Extraordinary Financial Support

According to Tunisia’s finance ministry, in August 2017, multilateral debt accounted for almost fifty percent of the country’s total external public debt.[1] In comparison with the rest of the region, this percentage is even more striking. According to the World Bank, in 2015, only two countries received more multilateral support relative to the size of their economy than Tunisia–Djibouti and Yemen, two low-income economies that have no access to international financial markets and need foreign aid to plug their structural deficits. All the other economies enjoyed lower levels of multilateral support as a percentage of their gross domestic product (GDP), with Syria and Morocco falling just behind Tunisia.

To this picture we can then add bilateral loans, which in August 2017 represented fifteen percent of total public external debt. While not all of these loans have been necessarily negotiated on concessional terms, it is reasonable to assume that most of this type of credit has been given at below-market rates. For example, France is the source of around fifty percent of bilateral loans, followed by Japan with nineteen percent–two countries that in the past have provided generous grants and cheap credit to Tunisia in multiple occasions. Indeed, interest payment on bilateral loans accounted for only seven percent of total external debt payments at the end of August 2017, showing a significant discrepancy with the percentage of bilateral loans (fifteen percent).

And that is not all. Sovereign bonds accounted for thirty-six of total external public debt in August 2017, but a significant share of these issuances has relied on guarantees by two strategic allies–the United States and Japan. In addition, Tunisia has been able to directly sell some of its bonds to Qatar through a private placement. The total amount of guaranteed sovereign bonds (to which we can add the Qatari private placement) is around $2.7 billion, equivalent to around forty-two percent. Unsurprisingly, the yields on these sovereign bonds are well below what Tunisia normally gets when it taps the international markets on its own, as foreign investors have no fear that the US and Japan will step in (and Qatar has been willing to offer Tunisia generous terms for its bonds).

Based on these numbers and some rough estimates, total concessional lending is probably equivalent to between sixty to eighty percent of the total public external debt stock and between thirty to forty percent of the GDP. In flow terms, in 2017 concessional lending represented about 7.5 percent of GDP. This cheap credit can be defined as a non-oil rent according to the rentier state theory, “which argues that unearned revenue streams, external to a country and accruing mainly to the government, shape that country’s political and economic character.”[2] Indeed, as Hazem Beblawi writes, a rentier state can be defined as such when a rent: 1) accounts for a sizable share of the economy; 2) is generated externally; 3) requires only a few people to be produced; 4) and the government is its main recipient.[3]

This extraordinary amount of support can obviously be explained by the 2011 “Arab Spring” uprisings and the unique political conditions that these events have produced. Thanks to the foreign media’s presentation of Tunisia ha as the only viable democracy in the region, the international community has provided almost unlimited support for this experiment. This policy was solemnly announced at the end of the G8 summit in Deauville, where the “partnership” between Western governments and Tunisia was born. The Deauville partnership had two pillars: “a political process… and an economic framework for sustainable and inclusive growth. It is designed to support Partnership Countries in the economic and social reforms that they will undertake, particularly to create jobs and enshrine the fair rule of law, while ensuring that economic stability underpins the challenge of transition to stable democracies.”

It is in this context that Tunisia has benefited from extraordinary financial support, mainly thanks to its status as the only democracy of the Arab world. This help has come with very loose strings attached, as the international community prioritized supporting Tunisia’s democratic experiment over everything else, thus configuring it as a democratic rent. Indeed, only in two cases has the IMF (followed by all the other multilateral organizations) suspended its disbursements to put pressure on Tunisian authorities–and one of them was when the international community wanted to push the political class to compromise during the 2013 crisis, when the democratic transition was in danger.

Yet, despite all the hiccups and misunderstandings, the financial relationship between Tunisia and the international community has remained strong and multilateral lenders have never seriously considered withdrawing their support from Tunisia. This has also been confirmed in private conversations with IMF, World Bank, and Western government officials based in Tunis over the 2011-2017 period. Clearly, geopolitical concerns have also played a significant role: jihadist attacks, Libya’s descent into chaos, and the migration crisis have provided further reasons for Western governments to shore up Tunisia. In this increasingly unstable region, the United States and Europe have decided to bank on this country’s democratic experiment.

