Will latest interest rate hike break Tunisia’s back?

Following Tunisia's third interest rate hike in 12 months, economic and political experts sound the alarm on shrinking purchasing power while the nation's largest trade union calls for protests.

al-monitor Tunisia's Central Bank Governor Marouane El Abassi arrives at a news conference, Tunis, Feb. 20, 2019. Photo by REUTERS/Zoubeir Souissi.

Mar 8, 2019

Tunis — At a recent parliamentary hearing, Central Bank of Tunisia (BCT) Governor Marouane El Abassi described a decision to raise the key interest rate by 100 basis points, from 6.75% to 7.75%, as “difficult but necessary.” The increase was announced in a BCT press release after Executive Board meetings held Feb. 16 and 19.

Abassi claimed at the hearing on Feb. 25 that the BCT had raised rates to curb inflationary pressures and stabilize liquidity to support the banking system. The BCT Executive Board had said as much in its statement. It is the third interest rate hike in 12 months. On March 5, 2018, the BCT had raised the interest rate by 75 basis points, from 5% to 5.75%. On June 20, 2018, the bank raised it again, by 100 points, to 6.75%.

The BCT Executive Board also asserted in its press release, “As for inflation, the Board noted that monetary policy measures undertaken [since] 2016 have contributed to a relative deceleration in the pace of inflation in January 2019, [down] to 7.1% compared to 7.3% on average for the year 2018.” It also pointed to an “ongoing current account deficit of the external payments’ balance which continues to post record levels, reaching 11.2% of GDP in 2018 compared to 10.2% in 2017.” It asserted, “The positive evolution of tourist receipts and transfers of Tunisians abroad could not compensate for the worsening of the trade deficit.”

Commenting on the interest rate increase, Moez Joudi, a financial expert and president of the Tunisian Association for Local Governance, explained to Al-Monitor that the BCT's decision stems from price hikes caused by an increase in the ratio of household debt, that is, an increase in the value of consumption against the decline in production volume.

“I think that this measure will not solve the problem of inflation and curb price increases,” Joudi said. “It will rather produce serious damage, especially by increasing the cost of lending and for financing institutions. This will further weaken purchasing power and disrupt investment, growth and employment.”

In a statement to Al-Monitor, Bouali Moubaraki, deputy secretary of the Tunisian General Labor Union (UGTT), linked the BCT’s decision to the International Monetary Fund (IMF). Last September, the IMF Executive Board had recommended that Tunisia, within the scope of an IMF Extended Fund Facility Arrangement involving $2.9 billion, curb inflation through monetary policies to reduce debt and implement strict wage bill management.

Moubaraki charges, however, that the interest rate hike undermines a recent increase in public sector wages and will increase the cost of home loans. “This would further exacerbate [the] purchasing power crisis,” he said.

The UGTT had staged a strike on Jan. 17 in which more than 670,000 workers took part and had threatened a general strike of government employees for Feb. 20-21, which was called off when on Feb. 7 the union reached a pay increase agreement with the government to boost workers' purchasing power.

The agreed upon wage increase ranged from 170 to 180 dinars ($57 to $60) for managers and between 135 and 155 dinars ($45 and $52) for other employees. The first installment is to be disbursed in March.

In a Feb. 21 statement to Radio Jeunes Tunisie, UGTT Secretary-General Noureddine Taboubi strongly criticized the BCT’s decision to raise the key interest rate, describing it as the government taking back the raise it had just given to public servants.

Bashir Boujdi, a member of the Executive Office of the Tunisian Confederation of Industry, Trade and Handicrafts (UTICA), also deplored the BCT’s decision, citing its negative repercussions on the competitiveness of economic institutions and the ability to finance investment. “The country currently needs measures that stimulate tourism, boost investments and promote the creation of projects and employment opportunities,” he asserted to Al-Monitor.

Ammar Amroussia, a parliamentarian for the Popular Front, told Al-Monitor, “The growing protests are a clear sign that the economic and resulting social situations have become unbearable. The Tunisian government should find solutions other than yielding to the IMF’s demands.” The UGTT had organized a strike held Nov. 22 calling for the wage increase as well as the strike in January.

Manji al-Harbawi, a parliamentary representative of the ruling Nidaa Tounes, told Al-Monitor that the interest rate hike threatens to bankrupt Tunisia, which has not yet emerged from the economic crisis following the 2011 revolution. “All political parties, social society organizations and the UGTT must cooperate to overcome this economic crisis,” he said.

Meanwhile, Youssef Oueslati, a political analyst and editor of the newspaper al-Shaab, published by the UGTT, expects more protests given that legislative and presidential elections are slated for the end of the year. “It is unlikely that the current government will succeed in overcoming the difficult challenges of development and employment and counter the trade deficit,” he told Al-Monitor.

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