October 21, 2014 / 10:26 AM / 5 years ago

Tunisia economy needs three years of 'painful' reform, PM says

TUNIS (Reuters) - Tunisia’s economy needs at least three more years of painful and politically difficult reforms, including tax changes and subsidy cuts, to revive growth after the damage it suffered during the 2011 revolution, Prime Minister Mehdi Jomaa told Reuters.

Tunisia's Prime Minister Mehdi Jomaa attends an interview with Reuters in Tunis October 10, 2014. REUTERS/Anis Mili

Parliamentary elections scheduled for Oct. 26 and a presidential poll next month are designed to complete a difficult and sometimes violent transition to democracy.

If the elections go smoothly, domestic and foreign investment could start to revive - a step towards boosting economic growth back to the 5 percent area which analysts believe is needed to cut unemployment, now around 15 percent.

But in an interview for the Reuters Middle East Investment Summit, Jomaa said a sustained recovery would not happen without a string of policy and regulatory reforms, some of which authorities have barely begun to tackle.

His comments underlined the obstacles still faced by many economies in the region three years after the Arab Spring. The uprisings hurt tax revenues and prompted governments to boost spending sharply to buy social peace, swelling budget deficits; private sector business confidence took a long-term hit.

Repairing the damage may take several more years, even if the Arab Spring countries manage to install stable, democratically elected governments.

“Because of continuing internal and external pressures, we expect only 3 percent gross domestic product growth in 2015,” said Jomaa.

“The economy does not grow through pressing a button - it will take some time. So we need at least three years of painful reforms to revive the economy.”

The government now expects GDP to grow between 2.3 and 2.5 percent this year, well below an initial forecast of 4.5 percent. Annual growth averaged about 4.4 percent in the 10 years though 2010.

Tunisia signed last year to obtain a two-year, $1.78 billion loan program from the International Monetary Fund on the understanding that it would pursue economic reforms.

Since then it has taken several steps. In July it cut fuel subsidies, raising petrol prices by 6.3 percent, in order to trim the budget deficit; this month it imposed new taxes, including a departure levy on foreign travelers. It has been allowing the dinar to depreciate in order to rebuild foreign reserves from dangerously low levels.

But Jomaa, an engineer and former industry minister who has headed a technocratic caretaker cabinet since January, said much more remained to be done.

“We need urgent reform that requires a lot of boldness and courage, including tax reform and the restructuring of public institutions, subsidy reforms, and steps to improve the investment climate.”

Jomaa added, “The next government should also continue energy reforms, and reform the banking sector via the restructuring of public banks to make them more competent and specialized.”

Tunisia’s economy is weighed down by a big trade deficit that is swelled by energy imports; boosting oil production and limiting consumption could spur GDP growth. Asset quality at many banks is weak and some are undercapitalized, making the financial sector a source of risk.

POLITICS

Jomaa, who was appointed as part of a deal to end a crisis between Tunisia’s Ennahda Islamist party and its secular opposition, has said he will not serve as prime minister in the next government, and many of his ministers are also likely to go.

So the extent of the next government’s commitment to reform is not certain. The elections will be fought mainly between Ennahda and a range of secular parties led by the Nida Tounes party, which has not excluded the possibility of forming a coalition with Islamists.

Jomaa said enough of a consensus had developed around economic reforms that they would probably continue regardless of the make-up of the next government.

“There is the same belief among the major political parties that economic reforms must continue, so one does not expect any surprises in this regard.”

Others see the possibility of social and political tensions disrupting at least part of the reforms, however.

“Increasing social tensions - including strikes and demonstrations - could further slow down production and delay much-needed reform implementation,” the IMF said in a report last month.

Jomaa predicted improvement in some key economic indicators next year, saying Tunisia could cut the state budget deficit to 5.0 percent of GDP in 2015 from an estimated 5.8 percent this year, and inflation to 5 percent from about 6 percent.

However, Tunisia is likely to remain heavily dependent on foreign financing, both aid and borrowing from the international markets, for years. To finance the 2015 budget, the government will need a total of 8 billion dinars ($4.5 billion) of which 5 billion dinars will come from foreign sources, Jomaa said.

“We have already started new discussions with the IMF on financing part of next year’s budget,” he said without giving any details.

Last week, Tunisia said it had issued a $825 million bond on the domestic Japanese market, guaranteed by the state-owned Japan Bank for International Cooperation. Meanwhile, bankers said the government had asked banks for proposals for its first issue of Islamic bonds, denominated in U.S. dollars, in order to attract investment from cash-rich Islamic funds in the Gulf.

“Tunisia will issue Islamic bonds worth $500 million within weeks, and we expect to finish the process this year,” Jomaa said.

The pre-revolution government steered clear of Islamic finance for ideological reasons. Jomaa said Tunisia could not now afford to let political issues deter it from raising money in this way.

“Tunisia must support Islamic finance without considering the intentions of the next government,” he said. “Islamic finance represents an additional solution to mobilize budget resources.”

Writing by Andrew Torchia

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