Tunisia focusing on stability and growth for the agricultural sector

With Tunisia striving to bring economic growth back on track, agriculture performed strongly in 2015, driven by outstanding production and olive oil exports, which generated TD2bn (€917.2m) in revenue. Combined with falling oil prices, this helped reduce the trade deficit from TD13.64bn (€6.3bn) in 2014 to TD1.2bn (€550.3m) in 2015.

The sector, which accounts for around 10% of GDP, has not been spared the instability affecting the country since the 2011 revolution, prompting efforts to initiate structural reforms, including enhanced organisation to boost productivity and stabilise output. Profitability is also a concern, as farmer debt soars amid rising input costs.

Fluctuating Production

In recent years the agriculture sector has been saddled with drastic variations in production whether in terms of produce, livestock or processed goods. In 2015 for instance, Tunisia had to grapple with a surplus of tomatoes, potatoes, dates, milk, poultry and eggs.

These variations stem from inefficiencies that have prevailed since the revolution in 2011 and include poor sector governance, instability affecting trade with Libya and, in some cases, the violation of supply and production quotas. The latter applies to the poultry segment, for instance. Soon after the revolution, the quota that had long been in place restricting volumes of imported poultry disappeared. Consequently, the number of egg-laying hens rose dramatically, causing supply to exceed demand and prices to plummet.

Another example is the tomato segment, which suffers from transportation issues, a lack of oversight and limited processing capacity in the face of rising production, which has increased largely due to favourable weather conditions and the implementation of modern production techniques.

Investment

Despite the turbulence experienced by many other sectors – such as tourism – in the wake of the 2011 revolution, agriculture was still able to attract steady investment inflows.

Private investment in the sector had grown by an average of 10-12% year-on-year (y-o-y) since 2011. In 2015 agriculture attracted TD683.5m (€313.5m) in investment, up 9.8% on 2014, according to the Agency for the Promotion of Agricultural Investments (Agence de Promotion des Investissements Agricoles, APIA), the public body overseeing private investment in the sector.

There is room for further improvement however, given that some smaller sub-segments have seen a slowdown in capital inflows. Poultry investment, for example, has declined from TD100m (€45.9m) in 2012 to TD30m (€13.8m) in 2015, while aquaculture investments — after three years of impressive growth under the government’s sectoral 10-year strategy — have fallen from TD85.8m (€39.3m) in 2010 by about 19% annually, according to a report by the National Observatory for Agriculture.

The causes of the mixed performance are manifold, ranging from fallout from the revolution, which brought down direct investment across the board, to challenges related to permitting issues and the protracted revision of the country’s investment code, which dates to 1992.

Trade

Over the past year Tunisia has seen a dramatic improvement in terms of its agricultural trade balance. Like many North African markets, Tunisia relies on imports for many staples, and fluctuations in global food costs have weighed on public finances in recent years. The value of food imports increased 9% y-o-y in 2015, with the main contributors being cereals, and, to a lesser extent, sugar, which together make up 60-70% of the total.

However, robust olive oil sales during the last agricultural season helped reduce the country’s overall food bill from TD1.38bn (€632.9m) in 2014 to TD91.1m (€41.8m) in 2015. A record 312,000 tonnes of olive oil were exported in 2014/15 thanks to abundant output and enhanced sector organisation. “Output was particularly well managed and all sector operators were mobilised to ensure that the excess in production was efficiently accounted for,” Abdellatif Ghedira, former director of the National Oil Office, told OBG (see analysis). Date exports also increased in 2014/15, rising 20% in value and generating TD460m (€211m). Dates account for 8% of agricultural output and the sector is a source of revenue for more than 50,000 households. Other exported food goods include fruit, vegetables, pasta and fresh and frozen seafood. Overall, the value of food exports in 2015 increased by 78% y-o-y.

Cereal Killer

The cereals industry returned 6.9m tonnes in the 2014-15 season, less than the average 10.5m yielded over the past five years. This is mainly attributed to lower rainfall, especially in the north of the country. With irrigated agriculture accounting for just 460,000 ha, cereal fields, which cover 1.4m ha, remain largely dependent on rainfall. Tunisia was compelled to import a total 1.61m tonnes in 2014-15 to offset the decline in local output. Up 32% compared to 2013-14, imports included 559,000 tonnes of durum wheat.

Boosting local production is therefore key to reducing the country’s food import bill and meeting the population’s cereal needs. With per capita consumption hovering around 181 kg a year, domestic production as it stands is only able to meet 50% of the population’s needs. The challenge is significant, albeit not insurmountable. “To boost investment and productivity, cereal farmers need to be able to operate on bigger swathes of land,” Abdessatar Fehri, director of cereal supply at the Cereal Office, told OBG. “Plantations of 10 ha and under account for 60% of cereal fields. Moreover, irrigation, a key ingredient for the cereals sector, is only extended to 10% of the country’s plantations, which is low compared to other producing countries, where up to 40-50% of areas are irrigated.”

