Karim, 35-year-old grocery store owner
© Sophia Baraket
Karim, 35-year-old grocery store owner
Last updated: April 29, 2013

Fuel, milk and alcohol targets of Tunisia's reforms

Banner Icon The government in Tunis is cutting subsidies and raising taxes to improve its fiscal situation.

The topic of Tunisia’s fiscal stance was brought up during one of the International Monetary Fund’s regular briefings earlier last month. William Murray, the Deputy Spokesman for the IMF’s External Relations Department, highlighted the fund’s steadfast commitment to assisting the newly elected Tunisian authority in consolidating its finances and moving forward with improving its governance.

There was also mention of a Stand-By Arrangement, or SBA, although discussions were still in their technical stages, therefore lacking a final product for the time being. The word Murray used to describe the arrangement, which was more salient than he may have realized at the time, was “precautionary.”

The press conference almost coincided with the celebration of Tunisia’s independence day. To further add to the events that week, Tunisia’s newly elected government won a vote of confidence from the National Assembly, securing 64% of the votes. Although its mandate was declared to be limited up until elections later this year, it still holds the decision-making power regarding whether or not to pull the trigger on a loan deal. There are, however, increasing complications that seem to threaten the terms of any feasible agreement.

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The loan has recently transformed from an SBA agreement to a solid loan contract that is expecting a signature during May of this year and is currently set at $1.78bn. This shift in strategy arose due to the ongoing fiscal crisis in the European Union coupled with investor anxiety regarding the country’s recent political tumult. Additionally, Tunisia will require the liquidity in the near future while battling its budget deficit, which was last projected to be 6% of GDP.

The loan amount is currently set at $1.78 billion, and from its incipiency has been defined as an SBA, which in layman’s terms is essentially a backup agreement. In other words, the loan will come into fruition if Tunisia requires the liquidity sometime in the near future while battling its budget deficit, which was last projected to be 6% of GDP. It will require, however, the implementation of several budgetary reforms, some of which should begin before the loan is even finalized.

These reforms, unfortunately, have been aimed at some particularly sensitive social programs, such as fuel subsidies. Prices at the pump have gone up by 6.8% in the past six months alone, further prompting protests against these policies, such as the recent strike by the National Chamber of Taxi Drivers. Even milk supplies, which have state-controlled pricing, were not spared from the proposed reforms and witnessed significant price increases in recent weeks. This, however, was taken note of in last month’s interim government cabinet meeting, and a buffer stock for the product was proposed in order to alleviate supply pressures.

Furthermore, policymakers coupled these cuts in subsidies with an increase in tax rates, specifically on salaries. The government imposed a levy of 1% on monthly paychecks above 1,700 dinars, which is the equivalent of $1,075. Those percentages will be channeled towards funding the remaining fuel subsidies, as well as disparate food programs still used by a significant portion of the population. The government even took a somewhat creative approach in the last few days of 2012 by raising the duty on alcoholic beverages, which was estimated at raising 170 million dinars, or $107.8 million. This, however, came at a hefty social expense from the more conservative population, which make up a significant electorate for the Islamist-led ruling coalition.

Rather than banning the substance, the argument was that simply imposing a tariff, regardless of its weight, implies that if you can afford it then it is legal. The rebuttal from policymakers is that a comprehensive ban on alcohol would stymie the tourism sector, and is therefore not in their best interests in terms of fiscal growth. Alcoholic products witnessed a further increase in taxes this month, signaling that policymakers are looking to lean on the industry for additional revenues.

The widespread criticism of these measures is surely to be accompanied with mass protests in the coming weeks, such as the one planned by the Tunisian Organization for Consumer Protection. One of the largest protests in recent history was held in the nation’s capital earlier this month to honor the 40-day anniversary of Chokri Belaid, a secular politician who was gunned down in broad daylight in early February. The injustice of the assassination only adds to the growing list of grievances encountered by the Tunisian people during this transitionary period, and is proving to be quite testing for the current ruling authority.

While it initially boasted that it was indeed the birthplace of the Arab Spring, recent shocks to the transitionary process have brought about difficulties for Tunisians across the social classes. The inclusion of independents to counter the heavy Islamist presence in the new government may have had decent intentions, but the overall sentiment has yet to migrate away from skepticism. The threat of political instability has begun to drag the economy down, and without proper fiscal support from the government, or otherwise, many believe that Tunisia will begin to backtrack on the road to democracy.

This article is part of Bassam's series on the public finances of Middle Eastern countries. Don't miss his previous articles:

Yemen's public finances – in need of a helping hand

"Jordan's fiscal distress"

Bassam Aoun
Bassam Aoun is a Business Editor at Your Middle East. He is currently based in Abu Dhabi and holds a BA in Economics from the American University of Beirut and an MPP (Master of Public Policy) from the University of Chicago. He has written for the Chicago Policy Review and is interested in economic and fiscal policy in the Middle East.
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