Economic Analysis - Fiscal Consolidation Ahead, But Risks Abound - MAR 2018

BMI View: Ongoing protests in Tunisia have elevated the risk of significant government backtracking on planned fiscal consolidation measures in 2018. Nevertheless, we believe the government will mostly stick to its planned austerity budget and gradually narrow the deficit, as part of efforts to maintain regular disburs ement of IMF funds.

We expect Tunisia's large fiscal deficit will narrow in 2018 on the back of continued government fiscal consolidation measures. The bulk of these gains will come from new consumption taxes and planned cuts to the public sector wage bill - measures outlined as necessary by the IMF as part of the loan programme initiated in 2016. Recent political instability offers some risks to government efforts to pare the size of the fiscal deficit. Indeed, ongoing protests in several major cities, including Tunis, have put pressure on the government to reverse some of the measures outlined in the 2018. This risk is only underlined by the January 13 announcement, wherein the government promised to increase aid to poor families and pensioners by TND170mn. Having said that, our deficit forecast - of 5.2% of GDP - already prices in some policy slippage, and is thus larger than the government's 4.9% projections. Barring a further escalation of the unrest, our core view is that the government will largely adhere to the IMF's demands, especially given its reliance on multilateral support to fund its twin current and financial account deficits.

Social Unrest Risks Increased Backpedalling

Gradual Narrowing Ahead
Tunisia - Fiscal Account, TNDbn
e/f = BMI estimate/forecast. Source: Ministry of Finance, BMI

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