Dairy

Tunisia is currently grappling with a milk surplus which has constrained storage capacity. In July 2015 stocks reached a record 70m litres. They have since decreased and as of January 2016 stood at 52m litres, which is still considerably high compared to the previous year’s 12m litres. The situation could prove particularly damaging for milk farmers if by March – the start of the high production season, which lasts until August and during which a daily average 2.2m litres of milk reach the country’s dairy plants – stocks have not shrunk.

The increase in production is a result of several factors, notably outstanding milk output and a fall in consumption owing to lower demand in the tourism industry and rising inflation, curbing household purchasing power. Tighter control along the Libyan border in recent years and stringent sanitary conditions on all foodstuffs entering the EU have stifled Tunisia’s export potential.

The government has taken a number of steps to address this. Milk exports had been subject to a pre-authorisation process, for example, but the restriction was repealed in December 2015 to allow exports to flow more freely and ensure better export visibility. Another proposed solution is to locally transform the excess fresh milk into powdered milk. However, this activity is limited to the country’s sole facility in Mornaguia, which has reopened with plans to process 4m litres monthly. Until recently this option was not seen as viable, as the cost of imported powdered milk remained lower than that of the locally produced variant. However, a ban is now in place restricting imports of powdered milk. In addition, the government has vowed to purchase 10m litres of fresh milk.

Irrigation

In the face of climate change and irregular rainfall, improving water access is one of the main priorities for Tunisia’s agriculture sector. The sector absorbs 76% of the country’s water resources, which are estimated at 4.8bn cu metres a year. Surface water accounts for 2.7bn cu metres a year, 87% of which is secured through dams.

Plans are under way to boost the country’s rainwater resources and raise the number of dams nationwide from 34 to 44 by 2020. Among the latest projects to come on-line is that of Oued Ettin in the northern province of Bizerte. Estimated at TD56m (€25.7m), the new dam will serve to irrigate up to 700 ha of agricultural land in Bizerte and Manouba. Tunisia is also planning to increase the number of hill dams from 230 to 275, that of catchment lakes from 894 to 950 and the number of wells from 5400 to 6000, all by 2020.

Initiatives to enhance irrigation techniques have also been rolled out recently. In 2015 Tunisia was among the 12 awardees of the Securing Water for Food scheme, which is led by a number of development organisations, such as the US Agency for International Development, with a view to increasing water availability and promoting its efficient use in agriculture. In Tunisia’s case the innovation, put forward by local firm Chahtech, was the buried diffuser, an underground water and energy-efficient technique capable of “irrigating two to three times more land volume than traditional drip methods”. Implementation and the amount of the award were yet to be announced at time of press.

Land

As elsewhere in the region, agricultural land in Tunisia is fragmented, with more than 60% of farmers operating on less than 10 ha, limiting investment and productivity. While attempts at land consolidation have proved fruitful in some areas, notably the dairy and olive segments, achievements have been less impressive in others, such as cereals. Limiting factors include land tenure rights and difficulty obtaining the necessary funding to acquire new swathes of land. While financial incentives to promote farmland consolidation do exist, their outreach has been limited.

The land loan is one example. Introduced in the 1990s, it is aimed at helping investors acquire farmland to carry out projects and at attracting younger people to the sector. Funding obtained under this loan can go up to TD150,000 (€68,800), with repayment extending over 25 years at an interest rate of 5% after the first five years. To ensure the loan is efficiently utilised, APIA has intervened since 2012 in selecting eligible applicants and providing them with technical and managerial assistance in developing their projects.

While the measure is well received, the overall annual amount of land loans granted to farmers stands at around TD4m (€1.8m), which according to Omar Behi, vice-president of the Tunisian Union for Agriculture and Fisheries, is negligible compared to the required amount. “The sector’s needs are closer to TD100m (€45.9m) a year,” he said.

Access To Finance

The sector’s financial health is in poor condition, with overall farmer debt estimated at TD1bn (€458.6m). Although the situation predates the 2011 revolution, mounting production costs, mandated price ceilings and meagre farm subsidies for most sub-sectors have since made it worse. This has hindered farmers’ abilities to repay existing bank debt – the majority of which is owed to the country’s main agricultural financial institution, the National Agricultural Bank (Banque Nationale Agricole, BNA) – and constrained their eligibility to apply for new loans.

Access to lending is difficult as a result. Today, no more than 6% of Tunisian farmers have access to bank credit, leading most to resort to trade credit from suppliers and bear the brunt of higher costs at the time of reimbursement. That said, even the small majority that does manage to obtain bank financing is also faced with high interest rates. “Farm loans come with interest rates of no less than 8% in Tunisia, whereas in Europe, they do not exceed 2%. Therefore, the financial burden associated with production costs can only hamper the sector’s competitiveness,” Ghedira told OBG.

