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Tunisia Needs Real Reform To Break A Ruinous Economic Cycle

The European Commission has committed €100 million to support Tunisia in the effort against migration, with an affectional €900 million in funding for the country. But how does the agreement expect to find success with a formula that has long held a reputation of failure?

Photograph of a Tunisian woman carrying a bag on her shoulders at the weekly market of Douz

02 March 2023, Tunisia, Douz: Sedentary and nomadic buyers and sellers at the weekly market.

Sebastian Kahnert/ZUMA
Timothy Kaldas and Ayoub Menzli

TUNIS — As pressure rises to break the deadlock over a possible IMF program for Tunisia, international players are rushing to find ways to get an agreement signed.

At the Italian government's request, the European Commission has committed what is likely to be an unconditional €100 million to support the fight against migration. The Commission has also announced €900 million in additional funding for Tunisia, if an agreement with the IMF is approved.

But as it stands, the IMF deal looks like a non-starter for Tunisian President Kaïs Saïed.

The current agreement between Tunisia and the IMF seems to rely on a time-tested and unsuccessful formula of drastic cuts and consumption taxes that could fuel inflation, increase poverty and hamper economic growth. It was wise to reject a repetition of regressive anti-growth prescriptions.

Avoid repeating past mistakes

Tunisia's recent IMF programs failed in part because they were politically unsustainable. Austerity measures that disproportionately targeted the population at large while often isolating elites were repeatedly rejected by the public.

Tunisians have pressured their leaders to derail planned reforms following IMF programs in Tunisia in 2013 and 2016. Repeating this cycle a third time, with a similar program, is sure to meet with public rejection. A new approach is needed.

Tunisian civil society has long advocated for a more progressive budget policy that includes efforts to strengthen the state's capacity to raise revenues, and it's time for the Tunisian authorities and international financial institutions to start listening.

Al Bawsala, a leading Tunisian civil society organization, has called for measures such as restoring a progressive income tax system, investing in the capacity of the tax collection authority and reducing tax exemptions for large companies, which, according to the Tunisian Ministry of Finance, have reached $1 billion — more than half the amount of the new program proposed by the IMF.

Photograph of the Tunisian President Kais Saied kissing a woman's forehead at the Municipal Market in Ariana.

August 23, 2023, Tunis: Tunisian President Kais Saied visits the Municipal Market in Ariana.

Tunisian Presidency/ZUMA

Corporate tax cuts, declining revenues

An analysis conducted by the Tunisian Economic Observatory has revealed a sharp drop in the share of direct tax revenues from corporate tax, after corporate tax cuts in 2015 and 2021.

A more progressive program is also better economics.

The share of direct tax revenue from corporate tax dropped to 28% between 2015 and 2020, while the share of income tax in direct tax revenue rose to 72%. The trend continued in 2021, when corporate tax was reduced to 15%. Furthermore, corporate tax cuts did not boost investment, which fell as a result of the cuts.

The new reform program should avoid cuts in essential food subsidies, which would increase poverty and food insecurity, according to Tunisian experts.

Tunisia's economic reforms can focus on shifting the burden upwards onto the country's middle and upper classes by investing in the state's ability to collect progressive sources of tax revenue, while closing the tax loopholes it has long abused. A more progressive program is not only more socially fair and more likely to win public support, it's better economics.

Whether proposed by IMF staff or, more likely, by Tunisian officials, relying heavily on VAT, other consumption taxes and aggressive subsidy cuts is bad policy for several reasons. These measures are counter-productive efforts to create fiscal leeway. Increasing the cost of goods through regressive taxes and the removal of subsidies intensifies already high levels of inflation.

Rising inflation levels put pressure on the central bank to raise interest rates. But, higher interest rates contribute to increased public spending on debt servicing, which can consume much of the revenue the state was intended to absorb.

Photograph of migrants who were intercepted by the Tunisian Maritime National Guard before crossing the Mediterranean Sea.

June 8, 2023: Sfax, Tunisia: The Tunisian Maritime National Guard intercept boats of migrants trying to cross the Mediterranean Sea

Hasan Mrad/ZUMA

Cuts will hurt Tunisians and weaken the economy

In addition, inflationary measures such as VAT and subsidy cuts depress domestic demand, which will weaken investment incentives for local companies. It is increasingly clear that cuts in food subsidies represent an untenable attack on Tunisia's safety net.

Cancelling previous tax cuts for large corporations could also increase revenue. These cuts, which protect the monopolies and cartels controlled by Tunisia's economic elites and oligarchs, have three damaging consequences.

Firstly, it deprives the State of revenue without encouraging investment, because monopolists have no incentive to invest. Secondly, reducing revenues weakens the State's ability to finance necessary services, and forces the State to rely on regressive revenue sources such as VAT and customs taxes.

Economic reforms are inherently political

According to a recent study by Aswaat Nisaa, a civil society organization, these types of taxes have a disproportionate impact on women and vulnerable populations. Elites benefit from these economic reforms, while ordinary Tunisians are left to bear the burden alone.

Without structural reforms to address the domination of Tunisia's oligarchs, other reforms will fall prey to their disproportionate and illicit influence. Tunisian academics have shown that previous IMF-mandated privatizations have been used as a mechanism to transfer public wealth to connected elites, reinforcing regulatory control.

Furthermore, studies have shown that politically connected companies are statistically more likely to evade taxes and tariffs. Including strong reforms to counter this will boost the popularity of an economic reform program and target well-established economic elites rather than the vulnerable and middle classes.

This is a historic opportunity to implement progressive fiscal policies to address Tunisia's economic challenges. Economic reforms are inherently political, but they should be designed to address the concerns and aspirations of the people affected by them.

Tunisia's economic difficulties are significant, but Tunisian researchers and analysts have studied the problems and come up with solid, practical and effective solutions that are not only economically sustainable, but also politically sustainable.

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