Hafed Al-Ghwell: Saied’s bid to save the Tunisian economy

Tunisia is teetering on the brink as a range of challenges continue to undermine its hobbled economy. Despite glimmers of recovery, the country is still burdened by high unemployment, skyrocketing inflation and substantial external debt, the stubborn effects of pandemic-induced disruptions.

According to the International Monetary Fund, Tunisia’s economy is expected to grow at a sluggish rate, not exceeding 1 percent this year, while public debt reaches an alarming 90 percent of gross domestic product.
In the midst of such a difficult climate, embattled President Kais Saied has proposed a bold, and controversial, measure: Levying a tax on the country’s wealthy elite. This initiative is part of his broader strategy to revitalize Tunisia’s beleaguered finances and stimulate economic growth.

The proposal, however, has been greeted with both curiosity and criticism. On the one hand, it is seen as a populist move, reflecting Saied’s characteristic brand of populism. On the other hand, it is viewed as a step toward social justice, a bid to bridge the widening wealth gap and ensure a more equitable distribution of resources.
In the president’s view, the new tax will target those with significant wealth, with the money it raises used to fund public services and reduce the country’s mounting debt.

While it has certainly inflamed discourse on both sides of the Mediterranean, it remains to be seen whether this tax will prove to be a practical solution to Tunisia’s economic struggles or merely the latest gambit in Saied-style populism, disguised as social justice but which has little economic substance, if any.
The IMF and Tunisian authorities last October agreed a $1.9 billion bailout loan to help stabilize the country’s economy — a deal that would be a multiplier for additional external financial assistance to the tune of about 4 percent of the North African country’s GDP.

However, Saied, who came to power in July 2021, rejected the terms of the agreement on the grounds that the IMF’s conditions for the deal, which included eliminating subsidies on consumer goods, would adversely affect Tunisia’s growing numbers of impoverished citizens.

READ: Tunisia prepares alternative IMF proposal

For now, Saied’s unexpected rejection will likely not affect Tunisia’s repayment of Eurobonds that are maturing this year: About $166 million in August and €500 million ($547 million) in October. Unfortunately, without a deal in place, or even temporary relief, the record current account deficit, coupled with external debt obligations due to mature in 12 months, will be double the amount of Tunisia’s foreign reserves, which stand at about $7 billion.
The worst-case scenario is that Tunisia will default on its loans if no deal can be reached to help Tunis keep the battered economy afloat with affordable and generous external financing. A default would be followed by a surge in inflation and sharp depreciation of the Tunisian dinar, spawning more troubles that would likely worsen when capital controls kicked in to prevent depositors fleeing.

An economy drained of much-needed liquidity would drive an irreversible downward spiral, leading to even more boats filled with migrants attempting to cross the Mediterranean in the hope of reaching European shores. This is precisely why the EU has taken a rare, active interest in preventing Tunisia’s collapse, offering a generous €900 million loan, contingent on a finalized deal with the IMF, while also pressuring Saied to present a proposed alternative to the IMF’s terms.
Although Saied’s administration has yet to publish a final document outlining what it considers to be more palatable terms, Tunis has stated unequivocally that it will not institute contentious subsidy cuts.

It makes sense to avoid pulling the rug out from under struggling Tunisians, particularly those who are dependent on the nearly $3 billion Tunisia spends on subsidizing food, fuel, electricity and transportation, especially given that welfare payments to the poorest have declined by 8 percent.

It is also a political calculation, because austerity would probably be the final straw for an overwhelmed Tunisian public that has stumbled from one crisis to the next for the past decade.
Saied’s economic strategy, particularly his decision to reject the IMF’s loan conditions, has generated both praise and criticism. As Tunisia lumbers through its economic challenges, the international community is closely watching how the president’s boldest move yet will play out. The initial agreement, painstakingly negotiated over several months, entailed a restructuring of state-owned enterprises, the collective debts of which are estimated to be about 40 percent of the country’s GDP.

READ: Tunisian foreign reserves hit new low

With the proposed cuts to subsidies now off the table, the alternatives that Tunisia might suggest to the IMF to reduce deficits and long-term debt remain speculative. As noted, Saied has proposed taxing the wealthier strata of Tunisian society, but it is uncertain whether that would generate enough revenue to significantly alleviate the funding shortfall and assuage donor apprehension.
This has not prevented pundits from comparing the move to a “Robin Hood” tax — a progressive system of taxation that aims to redistribute wealth from the rich to the poor. In Tunisia’s case, the aim is clearly to lighten the rather disproportionate economic burden that continues to be borne by the poorest, while raising funds to stabilize state finances and service the country’s substantial debt.

However, this proposal has been greeted with apprehension by economists, who fear it could discourage potential investors and trigger a capital exodus from an already cash-strapped economy. As Tunisia wrestles with formidable fiscal pressures, an attractive investment environment is an absolute necessity. There are concerns, therefore, that increasing the tax burden on the wealthy could prompt them to relocate assets and businesses, thereby further destabilizing the economy.

While a Robin Hood tax could potentially generate additional revenue, it is unlikely to provide a long-term solution to Tunisia’s fiscal difficulties without wider structural reforms. Nevertheless, the proposal does represent a brave attempt to tackle the economic challenges the country is facing. Its success will largely hinge on the government’s ability to strike a balance between the pursuit of social justice and the necessities of economic stability and growth.
If not managed prudently, the tax could be counterproductive. Therefore, Tunisia must navigate this path with care, ensuring that the tax does not hinder investment while also protecting the welfare of its most vulnerable citizens.
It is, of course, not the most novel proposal, given that similar taxes have been implemented around the world, albeit with varying degrees of success. A key parameter will be whether the tax system is structured in a way that encourages wealth redistribution without stifling economic growth.

Unfortunately, Tunisia already has one of the highest tax burdens on the African continent. This resulted in tax revenue increases between 2010 and 2022, but it has not helped to widen the tax base, which is absolutely critical to generating the resources required for the state to maintain its role as provider of social welfare.
Saied’s Robin Hood tax is a curious mix of his brand of populism and undeniable practicality. On the one hand, it appeals to the masses by promising wealth redistribution, given that the tax burden on wage-earners increased by more than 8 percent over a 10-year period, while employers faced only a 0.35 percent increase. On the other hand, if implemented correctly, it could provide an unorthodox yet practical solution to the country’s economic troubles by bolstering state subsidies and possibly reducing the budget deficit.
Economists will disagree, preferring Tunisia to cut rather than add to its already strained budget by, for example, promising to compensate up to 8 million Tunisians who would be harmed by the removal of subsidies.

The challenge, as noted, therefore lies in striking the right balance to ensure the tax will not discourage investment or worsen Tunisia’s economic woes.
At present, however, Tunisia needs a lot more than a Robin Hood tax, or any other similar Band-Aid solution that fails to fix the major structural deficiencies that are responsible for pushing the nation’s economy to the brink.

Hafed Al-Ghwell is a senior fellow and executive director of the Ibn Khaldun Strategic Initiative at the Foreign Policy Institute of the Johns Hopkins University School of Advanced International Studies in Washington, DC, and the former adviser to the dean of the board of executive directors of the World Bank Group. This article originally appeared in ArabNews
Twitter: @HafedAlGhwell