Tunisia is experiencing an unprecedented economic crisis

The lack of agreement between the government of Hichem Mechichi and the Tunisian Central Bank on the means to finance the additional budget deficit has plunged Tunisia into an unprecedented economic crisis. 

The governor of the Central Bank of Tunisia, Marwan al-Abbasi, is forecasting a drop in gross domestic product (GDP) of 7 to 8% this year, after having recorded a contraction of 2% in the first quarter of 2020 and 20% in the second quarter. 

This is what happened during a parliamentary session on Thursday on the economic situation and policies and the role of the Central Bank during the coronavirus crisis. 

Al-Abbasi attributed the slowdown in the local economy to the coronavirus crisis, adding: "The economic situation was difficult before the pandemic and was aggravated by the impact of COVID-19".

For his part, Mechichi calls for the Central Bank to play a role in financing the budget through loans to the state, arguing that many countries have adopted this approach in exceptional circumstances. On Tuesday, the Tunisian Prime Minister acknowledged that the country was going through a "very difficult and unprecedented" economic situation, with the cost of the pandemic reaching $2.9 billion, requiring unconventional solutions. Mechichi said that Tunisia is experiencing an unprecedented economic crisis, but "is not threatened with bankruptcy or even close to it". 

"Tunisia has not experienced in its history an economic and social crisis like the one it is going through today, due to the accumulation of many years without finding solutions or developing strategies to get out of this situation," Mechichi said. 

Justifying the option of borrowing from the Central Bank, Mechichi said: "This is not a passing fad. The same thing has happened in countries similar to Tunisia and in liberal countries".

The Prime Minister stressed that "the possibility of postponing the relief of the Tunisian State's debt lies in maintaining the wide margin of confidence in which our government is working". Mechichi said that the executive plans to reduce the deficit to 12% of GDP, compared to the 14% initially announced. 

Previously, the Tunisian government had announced the expected work of the Central Bank on domestic financing by injecting 3 billion dinars (about US$1 billion) to save the budget's financial deficit, and this option sparked a wide debate in parliament, which was divided among supporters of the proposal given the stressful situation and the fact that it does not have the luxury of a bond option. The state must comply and expressed the need to go through a system of reform and development and not to facilitate solutions. 

Small and medium-sized enterprises have been the most affected by the pandemic and are facing a difficult situation, according to the Governor of the Central Bank, who confirmed: "The coronavirus has also had a negative impact on the tourism sector and has exacerbated the unemployment rate".

According to estimates by the Tunisian Central Bank, the tourism sector has contracted by 60% this year, while the unemployment rate has exceeded 18%, against 15.5% in 2019. 

The Central Bank of Tunisia forecasts a slowdown in inflation to an average of 5.4% in 2020, against 6.7% in 2019. 

Al-Abbasi said: "By the end of the year we will have an inflation rate of 5.7%, which is a positive figure". 

Data from Tunisia's National Institute of Statistics showed Thursday that the inflation rate remained stable at 5.4% for the third consecutive month.

The experts draw attention to the Lebanese model, which is based on bank financing of the budget and loans to the state, which eventually led to the collapse of the financial situation of Lebanon, which announced last March that it could not pay its debts for the first time in its history.

Lebanon has long suffered from a financial crisis, with a debt/GDP ratio for 2019 of around 155%, making it the third most indebted country in the world after Japan and Greece. 

The Tunisian Central Bank rejects the government's plans to force it to buy Treasury bonds, which it considers a real threat to the economy, including increased pressure on liquidity, high inflation and the weakness of the local currency.