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The authors are Ahan Gadkari and Sofia Dash, fifth and second year B.A. L.L.B. candidates, respectively, at Jindal Global Law School.
Introduction
This article aims to provide clarity to the discourse surrounding the recent decision of Tunisian President Kais Saied to resist the prescribed conditions of the International Monetary Fund (“IMF”) in exchange for a loan of $1.9 billion.
One perspective posits that an IMF loan can potentially mitigate Tunisia’s severe financial challenges and bolster trust in the nation, stimulating fresh private investment and reducing the influx of migrants to Europe. Conversely, a fraction of individuals maintain that the alterations mandated by the Fund would exacerbate the nation’s socio-economic instability, resulting in heightened impoverishment and social disparities.
To gain a more comprehensive understanding of the dichotomous stances at hand, it is imperative to provide contextualisation of the matter, commencing with the presentation of pertinent data.
Tunisia’s Economic Challenges
Being categorised as a middle-income nation, Tunisia is ineligible to receive loans with favourable conditions from the International Development Association (“IDA”) or the IMF, which are reserved for low-income countries.
The data pertaining to the year 2020 from the World Bank depicts a nation grappling with a high unemployment rate of 16%, particularly among individuals aged between 15 and 24 years, where the rate stands at 38%. Additionally, the country is experiencing an inflation rate of 8.3% and a significant proportion of its population, approximately 12.6%, is facing severe food insecurity.
The Covid-19 pandemic and the ongoing conflict in Ukraine have aggravated the situation. As a result, in 2022, the International Bank for Reconstruction and Development (“IBRD”) funded a project that enabled the continuity of wheat production and uninterrupted access to bread for impoverished and vulnerable families.
The contemporary era is marked by a complex and multifaceted crisis, commonly referred to as ‘poly-crisis’, which has had a significant impact on the escalation of the nation’s indebtedness. In February 2021, following the bilateral consultations conducted under the provisions of Article IV of the Statute, the IMF assessed the country’s debt as unsustainable. However, the current state of affairs appears to be even more alarming.
Notably, a significant proportion of Tunisia’s sovereign debt, specifically 72.3%, is attributed to official creditors. To be more precise, over half (54.1%) of the debt is attributed to international organisations, with the World Bank accounting for 14.1%, the African Development Bank for 11.1%, the IMF for 8.7%, and the European Investment Bank for 8.6%. The remaining 18.2% is owed to bilateral creditors, namely France, Japan, Saudi Arabia, and Kuwait. According to the International Monetary Fund’s Staff Report of the ‘Tunisia: 2021 Article IV Consultation’, as of February 2021, private individuals, specifically commercial banks or bondholders, hold a mere 27.7% of the country’s debt.
The significant exposure to multilateral creditors renders the restructuring of sovereign debt implausible, given that the IMF, World Bank, and other multilateral development banks enjoy the protection of privileged creditor status. The discharge of debts to said creditors is feasible under extraordinary circumstances, observed only once during the 1990s with the implementation of the Heavily Indebted Poor Countries Initiative (“HIPC”).
Currently, a considerable distance exists from implementing a novel programme akin to HIPC that encompasses middle-income economies. This is despite numerous individuals' assertions that a fresh systemic debt crisis is imminent and that the absence of influential creditors from debt restructuring obstructs the most susceptible nations’ ability to pursue a sustainable development trajectory. This viewpoint is exemplified in the Draft Commentary Guiding Principles on Foreign Debt and Human Rights.
Upon analysing the framework, an initial deduction can be made: the potential loan extended by the IMF may result in a heightened level of indebtedness for the nation, with a greater emphasis on a select creditor and an increase in the expenses associated with debt maintenance. Hence, it is imperative to inquire whether the intricate political decision to seek economic aid from the IMF and comply with its terms can be rationalised in any other way.
Recent Proposal by the IMF
The information available regarding the reforms that are set to be funded by the loan can be found in the press release pertaining to the agreement in principle that was reached between the Government of Tunisia and IMF officials in October 2022, also known as the staff level agreement. The proposed loan aimed to support Tunisia's economic reform program, which aimed to restore the country's external and fiscal stability, improve social protection, and foster greener, and more inclusive growth with a focus on private sector-led job creation. The reform program included several key measures. First, efforts were made to bring the informal sector into the tax net and broaden the tax base to ensure fair contributions from all professions, thereby improving tax equity. Second, expenditures were contained to create fiscal space for social support, including measures to reduce the civil service wage bill and gradually phase out wasteful price subsidies while providing targeted protection to vulnerable segments. Third, the social safety net was strengthened through increased cash transfers and expanded coverage to help vulnerable households cope with higher prices. Fourth, state-owned enterprises underwent comprehensive reform, starting with the enactment of a new law. Fifth, structural reforms were implemented to enhance competition, simplify investment incentives, and create a transparent and level-playing field for investors. Sixth, governance and transparency in the public sector were strengthened through a comprehensive diagnostic process that established a roadmap for reforms. Finally, the program promoted investments in renewable energy, land and water management, and measures to preserve Tunisia's coastlines, agriculture, health, and tourism, adapting and building resilience to climate change.
