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Expropriation Risk: 52 52 62 46 ▼ Political Violence Risk: 48 48 59 59 ► Terrorism Risk: 55 55 53 51 ▼ Exchange Transfer and Trade Sanction Risk: 55 55 55 55 ► Sovereign Default Risk: 66 66 75 75 ►
TREND ▼
Government's commitment on climate policy Weakest 1 2 3 4 5 Strongest
Tunisia is highly vulnerable to the effects of climate change. Water resources are already heavily overexploited, and challenges will only mount as summers become longer and drier. Most of southern Tunisia is arid desert, with agriculture, which only accounts for around 10% of gross domestic product (GDP) and 14% of employment, concentrated in northern coastal and upland regions. However, much of the country’s existing agricultural land may eventually become unable to support staple crops, fruits, and nuts.
Yet the green agenda has rarely been a central issue for national-level political debate in the tumultuous decade after the 2011 revolution, and political parties with a specific environmental focus have only ever won one seat in parliament in elections since this time. This is despite having an electoral system relatively favourable to small parties.
This has meant climate change mitigation has not been a priority for successive governments, and incumbent President Kais Saied has rarely spoken on the issue. Meanwhile, budgetary constraints have left little room for state investment in environmental projects, and weak private-sector growth has also precluded upgrades to equipment and facilities.
Theoretically, Tunis continues to aim for targets set in 2010 for a 41% reduction in greenhouse gas emissions by 2030 and to produce 30% of its electricity from renewable sources. However, progress has been slow, in part because of financing challenges and inefficiencies, as well as a lack of political will. The country still relies on fossil fuels for around 97% of its electricity.
Several recent moves by the government will concern foreign investors. Foremost of these is Saied’s decision in February to restructure the judiciary to give the presidency greater control and effectively remove the separation of powers. This is almost certainly intended as a precursor to more aggressive political prosecutions of Saied’s opponents and is viewed as a threat to the rule of law.
At the same time, the government has set in motion a plan for the compulsory liquidation of the Banque-Franco Tunisienne, which stands at the heart of a long-running expropriation dispute, dating back to the state’s seizure of the Dutch ABCI Investments’ majority stake in the bank in 1989. The liquidation aims to sidestep an ongoing World Bank-sponsored arbitration process, and it remains unclear whether the move will be accompanied by some form of compensation for ABCI.
TREND ►
High levels of unemployment and rising living costs have been fuelling on-and-off protests over several years, especially in the centre and south of the country. Many such demonstrations have ended in violent confrontation with the security forces. With citizens’ purchasing power expected to suffer in coming months, the risk of political violence is set to rise.
Alongside global inflationary pressures, household budgets have been additionally squeezed by the gradual lifting of petrol subsidies, with several price rises at the pumps over the last year. The government has also signalled it may scale back subsidies on other basic goods in the coming months, which would certainly be met with popular resistance.
At the same time, Saied’s efforts to consolidate power are being met with increasing resistance from the political establishment and civil society. Indeed, the president’s opponents are growing in number as he has successively marginalised various elements of the political elite. This raises the likelihood of more frequent and larger anti-government mobilisation.
The terrorism risk appears to have been on the decline over several years, and no significant incidents have occurred in the country for over 18 months. Nonetheless, a state of emergency, imposed in 2015, remains in place and small militant cells are present in remote mountainous areas in the west of the country.
The prevalence of weapons and weak state control over large areas of territory in neighbouring Libya continues to pose an escalated risk of cross-border operations by extremists. Fresh attacks are possible, although they would likely be directed at the security services rather than commercial targets.
Foreign currency reserves held by the central bank increased slightly in late 2021 and early 2022, driven by an uptick in remittance flows from Europe. As of March, foreign currency reserves stood at the equivalent of USD8 billion, up from USD7.4 billion a year previously. However, the outlook is deteriorating in light of the Russia-Ukraine crisis, which has led to spikes in the prices of wheat, oil and other commodities, portending a significant widening of the current account deficit.
At the same time, the increasingly authoritarian tenor of Saied’s administration is alienating countries that Tunisia would traditionally turn to for economic support. This is not helped by the seemingly chaotic nature of governance in Tunis at present, which is stymying diplomatic outreach.
While there is no serious discussion of sanctions on Tunisia over its democratic backsliding, the situation is a deterrent for European governments and European Union (EU) institutions, which are a key source of development loans and grants. Indeed, the EU has been slow in disbursing a second EUR300 million tranche under its Macro-Financial Assistance programme, possibly in part owing to concerns over the political environment.
The 2022 budget indicates Tunisia plans to repay USD1.5 billion in external debt this year, while taking out a further USD4.3 billion in foreign loans (in addition to significant domestic borrowing) to cover an expected fiscal deficit equivalent to 6.7% of GDP.
Crucial to these assumptions is securing a new financial support package from the IMF, which would in turn instil confidence among other institutional lenders. The government has been in talks with IMF over such a programme for almost a year, having been disrupted by Saied’s coup and a high rate of turnover within government departments.
Tunisian officials say they are optimistic a deal will be reached in the coming weeks and leaked documents in January indicated the contours of a reform plan have been drawn up. That would primarily target the large public sector wage bill as well as the subsidy system. Yet such changes would be deeply unpopular and would be met with civil society resistance, which raises the question over whether Saied’s administration can demonstrate it has secured broad buy-in for its proposals, a key condition for the IMF.
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