Tunisia's government accelerates economic and social reforms

The period from 2011 to 2016 ushered in unprecedented change for Tunisia. Six years after the beginning of the Jasmine Revolution, Tunisia has embraced a democratic rule of law, along with all of the swings and roundabouts that can entail.

Tunisia’s democratic transition has earned it international recognition, garnering the 2015 Nobel Peace Prize for the National Dialogue Quartet, a coalition of civil society groups that played an instrumental role in achieving this peaceful transition.

But while Tunisia managed to avoid much of the regional fragmentation that followed the Arab Spring, slow economic growth, stubborn unemployment and inequality have prevented a perfectly smooth transition. Formed in August 2016, a new national unity government is working to address those issues and stoke higher growth, in what could signal the beginning of a new chapter for the North African country.

Political Transition

Tunisia’s long-serving president, Zine El Abidine Ben Ali, fled the country after 23 years of rule. He left during a wave of anti-government protests in January 2011. Faced with the task of rebuilding the country’s entire political and government apparatus – a result of decades of endemic corruption and misuse – Tunisia proceeded to hold elections in October 2011 to establish a 217-seat National Constituent Assembly (Assemblée des Représentants du Peuple, ARP).

The voting process, which gathered parties from across the entire ideological spectrum, was viewed as free and fair by international monitoring groups and saw the formation of an interim governing coalition led by the long-time opposition, the moderate Islamist party Al Nahda (often written as Ennahda).

The years that followed were marked by a number of blockages, with a variety of actors – from political parties and business groups, to unions and civil society – hoping to influence the drafting of a new constitution and the newly formed government. A successful process of national dialogue, brokered in part by the Tunisian National Dialogue Quartet, allowed the country to overcome a political standoff in 2013, and culminated in the passage of a historic constitution in late January 2014. The new constitution, which was approved by an overwhelming majority (93%) of the ARP, established a semi-presidential system and guarantees the protection of citizens’ rights, focusing on key issues such as decentralisation, youth empowerment, social justice and gender equality. These are enshrined in constitutional articles 14, 8, 12 and 21, respectively.

A new nine-member election commission, the Independent High Authority for Elections (Instance Supérieure Indépendante pour les Elections, ISIE), was established immediately thereafter to oversee the electoral process. By March 2014 the state of emergency, which had been in place since 2011, was lifted and a new electoral law was adopted in May, setting the stage for legislative elections in October, and a two-round presidential election in November and December of the same year.

Elections

The secular Nidaa Tounes party won both elections in 2014, securing 86 out of the 217 seats. Ennahda received the second-highest number of seats, with 69, a 20-seat loss from the 2011 elections. The populist-centrist Free Patriotic Union, the leftist Popular Front and the centre-right Afek Tounes parties also obtained enough seats to play a role in the formation of the government, with 16, 15 and eight seats, respectively.

Former Prime Minister Béji Caïd Essebsi was elected president with 55.7% of the vote, defeating the incumbent interim president, Moncef Marzouki (44.3%), in a runoff to become Tunisia’s first directly elected president. Habib Essid, former minister of the interior, was appointed prime minister in January 2015.

Both elections registered voter turnout above 60%, and despite scattered protests, they took place without incident, and were viewed as free and fair. In 2015 Freedom House – a US-based human rights and pro-democracy NGO and watchdog– upgraded the country’s overall status from “partly free” to “free”, with a political rights rating of 1, the highest possible rating. Freedom House attributed this ratings increase to the country’s adoption of a progressive constitution, recent improvements in governance, as well as the holding of a free and fair election with a large degree of transparency.

Rocky Road

While the most challenging component of the country’s political transition was accomplished in early 2015, with the inauguration of the new government, the political climate has continued to be marked by party infighting.

This was exacerbated by an economic slowdown, which highlighted existing macroeconomic imbalances. After GDP growth of 2.3% in both 2013 and 2014, growth slowed to 1% in 2015, according to the IMF, a result of production declines in key sectors –in particular mining and manufacturing – and the effects of two deadly terrorist attacks on the tourism sector, a key contributor to GDP.

Weaker demand in the eurozone, the country’s primary trading partner, and continued political and security instability in neighbouring Libya further impacted the country’s already challenging economic and security environment. The result of this was a rise in unemployment to more than 15%, while the fiscal deficit widened to a reported 4.4% of GDP, which was due in large part to public sector wage increases.

Unity Government

This had noticeable political impacts. Faced with a slowing economy and increasing pressure from international lenders, in mid-2016 President Essebsi called for a shake-up of the government in an effort to speed up the introduction of fundamental economic reforms.

In July 2016 the legislature voted to remove Habib Essid as prime minister in a vote of no confidence, the first for the country, after he failed to get parliamentary approval for a much-needed economic reform package to improve the investment climate, address rising unemployment and combat corruption.

The government was reshuffled accordingly, and discussions between the two largest parties, Nidaa Tounes and Ennahda, led to the creation of a coalition, referred to as the national unity government.

The new government formed in late August 2016, backed by 167 of the 217 ARP members. Youssef Chahed was appointed head of government, becoming Tunisia’s seventh prime minister in less than six years. The new government’s priorities were outlined in the Carthage Agreement of July 2016, which established six broad strategic actions: combatting terrorism; spurring growth, development and employment; fighting corruption; stabilising public finances; decentralisation; and increasing government efficiency.

