Will the loans plunge Tunisia into a stifling financial crisis?

The Tunisian government said that it had resorted to the Central Bank to pay urgent foreign debts (Reuters)

Tunisia -

Economic experts attribute Tunisia’s ability to repay all its internal and external loans for the year 2023 mainly to borrowing, and not to the development of its internal incomes, stressing that it will face a stifling financial crisis this year, because it is unable to mobilize the external loans programmed to finance its needs and pay its debts as a result of the disruption of the agreement with... International Monetary Fund.

Due to the government's extensive resort to internal or external borrowing to cover the high budget deficit, economists expect that Tunisia this year will witness a significant increase in the level of inflation, a decline in investment, and a decrease in the economic growth rate specified in the budget law for the year 2024 by about 2.1%.

Finance Minister Siham Namsia recently confirmed that Tunisia was able to pay all installments of its internal and external debt in principal and interest for the year 2023.

The news quickly spread in the media and was carried by the public on the streets, believing that Tunisia had succeeded in paying off its debts thanks to improved growth and the development of its revenues from tourism and remittances from expatriates.

Reason for repayment of loans

However, the matter is not accurate, as experts have confirmed that the basis for repaying these loans is borrowing, and economic expert Moez Hadidan says that Tunisia was able to pay off its internal debts through more borrowing from local banks, while it was able to pay off its external debts by borrowing mainly from abroad and Less than domestic foreign currency.

He continued in his interview with Al Jazeera Net that the Tunisian government paid foreign debts worth 8.7 billion dinars ($2.7 billion) during the year 2023.

Hadidan confirms that there is an excessive tendency to borrow from local banks to pay off Tunisia’s internal debts and manage its expenses, explaining that the government programmed last year to borrow an amount of 11.36 billion dinars ($3.5 billion), but it only succeeded in borrowing about 9.76 billion dinars ($3.1 billion). Until the end of last November.

The government planned to borrow about 10.56 billion dinars ($3.2 billion) from abroad in 2023, but it only succeeded in borrowing about 5 billion dinars ($1.5 billion) until the end of last November, and this clearly affected the import of basic materials. , including medicines, coffee, sugar, and grains, and creating queues in front of bakeries.

Hadidan attributes the government’s inability to reach the level of borrowing it set in last year’s budget (estimated at 11.36 billion dinars) to the disruption of negotiations with the International Monetary Fund, which hindered the possibility of accessing external debt markets within the framework of bilateral and multilateral financing such as the World Bank and the European Union. And others.

Experts warned that borrowing from the central bank would negatively affect the local dinar exchange rate (Getty)

Reduce support

The scarcity of foreign funds has a negative impact on Tunisia, and this scarcity has led the government to reduce its imports of subsidized basic materials.

Hadidan says that support expenses and social transfers declined from about 19.16 billion dinars (5.9 billion dinars) to 10.8 billion dinars (3.3 billion dollars) at the end of last November.

Hadidan expects that 2024 will be a difficult financial year in terms of mobilizing external loans to finance Tunisia’s needs for basic materials and debt repayment, noting that the government has programmed to borrow 10.3 billion dinars this year ($3.2 billion) without specifying its source, which raises several questions about how to fill it. That hole in the budget?

Hadidan does not rule out that a significant portion of these programmed loans of unknown origin will be financed from within through the Central Bank of Tunisia after introducing revisions to its law, warning that resorting to direct borrowing in dinars from the Central Bank will have bad repercussions on the banking system and banks and on investment and growth.

He says, "Any increase in the monetary supply will have a direct impact on higher inflation."

Loss of essential materials

In turn, economic expert Reda Al-Shakandali explains to Al-Jazeera Net Tunisia's success in repaying its internal and external debts for the year 2023, despite the disruption of the agreement with the International Monetary Fund, mainly to borrowing from inside and outside, indicating a noticeable increase in the volume of internal and external borrowing in 2023 compared to the previous year. .

External borrowing increased from 7.6 billion dinars ($2.4 billion) in 2022 to about 10.5 billion dinars ($3.2 billion) in 2023. While the volume of internal borrowing increased from 10.5 billion dinars ($3.2 billion) in 2022 to 11.3 billion dinars ($3.52 billion). dollars) in 2023, according to the economist.

Al-Shakandali says that repaying external loans, especially through external borrowing, was at the expense of supplying subsidized basic materials to Tunisians, whose suffering has increased from high prices, inflation, and the loss of basic materials.

Al-Shakandali pointed out that repaying foreign debts had a negative impact on economic growth, which declined from 1.6% estimated in 2023 to 0.9% (compared to 1.8% programmed) due to the reduction in the supply of basic materials used in factories.

He added, "The state has lost more than one billion dinars ($300 million) in tax resources on industrial companies due to the decline in growth."

Economic damages

Al-Shakandali says that it is not possible to continue in the same way in repaying foreign loans, especially by relying on reducing the import of basic materials, because this may force some institutions to close, lay off workers, and reduce growth to less than 0.9%, compared to the expected 2.1%.

Al-Shakandali also believes that excessive borrowing internally or borrowing from the central bank to cover consumption expenses without creating development and investment will fuel inflationary pressures.

He says, "If the state intends to borrow directly from the central bank to support the budget and cover its consumption expenses, it will be a major disaster."

Borrowing from the central bank

The experts' statements came shortly before the Tunisian Minister of Finance announced that the government had resorted to requesting direct financing from the Central Bank to pay off urgent foreign debts, including international bonds worth 850 million euros ($920 million) due to be paid on February 16.

Al-Boughdiri said before the Parliament’s Finance Committee that Tunisia is committed to paying all its debts on time “despite all the constraints within the framework of preserving national sovereignty and within the framework of self-reliance.”

Central Bank Governor Marwan Al-Abbasi told the Finance Committee that repaying a loan worth 850 million euros will lead to a decrease in currency reserves within 14 days of importation, and will have an impact on the exchange rate, but will not affect inflation.

Al-Abbasi warned in 2022 that the government’s plans to ask the bank to buy treasury bonds entail serious risks, including high inflation rates and a decline in the value of the local currency.

He said at the time that this step would lead to an uncontrollable increase in inflation, which could reach three figures, warning that “the Venezuelan scenario will be repeated in Tunisia.”

Source: Al Jazeera + Reuters