Postponing Austerity and Feeding Patronage

As mentioned, this democratic rent has come with very loose strings attached. Tunisian authorities have hesitated in implementing the reform programs negotiated with the multilateral lenders and they have enjoyed a degree of tolerance that in the past, other developing economies did not. In private conversations with the author of this article, diplomats have regularly complained about the slow pace of reform, the lack of executive decrees enforcing the adopted measures, and the authorities’ inability to tackle the growing twin deficits. Similar points have been made in various reports, which have highlighted weaknesses in the cooperation framework between Tunisia and the international community.

Indeed, successive Tunisian governments have found themselves between a rock (the international community) and a hard place (domestic constituencies), forcing them to dilute and postpone many of those measures that foreign partners wanted to see implemented. Moreover, owing to the unstable political environment, the authorities have used this rent to expand current spending and patronage networks. This policy has accommodated demands for employment and social justice and, in general, better living conditions formulated by previously neglected sections of Tunisian society, as well as new social and economic actors.

Despite deteriorating economic indicators, the authorities have managed to introduce only limited spending cuts to reduce the country’s growing fiscal and current account deficits. Tunisia’s fiscal deficit went from 2.6 percent of GDP in 2010 to a peak of 6.8 percent in 2012, to decline only marginally to 5.4 percent in 2016. Its current account deficit rose from 4.8 percent in 2010 to 9 percent in 2016. In the meantime, public sector wages rose from around ten percent of GDP in 2010 to 14.5 percent in 2016, and subsidy spending fluctuated based on commodity prices and domestic demand. At times of intensifying pressure from international lenders, the authorities have been forced to temporarily freeze public sector wages or hike fuel prices, but these measures have remained isolated and have not been part of a broader effort to contain domestic demand. This stands in sharp contrast with what Morocco has done since 2012 or Egypt has implemented in the past few months–both countries have managed to contain public sector wages and subsidy spending, thus reducing their deficits.

This policy of delaying the fiscal adjustment has been the result of intense domestic negotiations with domestic constituencies and interest groups, particularly with the Tunisian General Labor Union (UGTT). Well aware of the social tensions unleashed by the 2011 uprising, the authorities have treaded carefully and prioritized maintaining a cooperative relationship with the UGTT, one of the few organizations that enjoys legitimacy and has a sizable presence within the peripheral and least developed regions of the South and the West. Appealing to the international community for exceptional flexibility in view of the country’s special circumstances, the various post-uprising governments have obtained from their international partners permission to postpone or dilute painful austerity measures.

In this context, it is unsurprising that the Tunisian authorities have oftentimes contradicted themselves. On the one hand, they have been willing to accept IMF reform programs in return for cheap credit. On the other hand, the lack of well-identified domestic constituencies favorable to these measures has crippled their compliance with this reform agenda. The most obvious exampleof this contradiction was Prime Minister Habib Essid’s initial promise to the IMF to freeze public sector wages in 2015, which was later reversed as the government prioritized reaching an agreement with the UGTT over keeping its word with the international lenders. This inability to implement the IMF-sponsored reform agenda was among the factors that led to the downfall of his government in July 2016 and his replacement with Youssef Chahed. Despite the reshuffle, the decision to increase public sector wages triggered a short-lived reaction by the IMF at the end of 2016, which suspended its second tranche disbursement for a few months. The second tranche was unblocked in early 2017 after the authorities committed to devaluing the exchange rate and hiking interest rates.

Likewise, structural economic reforms have been met with significant resistance from often less clearly identifiable interest groups in the bureaucracy and the private sector. The IMF and World Bank reached an agreement with the Tunisian authorities on a long list of measures, ranging from subsidy reform to bankruptcy, competition, private-public partnership (PPP), banking sector, and investment laws. However, many of these reforms have been delayed, stalled, or diluted either before the adoption or during the implementation phase. An example of the former is the proposed creation of an Asset Management Company to deal with non-performing loans (NPLs) in the banking sector. Because this measure would have hit assets held by entrepreneurs in the tourism sector (from where most NPLs originated), parliament rejected this proposal in 2014.[4] As for delays in the implementation, the PPP law is a good example: this measure was adopted in 2015, but by late 2017 the application decrees were still missing.