In a bid to alleviate the sector’s financial ills, the government intervened in 2015 to clear debt for farmers with arrears of TD3000 (€1376) and under. The move was well received, but did not solve the problem altogether. “The system is a vicious circle and clearing farmer debt does not suffice. Deep restructuring of the sector is needed to bolster profitability and instil confidence,” Maher Bouzaien, credit director at Banque de Financement des Petites et Moyennes Entreprises, told OBG.

Consumption

To promote responsible consumption and production, and thus have better control over the food import bill, in January 2016 the Ministry of Agriculture, Water Resources and Fisheries, in collaboration with the Food and Agriculture Organisation, launched a food loss and waste reduction and value chain development programme. Food waste in the Near East and North Africa region is estimated at 250 kg per person per year, higher than the global average and representing losses of up to €55bn. The three-year project is expected to cost €2m and will bolster Tunisia’s food security. The project aims to reduce food losses along production and supply chains, thus increasing the efficiency of the food system. The programme will identify specific deficiencies related to waste in the cereal and dairy segments.

Agribusiness

Agribusiness accounts for 3.7% of GDP and 19% of industrial sector value added. Although investment levels have remained modest since 2011, they have maintained a rising trend, increasing from TD350m (€160.5m) to TD440m (€201.8m) in 2014. Disruptions in trade with Libya, a major export destination, in the past three years have impeded growth in some segments, notably pasta, and preserved and semi-preserved canned goods. Yet with trade ties gradually recovering, all three posted positive growth in 2015, with overall pasta exports up 10%, and preserved and semi-preserved canned goods exports up by 19%.

Irregular access to raw materials, which remain highly dependent on rain-fed agriculture, is one obstacle to stable growth. This is particularly pronounced in segments such as tomato processing. “Output instability blurs visibility and limits opportunities for firms to expand their business internationally,” Noureddine Agrebi, director of agribusiness at the Ministry of Industry, Energy and Mines, told OBG. Improving vertical integration is one way Tunisia is looking to address this. “Plans are under way to enhance sector organisation with a view to boosting output and promoting collaboration between sub-sectors,” Agrebi said. To that end, authorities are debating the possibility of developing agro-industrial clusters to unite Tunisian firms, promote downstream and upstream integration and boost the sector’s value added. These clusters would link all sector operators, from producer to processing industries and merchants, to streamline negotiations and ensure vertical integration of each sub-sector. Such clusters have already been set up in the olive oil and date industries, but the approach is still in its infancy and will take time to develop.

DCFTA

Tunisia is currently negotiating a Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU, with the latest round of negotiations having taken place on October 19, 2015. The accord will build on the existing free trade deal, the Euro-Mediterranean Association Agreement, first signed in 1995 to promote the trade of goods in the area. The DCFTA aims at further enhancing access to market opportunities and introducing regulatory revisions related to the trade of goods, including sanitary and phytosanitary measures. The latter were among the issues stressed by the Tunisian party during the October negotiations. The deal is expected to be enforced by 2017.

While such an agreement may present itself as an opportunity for Tunisia to rid itself of production surplus and bolster exports in established robust segments like olive oil and dates, the rise in competition may prove more challenging for other crops and commodities. “Tunisian agriculture is not ready to confront its European counterparts in terms of profitability or competitiveness,” Behi told OBG. “However the DCFTA could constitute a good opportunity to upgrade the sector.”

Working towards establishing more competitive segments is therefore the next step forward for Tunisian agriculture if the agreement is to benefit both sides. “Liberalising trade under the DCFTA will require a great deal of investment to upgrade Tunisian agriculture and face up to competition,” Abderrahmen Chaffai, general director of APIA, told OBG. As part of this, the EU has donated €300,000 to fund much-needed sectoral studies in anticipation of the agreement and to assess its potential impact on Tunisian producers.

Outlook

In the lead up to the conclusion of the DCFTA, strengthening the competitiveness of Tunisian agriculture and implementing deep structural reforms will be key in determining the success of such a deal. “Tunisia needs to carefully negotiate the terms under the expected DCFTA. While it will largely benefit the most competitive segments, for example ridding olive oil from the monthly quotas it is subjected to, Tunisia needs to beware of the necessity to protect its vulnerable and less competitive segments,” Agrebi told OBG.

Given the role that the sector has come to occupy in securing foreign revenues and bolstering the country’s trade balance, Tunisia should further tap into existing assets, such as its geographical location and favourable climate, to boost exports to Europe. There is also significant potential to enhance exports to neighbouring Libya and Algeria, where non-tariff barriers are less of an impediment to trade than they are in Europe’s case.