Tunisia’s economy threatened as Libya unravels

The security deterioration in Libya may directly harm the economic recovery in Tunisia.

al-monitor A Tunisian border policeman stands guard at the border crossing of Ras el-Jedir Ben Guerdane, southeast of Tunis, Aug. 2, 2014.  Photo by REUTERS/Zoubeir Souissi.

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tunisian economy, tunisian development, tunisia, trade, revolution, libya, economy, business

Sep 7, 2014

Since July 2014, political instability and armed violence have been on the rise in Libya. The future of Tunisia’s neighboring country is uncertain and could escalate at any time into a conflict that permanently destabilizes the region. The difficult economic situation in Tunisia could get worse at a time when the country has been expecting growth to take off in 2015 with the consecration of political stability after the elections. The Libyan crisis could endanger this optimistic scenario and is now directly impacting the Tunisian economy.

The Libyan crisis could negatively impact the Tunisian economic recovery, according to the report published in August 2014 by the United Nations’ Economic and Social Commission for Western Asia (ESCWA). Tunisia has been a member of ESCWA since 2012.

A correlation analysis between Libya and Tunisia from 1995 to 2013 has revealed that GDPs of the two countries are strongly linked despite their structural differences. The correlation is mainly due to the strong economic ties between Tunisia and Libya.

According to ESCWA, Europe accounts for nearly 80% of Tunisian trade. Consequently, weak growth in the EU has weakened the Tunisian economy. Any other disturbances will also negatively affect economic growth. Although Libya receives only 5% of Tunisian exports, this represented [a significant amount] of Tunisian GDP during the 2008-2013 period. Exports increased by 23.6% annually from 2000-2013. Until recently, Tunisia’s exports to Libya helped offset t losses from the European market.

Tunisia and Libya have developed strong economic and commercial relationships. For example, an agreement was signed in 2013 to supply the Tunisian market with 650,000 barrels of crude oil and gas a month. Tunisia depends heavily on these imports and production disruptions in Libya have prevented it from meeting its commitments; Libya used to provide more than 25% of Tunisia’s fuel needs at preferential prices.

In addition, ESCWA said that the informal trade between Libya and Tunisia was considerable and could be as high as half of the total trade between the two countries. Informal trade takes place mainly through the border post of Ras Jedir. Its shutdown due to the deteriorating security situation in Libya has had a huge impact, given that the informal trade in the region is significant.

Informal trade involves a large number of people, such as carriers, street vendors, seasonal retailers, wholesalers and Tunisian consumers for whom this activity makes goods more affordable. In addition, various goods from China and Turkey enter Tunisia through Libya because of differences in tax rates, which can be as high as 78%. Instability has hampered official Libyan trade routes, so informal trade has become even more vital for needed imports and for exports, which provide revenue in hard currencies.

The economic impact of the shutdown of the Tunisian-Libyan border is difficult to estimate. It is reported that the unemployment rate for Ben Guerdane is 2% lower than the average in the Medenine governorate, where unemployment stands at 11%. Up to 20% of the workforce, including 83% of the people in Ben Guerdane, are involved in informal trade in the region, making informal trade the main source of employment.

ESCWA cited a UNDP report stating that 10,000 to 15,000 families have had no income since February 2011, when the revolution in Libya broke out. It could be that this is a consequence of the Libyan crisis.

Regarding tourism, the report estimated that about 1.8 million Libyan tourists visited Tunisia each year. Referring to a study by the African Development Bank, it has been shown that Libyan tourists spend an average of 200 to 400 dinars ($115 to $230) a week. On the other hand, medical tourism has become a powerful driver of economic growth in Tunisia. The country draws in 100,000 patients a year from Libya, bringing total revenues from Libyan tourism to 890 million Tunisian dinars ($510 million). If this flow drops because of the recent events in Libya, it will affect this crucial sector. The survey noted that in 2011 the number of Libyan tourists in Tunisia fell 30%, but confirmed that at present an annual increase of 5.3% was being recorded. Tunisian tourism is called to “once again prove its resilience.”

Meanwhile, the number of Libyan refugees in Tunisia has rapidly increased. Some say that this benefits Tunisia, but they fail to consider the impact of this massive influx on state finances. The influx will directly impact real estate markets and inflation, and will likely threaten internal security. According to ESCWA, Tunisia is not equipped to handle a large influx of refugees because the country’s asylum system does not meet international standards.

Another consequence of the instability in Libya is the return of Tunisian workers living in Libya. The report indicates that about 40,000 Tunisian workers left Libya in 2012. This number is likely to increase if the conflict persists. Moreover, the World Bank estimates that remittances to Tunisia generated by these workers represent 0.56% of Tunisia’s GDP. Although the remittances seem small, their loss could affect the private sector. The return of Tunisian workers will also impact the labor market, further increasing unemployment in Tunisia.

In sum, the ESCWA report reveals that the Libyan crisis will jeopardize economic development in Tunisia over the medium and long terms. Even a small impact could have significant consequences for the country. In addition, the security deterioration presents the Tunisian authorities with a challenge: dismantling the networks smuggling in weapons that are used to commit terrorist attacks and countering the jihadists who are trying to infiltrate Tunisia.

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