Diluting austerity measures and resisting structural reforms have not been entirely successful in quelling social tensions. Faced with spontaneous protests and unrest in the least developed regions of the country, the authorities have also resorted to quietly expanding patronage to meet demands for employment and better living conditions. By expanding patronage, the new elites have effectively stretched the existing social contract to make room for previously underrepresented groups, such as unemployed youth, Islamist activists, etc. The rentier economy has therefore expanded to new sections of Tunisian society, incorporating those who were previously excluded, and in turn, expect the government to provide jobs and investment.

Patronage has taken both explicit and implicit forms. Explicit forms of patronage can be seen in the public sector, where thousands of people have been hired since 2011, in a spectacular expansion of the civil service aimed at buying social peace and rewarding activists and sympathizers who took part in the uprising. Likewise, state-owned enterprises have offered permanent deals to contractors and hired thousands of people, particularly in the least developed regions of Tunisia. Implicit patronage has characterized the informal economy, including smugglers, who have benefited from the authorities’ greater tolerance and the ability to import and export subsidized products across the borders with Algeria and Libya. Many informal and black economy entrepreneurs have therefore thrived since the end of the Ben Ali regime, because the authorities have decided to turn a blind eye to their activities for fear of social unrest. A similar dynamic has characterized the “democratization” of corruption, which now affects all the major branches of the civil service, as well as parts of the private sector. Implicit patronage has also affected regulated economic sectors, as private business have captured (state capture) sections of the civil service, having extended their influence over weakening institutions and exploited bureaucratic conflicts to promote their own interests, obtain licenses, constrain competition, etc.

A Growing Risk of Moral Hazard?

Despite the deteriorating picture and the lack of a clear direction in government policy, Tunisia’s democratic rent has managed to soothe the negative effects of this situation and forestall any potential contradiction between the democratic transition and the economic crisis. The availability of cheap credit has played a key role in smoothing social tensions and, through the occasional application of pressure, in promoting the current national consensus that has dominated Tunisian politics since 2014. Whether it was a by-product of international support or it happened by design, the democratic rent has helped the authorities smooth over the Islamist/secularist cleavage, while leaving aside other socioeconomic fractures. As a result, elite consensus has become the priority, at the expense of underrepresented constituencies, such as unemployed youth, informal entrepreneurs, border communities, and low and mid-ranking public sector workers, among others.

The downside of this approach has been the inflation of moral hazard, both domestically and on the international markets. Moral hazard happens when the insured takes additional risks because they feel guaranteed against any negative effects. Inside Tunisia, domestic constituencies have ramped up their demands as the authorities have largely failed in their didactic duty to communicate the financial and temporal limits of what they can do. Most importantly, they have also failed to present a domestic development agenda that was not imposed by the international community, but acceptable to the majority of Tunisians. Excluded from the national consensus that has brought together Islamist party Ennahda and the secular Nidaa Tounes, marginalized social categories (such as unemployed youth or inhabitants of the country’s least economically advanced regions) have protested at the lack of a credible development plan after decades of underinvestment and neglect by the central authorities. Inevitably, they have been recalcitrant to acknowledge the increasingly dangerous economic situation and the price to pay for the increasingly painful adjustment. Unable to manage their expectations, post-uprising governments have chosen to try and meet these groups’ demands now, rather than present a convincing long-term plan for sustainable development, thus avoiding any confrontation. As Tunisia has become too important to fail, the international community’s implicit insurance against any risk of sociopolitical disaster has made this bargain possible.

Outside Tunisia, the involvement of multilateral lenders and foreign partners has reassured international investors, who have continued to provide credit at a reasonable cost despite the deteriorating economic conditions. Foreign investors have seemed unfazed by the series of sovereign rating downgrades by Fitch and Moody’s since 2011 and the country’s difficult political economy. The coupon on Tunisia’s ten-year dollar-denominated sovereign bond issuance in 2015 was 5.75 percent, which is below what the country paid in the late 1990s and early 2000s without IMF funding. The same can be said for Tunisia’s euro-denominated issuances. Likewise, since 2011 Tunisia’s five- and ten-year sovereign bond yields have been trading slightly below Peru’s and Indonesia’s, despite the former’s more difficult regional and domestic political contexts, and larger fiscal and current account deficits. Clearly, abundant liquidity on the financial markets since 2009 has contributed to this outcome.