Reform Agenda

Reviving the economy is a top priority for the current Cabinet. Between 2011 and 2015 annual GDP growth slowed to an average of 1.5%, compared to 4% in the period from 2007 to 2010. Meanwhile, foreign direct investment (FDI) flows declined from $1.6bn in 2012 to $1bn in 2015, according to the UN Conference on Trade and Development. This loss of competitiveness was reflected in Tunisia’s rankings in the World Economic Forum’s Global Competitiveness Index, with the country falling from 40th place out of 142 countries in 2011/12 to 95th out of 138 countries in 2016/17.

Boosting growth will be key to reducing high unemployment rates, accelerating regional development and reversing falling living standards – the main social drivers of the revolution. According to Tunisia’s National Institute of Statistics (Institut National de la Statistique, INS), the unemployment rate reached 15.5% in the third quarter of 2016, a trend that disproportionately affects the youth (31.8%), university graduates (31.2%) and women (22.6%), as well as the less-developed interior regions. Roughly two out of every five young Tunisians are unemployed, while one in four is neither employed nor enrolled in education or training – nearly twice the rate seen in most OECD countries, according to a 2015 report by the OECD.

Managing insecurity and its impact on productivity and the country’s economic recovery has also topped the new Cabinet’s agenda. The spill-over effects of instability elsewhere in the region – particularly in Libya – have had a visible impact on some of the country’s key revenue earners, such as the tourism industry. This was highlighted in 2015, with two deadly terrorist attacks at the Bardo National Museum and a beach resort in Sousse. Addressing this insecurity has come at a price: President Essebsi told the press in May 2016 that the war against terrorism has cost the Tunisian economy some $4bn.

Consensus Needed

However, the prospects for substantial economic reform have been brightening, and with a broad political coalition base that includes secular, Islamist, leftist, independent and trade union allies, the Nidaa Tounes-led government is expected to be able to garner the political capital necessary to steer essential reforms through the ARP.

Chahed has pledged to take a particularly tough stance on economic reforms to boost growth as the country comes under increasing pressure from international lenders to accelerate reforms and trim public spending. In October 2015 the World Bank announced a $500m development policy loan to help fund reforms to the financial and civil service sectors. This was followed by a $2.9bn IMF loan in June 2016 to boost economic growth and strengthen job creation.

Tunisia has also rolled out a new investment code; new banking, competition and bankruptcy laws; as well as a new legal framework for public-private partnerships (PPPs). The legislative changes are expected to significantly improve the country’s business environment, and stimulate foreign and domestic investment. Since 2011 the country has also taken important steps to increase transparency and good governance. In 2013 Tunisia launched Marsoum 41, an online platform that promotes transparency and provides citizens access to public documents, and in 2014 it joined the Open Government Partnership, an international platform working to make governments more open, accountable and responsive to citizens.

Development Plan

The country’s first post-revolutionary development plan, for the 2016-20 period, was launched in 2016, and is expected to lead the country on a faster and more inclusive development path. The five-year plan proposes a series of major reforms and public works projects across five strategic areas: public administration reforms and anti-corruption measures for improved governance; human development and social inclusion; higher-added-value economic activity; mitigation of regional disparities; and the development of a green economy. With a value of some TD120bn (€51.5bn), this ambitious plan is expected to boost the country’s annual growth rate to 4% by 2020 and reduce unemployment to below 12% with the creation of some 400,000 new jobs. Meanwhile, social programmes under the plan are expected to reduce poverty to around 2% by 2020, down more than two places from 4.6% in 2010.

Increasing foreign FDI flows will be key to the plan’s success. The scheme projects an 80% increase in FDI volumes over the next five years, raising investment from 18.5% of GDP in 2015 to 25% by 2020. According to the Ministry of Development, Investment and International Cooperation, a total of TD59bn (€25.3bn), or 40% of funding for the projects, will come from the government budget and state-owned companies; this represents a near doubling of the investment budget for 2011-15. The plan also contains some 100 projects to be implemented as PPPs, 65 of which are geared towards the needs of inland regions.

The development plan was unveiled to international partners at the two-day investment conference, Tunisia 2020, which took place in Tunis on November 29 and 30, 2016, where it garnered significant international support. Following the event, Prime Minister Chahed told the media that it had enabled the mobilisation of TD34bn (€14.6bn) in investments, including TD15bn (€6.4bn) in signed agreements during the event in addition to a further TD19bn (€8.1bn) in pledged investments (see analysis).

Next Targets

This international support comes as a sign of a modest yet distinguishable economic recovery, with the IMF reporting GDP growth of 1.5% in 2016 and also forecasting that growth will reach 2.8% by 2017, driven by rising public consumption and increased investment flows.

Rationalising current expenditure will be key to improving the country’s overall economic health. At 13.5% of GDP, Tunisia’s public sector wage bill is among the highest in the world, and is set to reach €5.8bn in 2017. However, previous attempts to introduce new tax and pension reforms were met with significant resistance from labour unions and other civil groups. Chahed told the ARP in August 2016 that an austerity programme – including public sector job cuts and new taxes – could be inevitable in 2017 if the country fails to address its economic difficulties.

Outlook

Though Tunisia continues to work through an extensive reform agenda and a challenging security environment, recent developments appear to signal the beginning of a new, more prosperous chapter for the North African country. The launch of the new development plan for the 2016-20 period and the introduction of key economic reforms are expected to stimulate both foreign investment and more inclusive growth in the country, provided the security context does not retrogress.

According to IMF projections, GDP growth will increase to 2.8% and 3.5% in 2017 and 2018, respectively, based on an accelerated reform momentum and a much-improved security environment. While the implementation of reforms does remain dependent on the current unity government’s ability to build a political consensus, its broad coalition base should help with facilitating successful political dialogue.