The agreement between the Tunisian authorities and the IMF, while well-intentioned, necessitates a significant internal adjustment to implement the proposed reform agenda. The primary objective of this adjustment is to achieve a positive balance, given that it currently stands at -8.2% as of 2020. To attain this objective, Tunisia must curtail its expenditure on public administration employee salaries, formalise the informal sector and subject it to taxation, gradually eliminate fuel and food subsidies, and substitute them with alternative forms of social welfare.
Analysis
The recent emphasis of the IMF on social safety nets can be considered a positive development, indicating a gradual shift away from a purely neoliberal approach, as evidenced by various sources. Nonetheless, as Shakespeare noted, “All that glitters is not gold”.
Earlier Tunisian government efforts to abolish subsidies have raised tensions and led to large demonstrations over the unexpected price increases on vital products. The Tunisian government had reduced or cut basic goods subsidies in 1978 and 1983, following World Bank and IMF recommendations. Thousands protested as bread and semolina prices doubled and the government had to deploy the army to quell the protests. The demonstrations devastated Tunisia's economy: a state of emergency had to be declared, closing businesses for months and delaying public transit.
According to a recent study, reducing subsidies for fuels and food items would result in the inaccessibility of necessities for numerous Tunisian households. Additionally, this reduction would cause a decline in productive activities and potentially incite significant social unrest. Further, implementing more specialised social welfare systems may marginalise middle-income groups, leaving them susceptible to financial insecurity and a heightened risk of falling below the poverty line.
Eliminating subsidies on essential commodities would hurt Tunisia's inlands, which depend on farming. Essential commodities prices will rise, making it difficult for farmers to sell their products at a profit, lowering agricultural output, worsening poverty and food insecurity, and slowing economic development.
Furthermore, as elucidated earlier, the proposed reforms do not encompass any measures pertaining to debt restructuring. Conversely, the internal adjustment endeavours to guarantee timely payment of the anticipated high debt service from 2021 to 2025. The efficacy of the two previous IMF loan-associated initiatives (2013 and 2016) in ameliorating the situation in the nation has been minor. It may be appropriate to modify the formula, with or without the involvement of the IMF.
Way Forward
The primary goal of the IMF is to aid countries in times of financial crisis by providing them with loans and other forms of financial support. As a result, imposing conditionality clauses such the withdrawal of subsidies on basic goods to restore economic development may appear fair and economically responsible. However, there are other financial institutions that may aid in Tunisia's economic growth with lower demands.
The European Investment Bank has been present in Tunisia since 1979, during which time it has supported several infrastructural projects, as well as climatic and environmental aims. The African Development Bank finances programmes in member nations to aid in economic growth, poverty alleviation, and long-term development across the continent. As is the case with many poor nations, Tunisia's infrastructure is in dire need of rehabilitation, and the African Development Bank has been assisting with these efforts.
Conclusion
While the IMF’s proposed loan aims to restore Tunisia’s external and fiscal stability, improve social protection, and promote inclusive growth, it comes with conditions requiring significant internal adjustments. These adjustments include curbing public administration expenditures, formalising the informal sector for taxation, reducing subsidies, and implementing alternative social welfare measures. However, these reforms raise concerns about the accessibility of necessities, potential decline in productive activities, and marginalisation of middle-income groups.
The IMF’s recent focus on social safety nets indicates a shift away from purely neoliberal approaches, but the effectiveness of the proposed reforms remains uncertain. The absence of measures related to debt restructuring is a notable omission, and previous IMF loan-associated initiatives have not yielded the desired outcomes.
In conclusion, the decision to seek economic aid from the IMF and comply with its terms in Tunisia is a complex and multifaceted issue. While the loan has the potential to address immediate financial challenges, it also raises questions about the country’s long-term economic stability, social welfare, and the effectiveness of IMF interventions. It is crucial for Tunisia to carefully evaluate the potential risks and benefits carefully, considering alternative approaches that prioritise sustainable development and the well-being of its citizens.