WASHINGTON Tunisia's economy is showing signs of revival after popular protests last year pushed it into recession but the crisis in the euro zone, its most important export market, presents risks, a senior IMF official said on Friday.
The International Monetary Fund has just completed its first review of Tunisia's economy since the "Arab Spring" popular revolution in January 2011 toppled veteran leader Zine al-Abidine Ben Ali after almost 23 years in power.
In an interview, the IMF's mission chief to Tunisia, Joel Toujas-Bernate, said the European debt crisis "is a big cloud" for Tunisia.
"We are seeing signs of improvements now - tourism is rebounding, foreign investment is also coming back but the big uncertainty is the situation in Europe, which is the main trading partner and source of investment," he said.
With constitutional changes in the works and prospects of a general election early next year, Tunisia's political transition was "proceeding well," Toujas-Bernate said.
A moderate Islamist party won elections held soon after the revolution and now leads a coalition government. The party's leaders have sought to reassure investors and tourists but successive protests and strikes organized by left-wing secular opponents have undermined efforts to restart the economy, which shrank 1.8 percent in 2011.
The IMF is forecasting the economy will grow somewhere between 2 to 3 percent this year, Toujas-Bernate said, emphasizing that the outlook depended on the extent of the slowdown in the euro zone, which is Tunisia's main source of investment and trade. Preliminary estimates Tunisia released this week show the economy grew 5 percent in the first quarter from a year ago.
"It isn't completely clear yet but we expect a rebound and macroeconomic policy will have to play an important role to support this recovery, especially budgetary policy," he said. "There is a clear potential for higher growth over the medium term based on the fundamental strengths of the Tunisian economy."
Toujas-Bernate said the IMF supported efforts by the government to lift spending this year to help offset slower demand in the euro zone.
"Tunisia started with a fairly comfortable public debt position so they have some room" to increase spending, he said, adding that the fiscal stimulus would widen the 2012 deficit to 7 percent of gross domestic product.
"After this year, as the recovery takes hold, we see the need for gradual (budget) consolidation over the medium term," he said. "We will see an increase and spike (in public debt) for a few years but the authorities will be able to put public debt back on the downward trend once the economy rebounds."
Toujas-Bernate said Tunisia had not requested IMF financing but the global lender stands ready to help if needed.
"For this year they have identified all of the external financing they need so they haven't called on us for financing but we are ready to respond to any request by the authorities, especially if there is some deterioration in Europe," he added.
He said inflationary pressures since the beginning of the year, driven by a rise in the price of food and clothing, had forced the central bank to act to tighten monetary policy.
Increased demand from neighboring Libya for food and clothing has pushed up prices in Tunisia and in some cases caused supply shortages, he said.
Inflation rose to 5.7 percent in April and "is something to watch," said Toujas-Bernate.
He said the authorities were aware that the financial sector needed to be strengthened and modernized to improve banks' ability to assess credit risk, which would go a long way in enhancing access to credit for small and medium-sized enterprises.
He said Tunisia's banking sector was not directly affected by the crisis in Europe. "We don't see much risk of financial contagion, it's more a risk for exports," to the European Union, he added.
(Editing by James Dalgleish)