Country Report Tunisia June 2008

Outlook for 2008-09

• The campaign to re-elect the president, Zine el-Abidine Ben Ali, in the 2009 election is gathering pace, but he is unlikely to face any serious competition.
• Despite recent protests over unemployment and rising food prices, we expect the government to be able to maintain social stability, although it will prove challenging, particularly given the constraints on fiscal outlays.
• Banking reform, which has been proceeding slowly, is likely to be accelerated, but the government will remain wary of taking measures that challenge the social order or hurt those connected to the regime.
• The continued strength of oil and foodstuffs prices in 2008-09 will place a burden on Tunisia's subsidy system, and the fiscal deficit looks set to widen in 2008 and remain high in 2009.
• With food and oil costs rising sharply and the dinar weakening against the euro—the currency which most of Tunisia's imports are denominated—we now expect inflation to average 5.5% in 2008, easing to 4.1% in 2009.
• Although export earnings will continue to grow at a robust pace, import costs will also expand rapidly, and we expect the current-account deficit to stay at around 2.5% of GDP in 2008-09.

Monthly review

• There have been renewed clashes between demonstrators and security forces in the town of Redeyef in south-western Tunisia; one protestor was killed after police opened fire on a crowd.
• The crackdown on radical Islamism has continued with the latest in a series of trials of Tunisians accused of "terrorism". In mid-April, 18 men were jailed for between one and eight years for being members of a terrorist cell.
• Banque centrale de Tunisie (BCT, the central bank) has announced that it is planning to increase bank reserve requirements, in order to reduce excess liquidity in the banking system and limit consumer credit.
• The economy has continued to expand on the back of healthy export figures and buoyant foreign direct investment inflows, but the pace of growth has slowed, with agriculture sluggish and manufacturing growth easing.
• The consumer price index grew by 6% year on year in April, its fastest rate for three years and roughly double the 2007 inflation rate of 3.1% and the government's 2008 inflation target of 3%. Inflation eased slightly in May.
• Export growth has remained robust, with export earnings up by 28% year on year in January-April in local-currency terms. However, with import costs also rising rapidly—up 25% year on year—the trade deficit has continued to widen.

Source: Country Report