Interest rate hike just the start for ‘firefighting’ Tunisia central bank

Bloomberg

Tunisia’s central bank warned over the deteriorating state of the country’s finances and called for additional efforts to curb inflation after the first hike in
interest rates since June.
The current-account deficit reached an “unprecedented” 11.2 percent of gross domestic product in 2018, according to Governor Marouane El Abassi. The decision to raise the benchmark by 100 basis points to 7.75 percent was necessary to avert the possibility of double-digit inflation, he said.
The North African nation is staring down challenges ranging from a currency that’s depreciated 18 percent over the past year against the euro to chronic worker strikes. Political infighting has hobbled government efforts to revive the economy since the 2011 uprising that ousted President Zine El Abidine Ben Ali.
“They hiked interest rates quite a few times last year, and it just seems like the central bank is firefighting,” said Hamish Kinnear, Middle East and North Africa analyst at Verisk Maplecroft, a UK-based risk assessment consultancy.
Finances are under strain because the country’s main sources of foreign currency such as oil and gas and phosphate production “have taken a hit since 2011,” he said.
El Abassi also urged other measures, such as a crackdown on smuggling and non-competitive practices in some industries that have led to shortages of key goods. Tunisia needs to boost phosphate output and tourism levels to 2010 levels, he said.
The central bank chief said that he expected inflation to slow to under 7 percent by the end of 2019. It already eased slightly to an annual 7.1 percent in January.
The timing of the central bank’s decision may have had something to do with a looming visit by the International Monetary Fund.
Local media have reported that the IMF is expected to visit in March to review Tunisia’s economic program. A positive assessment could unlock the next installment of the $2.9 billion loan the lender approved in 2016. Payment has been delayed for months as the government and the powerful General Labor Union wrangled over public-sector pay raises.
While the rate hike may help contain the dinar’s depreciation by stemming the outflow of hard currency, it also carries the risk of stifling investment and growth. “That seems like a lesser evil at the moment, though, with the continued depreciation of the dinar weakening consumers’ purchasing power,” said Axel Dalman, country risk analyst with Fitch Solutions. “Unless the government can reduce this political risk, investment isn’t going to be forthcoming anyway — so it makes sense to prioritize lower inflation for now.”