March 8, 2018 / 10:36 AM / 2 years ago

UPDATE 2-Tunisia central bank can't defend dinar, governor says

(Adds details, background)

By Tarek Amara and Ulf Laessing

TUNIS, March 8 (Reuters) - Tunisia’s central bank cannot defend the dinar with foreign reserves that now cover less than 80 days of imports, while some of the country’s economic indicators are “frightening”, the bank’s new governor said on Thursday.

Tunisia has dropped into a deep economic slump since its autocratic leader, Zine El-Abidine Ben Ali, was overthrown in 2011. Since then, nine governments have failed to cut the budget deficit and the country needs $3 billion in foreign loans this year alone.

Two deadly militant attacks in 2015 all but destroyed tourism, an important source of hard currency. Tourists are returning since Tunisia increased security at resorts and Western countries lifted restrictions, but the overall situation has still worsened.

Unemployment has reached more than 15 percent and is about 30 percent among the young. Protesters demanding jobs blocked vital phosphate exports for more than a month before ending their sit-in this week, although their agreement with the government remains fragile.

“We can not defend the dinar ... with foreign reserves less than 80 days of imports,” Governor Marouane El Abassi told reporters at his first news conference at the bank’s headquarters since he was appointed last month.

By Thursday, foreign reserves covered 77 days of imports, compared with 112 days in the same period last year. The dinar has dropped more than 40 percent against the euro and dollar since 2011.

Tunisia’s current account deficit also hit 10 percent for the first time, reflecting “frightening” economic indicators that show the depth of the country’s troubles, Abassi said.

On Monday, the central bank raised its benchmark interest rate to 5.75 percent from 5 percent, a decision that Abassi said had been taken because the bank was worried that it might otherwise lose control of inflation.

Annual inflation rose to 7.1 percent in February from 6.9 percent in January, its highest for nearly 28 years. The central bank expects average annual inflation to reach 7.2 percent this year, then fall to 5 to 6 percent in 2019, a central bank official said separately.

“Nothing is more dangerous than inflation,” Abassi told reporters at his first news conference since taking over last month. “The high level of inflation could hit investment ... our decision is painful but it is necessary.”

Tunisia has been praised as the only potential success story among the nations where “Arab Spring” revolts took place in 2011.

But successive governments have failed to trim deficits and create economic growth, and the country is under pressure from international lenders.

The country depends on donors such as the International Monetary Fund to help plug its budget deficit. In April, the IMF agreed to release a delayed $320 million tranche of a loan after agreeing on a four-year program in December 2016.

Hopefully, El Abassi said, the IMF will give Tunisia a positive review on March 23 for the next loan tranche.

Bechir Trabelsi, an official in the central bank, told Reuters foreign reserves should not fall further, since tourist arrivals had risen recently.

“The tourism sector started to recover and the commercial deficit start to ease with an expected foreign financing,” he said, adding that a roadshow for a $1 billion bonds would start in the last month of March. (Reporting By Tarek Amara and Ulf Laessing; writing by Aidan Lewis and Ulf Laessing, editing by Larry King)

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