Tunisian President to Secure Direct Financing from Central Bank

Tunisian President Kais Saied is reportedly considering a bold strategy to seek direct financing for the government’s budget from the Central Bank of Tunisia, a move that analysts argue could exacerbate the country’s financial challenges, persisting since before the 2011 revolution.

The existing budget shortfalls have already led to the unavailability of state-subsidised essentials like flour, rice, and coffee on supermarket shelves, with inflation pushing the prices of other goods beyond the means of many households.

Facing a 10.6-billion-dinar (approximately $3.4 billion) shortfall in the current year and gaps in the previous year’s budget, the government is contemplating compelling the Central Bank to purchase government bonds as a means to secure direct funding. The proposals have been discussed by the parliament’s finance committee, with intentions to fast-track its passage for a vote during the upcoming plenary session next week.

Experts warn that this move could threaten the Central Bank’s independence and, by devaluing the currency, risk triggering inflation reminiscent of Venezuela. The legislation, if passed, would mark a departure from the 2016 law that separated the state from the central bank and has been sporadically criticised by the president.

“Tunisia has run out of credit,” says Hamza Meddeb of the Carnegie Middle East Center, highlighting the stalled negotiations for a loan with the International Monetary Fund (IMF) and the absence of financial help from other sources.

The potential legislation has raised concerns about the central bank’s independence, which economists argue is crucial for controlling inflation and limiting political interference in financial matters. While the current legislation doesn’t explicitly signal the end of the bank’s independence, it does undermine the 2016 law.

Economist Aram Belhaj stresses the importance of central bank independence in controlling inflation and preventing political pressure. He remarks that the proposed modification seems to be a short-term solution for the government to obtain a significant advance to finance the budget deficit.

The move comes after Tunisia rejected a finalised $1.9 billion bailout deal with the IMF in April, citing disagreements over spending cuts on subsidies and government salaries. Analysts suggest that this move reflects desperation, as the state seeks immediate capital without engaging in lengthy negotiations.

However, uncertainties remain regarding which funds the government would tap into, with potential risks of devaluing the dinar if foreign reserves are accessed or printing money to pay bills if domestic reserves are utilised, both scenarios posing challenges for attracting investors and financial backers.