Public Debt, Growth, and Stabilization in Tunisia

Published on: 20/11/23

By: Ishac Diwan, 

A New Narrative for a Structural Reform Agenda

This paper is an output of the project on “Stabilization and Adjustment in MENA”. The project has been managed under the auspices of the Finance for Development Lab (FDL) and the Economic Research Forum. FDL acknowledges the financial support of the International Development Research Centre (IDRC) for this project.

Tunisia has been facing major disequilibria in its public finances. To stabilize its debt andfoster a growth approach, Tunisian policymakers should:

  • Refrain from adopting an approach that relies entirely on austerity, as this is likely to generate social resistance that undermines adjustment and further harms the growth process.
  • Break away from the fundamentalist approach of austerity that penalizes potential growth and collective well-being.
  • Develop a national program for adjustment and recovery that places greater importance on restarting the growth process.
  • Elicit citizen support for reforms and build a coalition for change to guarantee the implementation of reforms without running the risk of a rise in social and political instability.
  • Include climate change challenges in this national program by greening monetary and fiscal policy and strengthening research and development efforts to boost the circular economy.

This paper assesses debt sustainability in Tunisia using the Debt Sustainability Analysis (DSA). We construct three hypothetical scenarios (A, B and C) over the period 2023-2027. The first two scenarios are called Business as usual approaches. In Scenario A, we assume that Tunisia will continue the same path as in the past three years, without an IMF agreement. In scenario B, Tunisia reaches an agreement with the IMF. However, the lack of considerable progress on the reform agenda causes the ending of the IMF agreement. The last one (Scenario C) is a proactive reform scenario. We conclude that “business as usual” approach (scenario A and B) cannot guarantee neither economic resilience nor debt sustainability. There is an urgent need for a broader approach to debt sustainability with reforms, similar to Scenario C, that would lead to resilience toward both economic and non-economic shocks.