The official foreign trade figures for the end of the first quarter of this year published and relayed by the media reflect a monumental deficit. The situation was expected, given the malfunctioning of the production apparatus and the drop in volume of foreign direct investments. Two fundamental questions arise: Is the situation sustainable indefinitely? What will be the impact on foreign exchange risk?
Overall, the data reported by the National Institute of Statistics indicate a deterioration in the trade deficit, widening from 2.419 billion dinars ($1.532 billion) at the end of March 2013 to 3.29 billion dinars ($2.083 billion) by the end of first quarter of 2014. The gap, observed at the global level, has mainly increased in the most important sectoral groupings, namely, the agriculture and agro-food industries, engineering industries and other manufacturing industries.
Thus, the stability of the food balance is at stake. The drop registered by the industrial sector illustrates a major dysfunction in the goods and services market, given the respective differential increases in importation of capital goods and raw and semi-manufactured materials by 5.4% and 3% during the analysis period. In short, interpreting the above figures must be accompanied by an impact assessment of the deterioration of foreign trade terms on the current accounts and capital accounts balances of the country. These are key elements for estimating the severity of liquidity and foreign currency risks if the rhythm of aggravation of the trade deficit keeps growing.
Overview of the international investment position of Tunisia
The analysis of the creditworthiness of a country is based on studying its possibilities to fulfill its obligations of repayment of its debt. Tunisia will meet its obligations by financing its needs for this purpose, measured by the variations of the value of its current account and capital account balances.
The balance and the account in question are statistical records that compile economic and financial transactions to track changes in national assets and liabilities.
In Tunisia, according to the parameters published by the Central Bank of Tunisia, the statement of current transactions revealed a deficit of 6.437 billion dinars ($4.076 billion) at the end of 2013 compared to a gap of 5.812 billion dinars ($3.68 billion) on Dec. 31, 2012. Regarding the capital account and financial transactions, the balance dropped from 7.83 billion dinars ($4.958 billion) to 5.343 billion dinars ($3.383 billion) during the same period.
The overall balance has largely deteriorated, registering a -1.095 billion dinars ($6.934 billion) compared to 2.138 billion dinars ($1.354 billion) during the period 2012–2013. This is an unprecedented situation given that the country has benefited, in this very short time, from a massive liquidity injection by incurring billions of dinars worth of debt. This clearly demonstrates that the trade deficit of Tunisia will indeed be problematic for the nation and could simply lead it to fail to make payments in a few months.
It should be noted that the international investment position faced a deficit of 76.374 billion dinars ($48.365 billion) at the end of last year, and a deficit of 68.606 billion dinars ($43.446 billion) in 2012. This infers a liquidity difference of 7.768 billion dinars ($4.919 billion).
This current situation, in which Tunisia’s trade and capital deficits have accumulated and reached an unsustainable limit, points to the national economy being in the classic position of a liquidity trap. This happens when monetary authorities are unable to properly manage through a global recession and they fail to inject additional money and affect key interest rates.
Under such circumstances, in which both private investment and consumption are largely paralyzed, such declines should be offset by increasing public spending. This, however, can be difficult when the development budget does not exceed 4.5 billion dinars ($2.8 billion). Thus, there is a dilemma that indefinitely poses the problem of finding liquidity in the unofficial circles of the Tunisian economy, namely, by addressing the tax-evasion abyss and going through the underground economy.
Other problems arise in regard to the continuation of the dizzying pace of the widening trade deficit, especially with regard to foreign exchange risk management and the preservation of the Tunisian dinar's value, which is managed by the Central Bank of Tunisia and fluctuates depending on a basket of foreign currencies.
These difficulties mainly result from the increasing volatility of capital inflows into Tunisia, the low growth of total productivity as well as the additional foreign currency withdrawals made by importers to meet their banking needs in this area.
The risk of national currency speculation could thus increase and lead to inaccurate price signals and a fluctuating real exchange rate. This generally leads to a sustainable integration of inflationary pressures, which are exacerbated by a state of uncertainty that undoubtedly increases capital costs and discourages investment.
Under such circumstances, there is an urgent need to think deeply about how to manage the trade deficit in correlation with macroeconomic choices whose effects are difficult to identify.
The reality is quite complex. Several economists have proven that the deficit in itself means nothing. However, a deficit is often a sign of a lack of competitiveness in a country living beyond its means and whose economic fabric is destroyed by taxation and regulation. It is not the deficit that matters, but rather what lies behind.
Continue reading this article by registering at no cost and get unlimited access to:
- The award-winning Middle East Lobbying - The Influence Game
- Archived articles
- Exclusive events
- The Week in Review
- Lobbying newsletter delivered weekly