Tunisia’s potential IMF deal to boost manufacturing investments

To:

Al-Monitor Pro Members

From:

Francisco Serrano

Journalist and analyst specialized in North Africa

Date

Nov. 29, 2022

Bottom Line: 

The past decade has been hard on Tunisian industry. Political instability has weakened sectoral policy. Regular labor stoppages drove down manufacturing output. Security concerns have discouraged foreign and domestic investors from expanding. The dire budgetary situation and the risk of debt default have weakened overall business confidence. But the economic balance that might come from the IMF deal could improve the sector’s overall prospects.

Background Facts:
  • In mid-October 2022, the International Monetary Fund (IMF) announced a staff-level agreement to support Tunisia with a four-year loan program worth $1.9 billion. The deal requires final approval by the IMF board, scheduled to meet in December.
  • Given the country’s calamitous economic situation — and the risk that it might default on its debt — the loan program is expected to move forward over the coming weeks. IMF support will be critical for Tunisia to secure additional donor support and bilateral financing over 2023-2024.
  • For the industrial sector, an IMF bailout might turn into a window of opportunity. After decades of industrial policy to create export-driven manufacturing clusters — especially in textiles, electronic components and mining — the economic and political difficulties that arose out of the 2011 uprising seem to have shifted Tunisia’s manufacturing capacity away from international markets. The share of exporting companies has gone down significantly, falling from 38% in 2013 to 32% by 2019.
  • According to the World Bank, the important decrease of export-oriented manufacturing pushed the net contribution of trade to GDP growth from 49% over the 1991-2010 period to -7% over 2011-2019.
  • The COVID-19 pandemic in 2020 resulted in a decrease in European demand for Tunisian manufactured goods: Textiles activity collapsed by 16.2%, chemical industries fell by 6.3% and electro-mechanic manufacturing saw a 16.5% reduction. Overall manufacturing exports collapsed by 11.9% in 2020. Still, sector investment increased by 14.9 %, mainly driven by local expansion projects.
  • By the end of 2021, with most of Europe overcoming the worst of the pandemic and consumption picking up again, Tunisian manufacturers saw their exports rise by 19.4%. But investment into manufacturing still fell by 25.8% to TD 2.54 billion ($782.5 million), from TD 3.42 billion ($1.053 billion) in 2020.
  • Manufacturing exports went up again during the first half of 2022 by 21.2%. Over the same period, investment by manufacturing companies decreased further by 20.5% to TD1.041 billion ($320.7 million), from TD1.3 billion ($400.5 million) in the first half of 2021.
  • Even though the performance of the industrial sector has improved post-COVID, many manufacturers have remained reluctant to commit to long-term investments given the degree of political and economic uncertainty in the country. This has now been compounded by external instability aggravated by the Russian invasion of Ukraine.
  • A recent survey by Tunisia’s National Institute for Statistics found that the biggest hurdle for the manufacturing sector as of the third quarter of 2022 was securing raw materials for manufacturing. This is likely to continue over 2023-2024.
  • Another challenge that is likely to remain is exposure to delayed payments, especially from a cash-strapped state. In November 2022, local subsidiaries of pharmaceutical manufacturers Bayer (German), Novartis (Swiss) and GlaxoSmithKline (UK) announced they are leaving Tunisia due to the country’s situation. The government reportedly owes pharmaceutical manufacturers $243 million.
  • Tunisia’s manufacturing environment has become gradually less attractive for foreign investors. In 2021, investment by 100% foreign-owned manufacturing companies fell by 30.8% to TD 582.8 million ($179.5 million). This trend has continued over the first half of 2022 with investments dropping by a further 28.6%, from TD 383.7 million ($118.2 million) in the first half of 2021 to TD274.1 million ($84.4 million).
  • Volatile internal and external conditions will allow some manufacturing segments to grow in 2023-2024 while forcing others to retreat. The GDP of textile manufacturing, for instance, has fluctuated alongside Tunisia’s internal challenges as well as global macroeconomic instability. After falling by 4% in 2019 and by an additional 16.2% in 2020 during the pandemic, it returned to growth in 2021, expanding by 9.3% in 2021. Textile manufacturing has continued its upward trend, expanding by 13.5% over the first nine months of 2022, relative to the same period of 2021.
  • The only two segments that saw a rise in investment volumes over the first half of 2022 were textile and clothing manufacturing, which grew by 55.4%, and shoes and leather industries, which increased 63.2%.
  • In the medium term, the environment necessary for Tunisian manufacturers to thrive will depend on both internal and external conditions. And while the approval of the IMF agreement might allow for a more stable internal environment, exogenous conditions will continue to have an impact.
Alternative Scenarios:

Scenario 1: The IMF deal is approved, and conditions improve for the Tunisian economy over 2023.

Despite the risk of labor instability — linked to low wages, reforms and austerity measures pushed by the government to abide by the loan deal — business conditions improve gradually. Externally, a cease-fire in Ukraine in the latter part of 2023 helps to bring global energy prices down, lowering inflation. European countries avoid a recession. And confidence in EU economies drives up Tunisian exports and industrial investment.

This would be the best possible but also the least likely scenario for Tunisian manufacturing, easing both external and internal instability. Although there is a possibility that a cease-fire is reached in Ukraine during 2023, which would bring about a lowering of energy and cereal prices, this still seems like an unlikely possibility as things stand. The external environment is likely to continue to impact Tunisian manufacturing over the short term.

Scenario 2: The IMF deal is not approved and the country defaults on its debt.

This scenario accelerates a retreat of foreign direct investment away from Tunisia. The continued depreciation of the dinar might make some Tunisian exports more attractive. But it creates so many problems for manufacturers to acquire inputs that some production lines are forced to stop. This leads to the loss of global market share by Tunisian manufacturers. Labor instability accelerates as living standards across the country continue to fall.

Given the stakes for Tunisia and the region if it defaults on its debt and economic conditions continue to deteriorate, the approval of the IMF loan is still the most likely option.

Conclusion - Most Likely Scenario:

The IMF deal is approved, and the Tunisian economy gradually stabilizes over 2023-2024. Devaluation of the dinar is slowed down. Although IMF support attracts additional donor involvement, it does not insulate Tunisian manufacturers from global economic conditions. The conflict in Ukraine continues, escalating after the winter into the spring of 2023. Global energy and food prices remain high. Inflation, likely above 7% in Tunisia during 2023, keeps the cost of manufacturing inputs high. Although a more centralized and robust governing style by president Kais Saied accelerates decision-making and industrial policy, it also keeps the risks of political instability, as opposition parties and the general population grow weary of his increasingly autocratic style. Recession in key European markets will impact manufacturing exports, at least during 2023.

Industrial production will likely remain under significant risk of stoppages, especially if the IMF agreement pushes the government toward painful reforms. Austerity measures or a move to significantly cut jobs in state companies would likely prompt the UGTT, Tunisia’s largest labor union, to call for strikes.

For the foreseeable future, manufacturing will face mixed outcomes, with some segments sustaining and even increasing exports and other industrial categories struggling. But this likely won’t translate into sizeable new FDI into manufacturing capacity until economic stability improves and allows investors some medium-term visibility. Diversifying away from European markets might potentially help to contain export losses over 2023.

Contributor Background:  

Francisco Serrano is a writer and analyst who focuses mainly on North Africa. He has been published in several outlets, including Foreign Policy, World Politics Review and the Middle East Institute. His second book, "As Ruínas da Década," about the past decade in the Middle East, was published in March 2022.

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