The Blind Leading the Blind

A Tunisian vendor sells dried fruit before an election poster in Tunis

A year after the revolution in Tunisia took place, one thing has become clear, though many of the grievances that led Tunisians to protest had economic origins, the living standards of most Tunisians have not improved—rather the economic situation has become more precarious. Ennahda, the political party that won the majority of the votes in the constituent assembly, has been in power for a few months and Tunisians are becoming impatient with what they see as a lack of economic progress since the election.

Indeed, the state of the economy remains weak even though the tourism sector is slowly recovering  and is expected to increase by 30 percent compared to last year, representing 6 million visitors. Nevertheless, according to the Central Bank, the country is running a trade deficit which is contributing to the decline of Tunisia’s foreign currency reserves which are down to 9.947 million dinars. The Central Bank also announced that bank savings rates have dropped and the number of non-performing loans has increased. This has created a liquidity crisis which has limited the capital banks capability to contribute to financing the economy.

[inset_left]Ennahda is in essence repeating mistakes of the past.[/inset_left]

Under today’s conditions, Tunisians do not have enough money to save nor do they have enough to meet their monthly expenses. Inflation has risen drastically and is currently at 5.4 percent. In addition, as the interest rate (3.78 percent) is lower than inflation, this has discouraged Tunisians from depositing money into banks—as their deposits would decrease by 1.6 percent if they did.

Inflation has also reduced the purchasing power of most Tunisians. At markets throughout the country, gasps are usually the reaction to the price of tomatoes. The impact of inflation has greatly affected the standard of living of many Tunisians who lived comfortably prior to the revolution.

The Central Bank meanwhile is caught in a catch-22 with regards to what it can do about inflation. Inflation is normally addressed by raising interest rates, yet in the case of Tunisia, raising interest rates would suffocate growth as it would discourage further borrowing and increase non-performing loans and defaults.

True, the government has other options.  Inflation has been attributed, in part, to a lack of supplies resulting from the smuggling of food, agricultural products and oil to neighboring countries, in particular to Libya. Exerting greater control over the black market trade of these products may be able to curb inflation further, though it is unclear whether the current government will be able to effectively decrease smuggling given that border control between Libya has been largely disrupted since the chaos in Libya began.

Under these strained conditions, Tunisia continues to face the structural problems of the economy that led to the revolution in the first place. High rates of unemployment, particularly amongst the educated youth, as well as regional disparities continue to plague the Tunisian economy.

Ennahda, though in power for only a few short months, is expected to be able to improve both the macroeconomic situation in the country and especially the living standards of Tunisia’s citizens. With that in mind, the government has passed a number of measures that they believe will be crucial in addressing the socio-economic challenges of the country.

In essence, the thrust of the Ennahda-led government’s policies is based on an economic reform program that will allow for a growth rate that can create enough job opportunities to reduce unemployment. According to a recent article by Al-Monitor, the government has considered 2012 the recovery phase of its economic program. In order to improve recovery the government has increased (and will continue to increase) expenditures so that regional disparities decrease. Unemployment, meanwhile, will be addressed largely through the creation of jobs in the public sector.

Ennahda’s intention to increase spending as a means of stimulating the economy is problematic. The current spending rate has increased by close to 20 percent since the creation of 25,000 new government jobs. These wages account for over 12 percent of the GDP, which can have a negative impact on the government’s budget. Though it is important for the youth to have opportunities available to them, Ennahda is in essence repeating mistakes of the past. Government jobs do not have the added value that the creation of small businesses might have. Instead they perpetuate an expectation that the government should be the source of employment rather than the private sector. As a short-term measure this may be effective, but if Tunisia intends to keep its expenses under control (so that it may invest them in to the economy) continuously creating jobs in the public sector will only aggravate unemployment in the long run.

Similar concerns arise with regards to the food and fuel subsidies that the government has put into place.  The government’s direct support for basic materials including fuel and electricity, as well as some foodstuffs (such as bread, pasta and tomato paste) is inefficient. Subsidies account for almost 20 percent of government expenditures.  However, these subsidies are not targeted which means that rather than helping the poor exclusively they also benefit the rich who do not need financial support. As a result, the government wastes a large part of its contribution. Though direct support helps maintain Tunisian’s purchasing power, the way it is being executed now is wasteful and better targeted measures could result in greater benefits to the most-needy.

Ennahda, which faces another election next year, is applying short-term solutions to long-term problems. Rather than addressing the source of Tunisia’s economic problems, Ennahda’s policies are superficial and will likely further the country’s economic problems in the future.

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