Tunisia Faces Economic, Social Challenges amid Historic Transformation

  • Domestic turmoil, spillovers from Libya led to economic downturn in 2011
  • Increase in public spending, tourist arrivals improve prospects for 2012
  • Structural reforms will help unleash medium-term growth potential
  • The country has moved steadily forward with its political transition, including through peaceful national elections, the formation of a coalition government, and the authorization of more than 100 new political parties.

    But the revolution has brought about economic and financial uncertainty, and downside risks to the outlook loom large amid a legacy of social and economic challenges and increased vulnerabilities, the IMF said in its annual report on the state of the economy. Nevertheless, stepped-up government spending and a rebound in tourism have helped improve prospects for Tunisia’s economy this year and next.

    Tunisia experienced a difficult 2011

    Domestic unrest and conflict in neighboring Libya took a heavy toll on the economy, with Tunisia’s economic activity contracting by 1.8 percent last year as tourism and activity in other sectors affected by strikes declined sharply.

    To help households and businesses cope with the effects of the recession, the authorities stepped up current public spending and injected liquidity into the economy. But these measures also led to inflationary pressures and losses in foreign reserves.

    The overall fiscal deficit widened to 3.7 percent of GDP in 2011 from 1.1 percent in 2010, as the government increased spending on an expanded wage bill, almost doubled food and energy subsidies to offset higher international prices, and implemented new social measures, including revamped youth unemployment programs.

    While Tunisia still recorded the lowest fiscal deficit and public debt ratio of all the Arab countries in transition in 2011, the country also posted the highest unemployment rate of this group of countries, which also includes Egypt, Jordan, and Morocco (see table).

    Tunisia’s external position weakened markedly: the current account deficit widened to 7.3 percent of GDP in 2011 from 4.8 percent of GDP in 2010 as tourism receipts fell by 33 percent and foreign direct investment inflows declined by 26 percent, and international reserves declined to $7.5 billion at end-2011 (equivalent to 3.8 months of imports) from $9.5 billion at end-2010.

    Policy mix to support recovery and preserve financial stability

    In 2012, growth is expected to reach 2.7 percent in 2012, thanks to a gradual...

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