In turn, these favorable market conditions have reinforced Tunisia’s dependence on its democratic rent, as international financial support has reduced debt servicing costs. While low interest payments are a sign of the international community’s successful strategy to shore up Tunisia during its difficult political transition, the question remains: if and when will the North African country be able to walk on its own–that is, to enter a virtuous cycle that will gradually reduce its reliance on concessional lending. Nominal gross public debt is projected by the IMF to reach seventy-two percent in 2018, from 62.9 percent in 2016. Public gross financing needs will rise to eleven percent of GDP in 2018 and continue to grow to fifteen percent in 2021-22, compared with 5.6 percent in 2016. If a virtuous cycle does not materialize, there are two main risks: liabilities could continue to grow relative to its GDP and therefore Tunisia might be unable to get out of this debt trap, at some point needing debt relief measures; or, for reasons that are currently difficult to foresee, the current flow of cheap credit could dry up, thus forcing the authorities to increase the country’s exposure to private lending, which could trigger a debt crisis with heavy political and social consequences in the long term.


The international community’s decision to provide virtually unlimited concessional lending to Tunisia after 2011 has played a key role in the success of its democratic transition. Based on some rough estimates, concessional lending is probably equivalent to between sixty to eighty percent of total external public debt and between thirty to forty percent of GDP. This unprecedented degree of financial support with very loose strings attached has de facto made the economy dependent on an external rent. This source of revenue is essentially a “democratic rent,” largely driven by the need to help the country’s democratic transition after the 2011 Arab Spring uprising.

This external rent has weakened “the work-reward causation” (Beblawi), particularly as the authorities have tried to balance the pressure applied by the international lenders and the more tangible and politically sensitive demands formulated by social categories that have been underrepresented for decades. As a result, the post-uprising governments have chosen to expand public spending to buy social peace and to delay or dilute both structural and austerity measures suggested by the IMF and other lenders. In addition, this external rent has been used to expand both implicit and explicit forms of patronage, by increasing the number of public sector employees and turning a blind eye to the expansion of the informal economy, corruption, and state capture by private interests.

Tunisia’s dependence on this democratic rent has also inflated the risk of moral hazard. Domestically, the authorities have failed in their attempts to provide a long-term vision for development and to manage expectations by marginalized social categories. Internationally, the implicit guarantee provided by the IMF and other multilateral institutions has reassured foreign private investors, who have been willing to buy sovereign bonds at what are probably below-market rates. The risk, however, is that Tunisia might struggle to wean off concessional lending and could remain stuck in a debt trap or, even worse, face a debt crisis if international financial support is suddenly interrupted.

These conclusions do not imply that the financial support provided by the international community has played a purely negative role. However, it is important to ask whether the current policy is sustainable in the long term and if the current framework is capable of encouraging the authorities to elaborate a credible plan for development that has sufficient backing from the population to be successful and is not simply a foreign imposition on the country. So far Tunisia’s successive governments have limited themselves to adhering to the IMF-mandated reform agenda on paper, while watering it down in practice. This failure seems to highlight the lack of buy-in by the political class and of a supportive domestic constituency for a reform program that remains deeply unpopular, thus reinforcing the country’s dependence on concessional lending.

It is therefore not surprising that, seven years after the end of the Ben Ali regime, Tunisia is still experiencing high levels of instability. The protests that occurred across the country in January have highlighted once more the frustration of the population and the authorities’ failure to convince Tunisians that today’s sacrifices could feed tomorrow’s development. The authorities might have found a temporary solution by increasing social spending to buy social peace. The austerity measures introduced by the government, however, do not convincingly reduce the risk of moral hazard, while leaving the problems of rentierism, patronage, and underdevelopment unaddressed.

 All the data in reported in this article are from the Tunisian Finance Ministry’s website and can be found here: http://www.finances.gov.tn/index.php?option=com_content&view=article&id=48&Itemid=334&lang=fr

 Adeel Malik, « Rethinking the Rentier Curse », International Development Policy | Revue internationale de politique de développement [Online], 7 | 2017, Online since 12 February 2017, connection on 16 November 2017. URL: http://poldev.revues.org/2266 ; DOI : 10.4000/poldev.2266

 Hazem Beblawi, “The Rentier State in the Arab World”, Arab Studies Quarterly, Vol. 9, No. 4 (Fall 1987), pp. 383-398

 Hakim Ben Hammouda, “Chronique d’un ministre de transition”, 2017, Editions Ceres.