Tunisia Was Right to Reject the IMF Deal

Tunisia’s bold move earlier this month to reject a $1.9 billion bailout loan from the International Monetary Fund (IMF) sent shock waves through the international community, raising concerns over the fate of the country’s fragile economy. The country’s worrisome political landscape, which was subject to a soft coup by current President Kais Saied on July 25, 2021, adds additional concerns given the president’s irrational behavior and unstable leadership. Yet Tunisia has other tools at its disposal to avoid a total collapse of its economy, and borrowing more money from the IMF will not bode well for the country’s future.

Tunisian authorities and IMF leaders agreed on a bailout loan in October 2022, but Saied, who has been ruling by decree since July 2021, refused to sign the deal, saying that “foreign diktats” will lead to more poverty. His rejection sent Western countries into a frenzy, particularly those that border the Mediterranean—such as Italy—which fear that a massive influx of migrants will reach their shores and send the European Union in disarray. His refusal also alarmed international creditors, who predict the country will default by August 2023.

Since 2011 and Tunisia’s transition to democracy after the Arab Spring, the country’s economy has faced significant challenges that have primarily affected the poorer segments of Tunisian society. Soon after the revolution, unemployment spiked to a staggering 18.33 percent, inflation rose by 1.4 percentage points, and the country’s trade balance plummeted to an all-time low in 2014 and continued to decline, hitting the current all-time low in 2018.

In 2013 and 2016, the IMF issued two separate loans to Tunisia, the first comprising $1.74 billion and the second comprising $2.9 billion. Neither loan has had noteworthy effects on the economy. Economic growth has remained sluggish, if not nonexistent, while unemployment and inflation have remained high. Today, after the COVID-19 pandemic and the start of the war in Ukraine, Tunisia faces significant food and fuel shortages, leaving the local population strained by hourlong queues at gas stations and empty shelves at supermarkets.

With Tunisia’s economic and financial conditions deteriorating significantly by the day, many believe an IMF loan is the only way to save the country from total collapse. Defaulting would result in catastrophic consequences, such as an inability to pay public wages, keep schools open, and ensure hospitals continue working.

Yet there are serious reasons to doubt why a loan by the global financial institution can help Tunisians in the long run.

The IMF’s loan to Tunisia comes with significant strings attached. Among other measures, the IMF is requesting that the Tunisian government eliminate subsidies on consumer goods—fuel and food—which have been in place for several decades to provide the local population with affordable access to essential goods. According to the IMF, eliminating these subsidies will improve Tunisia’s general economy immediately by increasing its growth and promoting greater equity.

However, past attempts by the Tunisian government to eliminate subsidies have increased tensions within the country, resulting in widespread protests over the sudden price hike on essential goods. In 1978 and again in 1983, following recommendations by the World Bank first and harsh demands by the IMF later, the Tunisian government reduced or eliminated subsidies on basic goods. Price hikes of 100 percent on goods such as bread and semolina and calls to strike by the country’s powerful Tunisian General Labor Union led thousands to protest.

In both instances, the government dispatched the army to crack down on both peaceful demonstrators as well as violent rioters to curb the unrest, killing hundreds and wounding many more. The results that the protests had on Tunisia’s economy were disastrous: the country’s leader, Habib Bourguiba, announced a state of emergency, and shops as well as cafes remained closed for months while the country’s public transport services were affected by serious delays.

Removing subsidies on basic goods will also heighten inequalities and widen the gap between Tunisia’s coastal and interior regions, in turn hurting the country’s economic growth. These regions are subject to severe economic disparities, with Tunisia’s coastal areas enjoying better economic growth and job prospects given the high volume of industries and business located there. Tunis, Sfax, and Sousse, the country’s three most populated cities, hold a disproportionate amount of its wealth, with 85 percent of Tunisia’s economic activity concentrated on the coast.

Eliminating subsidies on essential goods will have a particularly negative effect on Tunisia’s inlands, which heavily rely on agriculture and farming. Prices of essential goods will increase, and farmers will find it harder to sell their products at a profitable price, thereby decreasing agriculture production, exacerbating poverty and food insecurity, and hindering economic growth.

While the IMF argues that cutting food subsidies will bring long-term benefits to the country’s economy by rebalancing the budget and thus spurring economic activity, recent studies, including one that looked at the past impact of IMF policies in Tunisia, Jordan, and Morocco, suggest that removing subsidies will lead to greater poverty among middle- and lower-income households, and that Tunisia’s subsidy system is progressive and equitable. Thus, in the case of Tunisia, removing subsidies on essential goods will lead to a decrease in the purchasing power of the poor and the middle class.

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There are myriad ways to boost Tunisia’s economy without resorting to austerity measures. One recommendation would be for the government to implement a progressive taxation with additional higher-income bands, so that Tunisians who earn more are taxed at a higher rate. The independent, pro-democracy Tunisian nongovernmental organization Al Bawsala suggests that the government should restore its previous progressive income tax—a fiscal policy reformed in 1986 to increase government revenue—to redistribute the wealth from higher- to lower-income earners. Currently, taxes on higher-income earners are capped at 35 percent for anyone who earns 50,000 dinars or more (about $16,000). Restoring a more progressive income tax would mobilize significant tax resources and help balance Tunisia’s budget while also fighting income inequality.

Another long-term solution many agree on is for Tunisia to become more self-reliant on wheat production so that the country is less affected by price volatility on the world market when a crisis hits, such as the one in Ukraine. Tunisia is highly dependent on wheat imports from Ukraine even though it is itself a wheat supplier; however, the country is only able to produce less than one-third of its bread flour and is thus heavily affected by market fluctuations. Only a few months after the war began and the price of wheat soared to the highest levels in history, Ukraine refused to dispatch orders to Tunisia without an upfront payment of 50 percent of the goods.

Restructuring Tunisia’s agricultural production is an arduous task that most agree would take more than six months. But it is also a necessary one that can bring long-term benefits to the country, and which international organizations such as the World Bank are able to assist with.

The IMF’s core mission is to help restore a country’s balance of payment in times of crises through loans and financial assistance. Thus, it may seem acceptable and economically responsible to impose conditionality clauses such as the elimination of subsidies on basic goods to restore economic growth. Yet there are other financial institutions that can help Tunisia’s economic development—ones that come with fewer costs attached.

The European Investment Bank has a long history of supporting long-term, sustainable solutions such as financing infrastructure projects and climate and environmental goals, and has been active in Tunisia since 1979. The African Development Bank supports countries in Africa through projects to promote economic growth, poverty reduction, and sustainable development. The African Development Bank has been helping Tunisia improve its infrastructure, which, as is the case for many developing countries, needs significant improvements.

If Tunisia is looking for long-term, sustainable solutions that will help its economy by mitigating inequalities and prevent it from falling into a vicious cycle of debt and austerity, then the IMF is not the solution. Perhaps now that Tunisia’s economy is particularly aggravated, the country has a chance to finally buckle down and implement solutions that can help mitigate future risks of defaulting.

Correction, April 19, 2023: A previous version of this article misstated which subsidies the IMF requested the Tunisian government eliminate as part of the loan deal. The subsidies in question are for fuel and food.