Tunisia’s fiscal tightrope

Tunisia’s economy, battered by years of sluggish growth, mounting debt, and social unrest, entered the year in a woeful state. Public debt hovered near four-fifths of GDP, youth unemployment remained high, and inflation lingered stubbornly, squeezing households grappling with shortages of subsidized goods. The government’s reliance on stopgap measures merely papered over systemic weaknesses in competitiveness, tax collection, and public sector efficiency. Furthermore, the absence of an International Monetary Fund deal left Tunisia isolated from affordable external financing, forcing policymakers to craft a 2025 budget that reads as both a survival blueprint and a high-stakes gamble.
Looking back, Tunisia’s economic unraveling since its 2011 revolution remains a cautionary tale of unmet expectations and compounding structural failures. Once hailed as the sole Arab Spring success story, it now grapples with an ailing economy hollowed out by decades of cronyism, inefficient state monopolies, and a tax system that captures less than 15 percent of GDP. The post-2011 era saw successive governments expand public sector hiring to placate unrest, creating a wage bill where 650,000 public employees consume nearly half of state revenues. This unsustainable model collided with global shocks: tourism revenue flatlined after COVID-19, remittances dwindled as European economies slowed, and the war in Ukraine spiked import costs for energy and grain. By 2023, subsidies — which devour nearly a tenth of GDP — had become both a lifeline for citizens and an anchor on public finances.

The government’s tactics to stave off collapse has become a pattern of reactive policymaking with increasingly diminishing returns.

Hafed Al-Ghwell

In response, the government’s tactics to stave off collapse became a pattern of reactive policymaking with increasingly diminishing returns. Import restrictions, initially targeting luxury goods, expanded to include essentials like dairy and vegetable oils, fueling a black market where prices soared 300 percent above official rates. Concurrently, the central bank’s direct financing of deficits has propped up state operations while accelerating inflation. These measures sidestepped deeper issues: a private sector strangled by red tape, state-owned enterprises bleeding $2 billion yearly, and an education system producing graduates mismatched for deeply anemic job markets.
Compounded by Tunisia’s isolation from international debt markets due to the collapse of IMF negotiations, the country has been left navigating a crisis with fewer tools. President Kais Saied’s rejection of austerity tied to IMF lending — including subsidy reforms and state sector downsizing — reflects legitimate fears of triggering another 2013-style uprising. Yet the alternative — relying on Algeria and Libya for sporadic credit lines and the EU for migration-related aid — provides mere drips of relief against a $4 billion annual financing gap.
Moreover, with bond yields exceeding 18 percent and foreign reserves covering just three months of imports, the 2025 budget’s assumptions of 1.9 percent growth appear detached from reality. Such a disconnect suggests Tunisia is less charting a path to recovery than bargaining that regional instability or external desperation will force a bailout on less punishing terms — a dangerous wager in a world increasingly distracted by other crises.
Bringing us to the 2025 Finance Law — enacted amid this vortex of financial strain — which reveals a familiar strategy of a cornered government attempting to reconcile the irreconcilable. Its architects have opted for a cocktail of regressive taxation and aggressive domestic borrowing: new levies on digital services, a doubling of bank transaction taxes, and a controversial “solidarity contribution” targeting formal sector employees. These measures aim to raise $1.2 billion — equivalent to 3.6 billion dinars in domestic bond issuances, despite banks already holding state debt equal to nearly a quarter of their assets. This approach, however, risks crowding out private credit in an economy where small-to-medium enterprises, which employ 70 percent of the workforce, already struggle to access loans at interest rates below 20 percent.
A core issue of the law’s gamble is its reliance on the central bank as financier-of-last-resort — a role it has played since 2022 through direct purchases of treasury bonds. This quasi-fiscal financing, now institutionalized, injects liquidity at the cost of currency stability. The dinar has shed about half of its value against the euro since 2020, and further depreciation could render the budget’s inflation assumptions — pegged at just over 8 percent for 2025 — obsolete. Food inflation, already at 15 percent, would likely accelerate, eroding the purchasing power of households where close to half live below the poverty line. Yet, the government counters that maintaining subsidies on bread, fuel, and electricity, which consume 8 percent of GDP, will ease social pain. However, these subsidies benefit smugglers and black market operators more than citizens.
Politically, the Finance Law functions as both economic policy and an instrument of control. By avoiding IMF-mandated reforms like subsidy cuts or public sector layoffs — measures that triggered Egypt’s 2023 bread riots — the government seeks to preempt street protests. However, the new taxes disproportionately impact salaried workers and youth. It also risks alienating Tunisia’s historically restive middle class while leaving the informal economy, which monopolizes 54 percent of the labor force, largely unscathed. Concurrently, the administration is also intensifying prosecutions under anti-terrorism laws, charging over 200 opposition figures since January 2024 with “financial destabilization” — a nebulous category covering mere critiques of economic policy.
The law’s viability hinges on two very shaky assumptions. First, that tax compliance will improve despite eroding public trust; and second, that the central bank can keep printing money without hyperinflation. Neither is realistic. Tax evasion, estimated at $1.8 billion annually, persists due to weak enforcement and a culture of informality nurtured by decades of bureaucratic opacity. Meanwhile, the bank’s foreign reserves — down to $5.8 billion — are being drained to defend the dinar, limiting its capacity to monetize deficits without triggering currency collapse. Even if fully implemented, the measures would reduce the fiscal deficit by just 1.3 percent of GDP, leaving public debt on track to breach 85 percent of GDP by next year.
Ultimately, the 2025 Finance Law is less an economic remedy than a political holding pattern. By prioritizing regime survival over structural adjustment, it deepens reliance on unsustainable monetary tactics and regressive taxation. The absence of reforms to Tunisia’s bloated public sector and an inefficient subsidy apparatus leaves underlying imbalances unaddressed.
While the law may defer immediate crisis, it entrenches the economy’s downward trajectory, ensuring that when external shocks inevitably hit, the state’s capacity to respond will be severely diminished. In this context, the escalation of security charges against dissenters reflects not strength, but a recognition that this latest economic gambit has little room to placate an increasingly desperate public.

* Hafed Al-Ghwell is a senior fellow and executive director of the North Africa Initiative at the Foreign Policy Institute of the Johns Hopkins University School of Advanced International Studies in Washington, DC. X: @HafedAlGhwell