Tunisia expected to secure IMF deal in second half of 2022

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Fitch Ratings pointed out on Thursday that it still expects Tunisia to secure an IMF deal in the second half of 2022.

Nonetheless, risks to an IMF agreement remain, notably around the role and response of the Tunisian General Labour Union (UGTT).

Differences between the government and the UGTT may still pose obstacles to an IMF deal. The union has expressed its willingness to work with the government on reforms, but has opposed key elements of the proposals and expressed concerns about the new institutional order. Strong social opposition could delay an agreement with the IMF or diminish the government’s ability to keep the reform programme on track.

Fitch Ratings considered that "official creditors remain willing to support the country following the approval by referendum of a new constitution, partly because they perceive such support as reinforcing stability in the region and helping to contain migration flows across the Mediterranean."

Recent funding disbursements to Tunisia from the EU and World Bank have provided some relief from the additional current-account strains created by high oil and wheat prices linked to the Russia-Ukraine war. However, many partners' financial support is linked to an IMF agreement.

The new constitution was approved by voters in a referendum on 25 July without social unrest, albeit with a low turnout. It reaffirms distinct rights for citizens, political parties and unions, while increasing presidential powers over the legislative process and judiciary. This should strengthen the president’s capacity to pass his legislative agenda, at the cost of eroding checks and balances within the country’s political system. In effect, the weakening of parliament reinforces the position of unions as the main alternative centre of power to the presidency.

IMF representatives said on 19 July that good progress had been made on the parameters of a reform agenda during official negotiations with Tunisia that started in July. The IMF reiterated its preference for obtaining support from unions for the reforms plans. In Fitch’s view, an agreement with the IMF may now be reachable without a deal with the unions, given that the constitution provides a stronger basis for legislative action. However, it would probably require the prior implementation of some significant measures, which carries execution risks.

The rating agency "view the authorities as committed to entering an IMF programme, and our base case remains that an agreement with the IMF will be reached before the end of the year," expecting "a front-loaded reform programme, aimed at rebalancing spending rather than cuts, leading to the disbursal of substantial official creditor funding."

Without such funding, Fitch Ratings expect "Tunisia’s international reserves to gradually erode (from USD8.3 billion at end-June 2022) and the dinar to depreciate. This would increase the repayment burden associated with the sovereign’s foreign currency-denominated debt, which we estimate amounts to around 49% of GDP."

Without credible reform, Tunisia may ultimately be deemed to require a Paris Club debt treatment before becoming eligible for additional IMF funding, with implications for private-sector creditors.

Fitch placed Tunisia’s ‘CCC’ sovereign rating Under Criteria Observation (UCO) on 14 July, after introducing +/- modifiers in the 'CCC' category. Sovereigns rated 'CCC' could see a one-notch rating change, potentially migrating to 'CCC-' or 'CCC+', or remaining at ‘CCC’. We will resolve the UCO status within six months.