2020.

Last week, the Tunisian head of government sent a letter to Kristalina Georgieva [the IMF's managing director], formally asking for a new programme. Discussions will likely finish by May.

We have already begun to discuss areas of technical assistance with the IMF and World Bank, including assistance on the exchange rate and reserve management.

We will not have any problems in dealing with the IMF — our goals around reform measures have already converged. The focus now is how we can manage the aftermath of the crisis and achieve what was not done with the original formal IMF programmes, which included the EFF and Stand-by Agreement programmes.

One important area of discussion is subsidies. Subsidies — on electricity, water and even basic commodities — are creating a huge problem for us. These have led to huge distortions, both with the public deficit and with the state owned enterprises. Because of that, we are looking at restructuring five different SOEs, which the central bank is involved in. 

Tunisia has large financing requirements to fill this year — are the conditions right for Tunisia to tap the Eurobond market?

As an advisor to the government, my view is that the priority right now is our relationship with the IMF.

We may have a budget gap to finance externally. In this case our objective is to target multilateral and bilateral lenders. For now, the ultimate objective is to secure a durable IMF programme.

If we get that, we will have better visibility in the next three or four years when it comes to international investors looking at Tunisia.

It is not right to go to the international financial markets just yet. We may sell secured bonds this year and roll over the guarantees received in the past which is what we are trying to achieve with some of our bilateral lenders.

We have $1bn of debt maturing in July and August from the US. We are trying to get an approval to have the same amount again. We are going to Washington, DC in early May to discuss this further.

We are also in discussions with other bilateral lenders, for example like Qatar, for private loans. The focus this year is focusing on bilateral agreements with multilateral development banks and lenders, not the international financial market.

Tunisia has shown interest in issuing green debt in the past. Are there any prospects for issuing green bonds this year?

Tunisia is a country well-connected to digitalisation and to the green economy and we are investing a lot in both areas. By 2030, we want 30% of our energy to come from solar and renewable resources.

We need to finance that. We may not be looking at a green bond this year, but we will need to innovate by gaining from the experience of others like Egypt. But to be frank, we need to prioritise our actions.

Many other emerging markets are taking advantage of global interest rates being at record lows to raise cash. Why isn’t Tunisia?

Compared to other emerging market countries, Tunisia is not a frequent borrower in the international capital markets. The country never issued more than $1bn per transaction or new issue.

We need first of all to reach an IMF agreement and to introduce credible and sustainable reforms. Investors want to see reforms and political stability. We need to have a story to tell. There are many variables to fix before to make a decision to tap international capital markets.

Is Tunisia receiving the support it needs from external bodies?

Tunisia needs to be resilient, but it also needs to be supported by the international community. We are in a huge international crisis. Countries like us that are in the middle — i.e. not very poor and not very rich — have had difficulties managing a crisis on this level.

During the first wave of the pandemic, the IMF’s quick response measures helped our economy a lot, but there were few after-resources for countries like us. The IMF can restructure the debt for the poor and the rich countries have enough liquidity to offer helicopter money and have record low interest rates. But countries like us also need help managing the impact of the crisis. That is part of what the international community should think about, to maintain global economic and political stability.

The new allocation of [IMF] Special Drawing Rights is good but it is not enough. We had a good discussion with Kristalina in which we were very clear about the fact that middle income countries are trapped in a position with huge constraints and not enough resources to deal with it and the public deficit and rising inflation.

The international community needs to better understand the gravity of the situation for countries like us. Tunisia, along with the central banks of Russia, India, South Africa and Brazil, recently met with Gita Gopinath, the IMF’s chief economist, and we discussed the spillover effects of the crisis. All of us said the same: the crisis is continuing.  

What is the main challenge over the next year for Tunisia?

We are very cautious about the increase of rates in the US and the spillover effects in oil prices and emerging markets. This week, we increased fuel prices for the first time in 2021 for consumers by 5% to help with our budget deficit. In our discussion with the IMF, we had agreed on 2%.

It is difficult to predict where inflation will go, because of the increase of prices for international commodities alongside the tough measures the government has taken to raise prices domestically. I want to maintain the credibility of the monetary policy, to see inflation decreasing and to see exchange rate being stable. The exchange rate affects our debt, so that is another challenge that we are aware of.

As mentioned, our main priority today is to get a programme with the IMF to help recover economic growth. We also need to manage Tunisia’s vulnerable people, as unemployment in Tunisia has risen.