Highlights:

The drought slowed down an already limited economic recovery in the first half of 2023

The sixth consecutive year of below-average rainfall compromised Tunisia’s agricultural production and slowed down further an already limited economic recovery. The Tunisian economy expanded in real terms by 1.2 percent in the first half of 2023, half the rate of 2022, and almost a quarter of the 2021 rate. The drought has compounded a difficult recovery, marred by uncertain external financing and continued regulatory barriers to growth, which have not been addressed by economic reforms. Tunisia exhibits a very modest economic recovery in comparison with other countries from the Middle East and North African region, with its GDP per capita still 4.7 percent below the pre-pandemic level. With limited economic growth, the unemployment rate increased slightly by the second quarter of 2023, stabilizing at the pre-Covid level, while the labor force participation rate remained below pre-Covid.

Favorable terms of trade and the tourism recovery improved the current account deficit but external financing needs remain significant while external financing has declined.

Tunisia’s merchandise trade deficit declined by 39 percent in the first 8 months of 2023 to TD 12.2 billion (7.5 percent of 2023 GDP), boosted by more favorable international energy and food prices.

Shortages of basic products have continued, partly fueled by the system of subsidies and the drop in agricultural production, which have also increased the debt of state-owned marketing boards.

As external financing conditions remain tight, imports have continued to be compressed. That is particularly the case for highly indebted state-owned trade boards, which hold the monopoly over the import and distribution of specific products. For example, as the drought reduced Tunisia’s hard wheat harvest by two-third in early 2023 compared to previous year, the Office des Céréales had difficulties to step up its imports to compensate for the shortfall. The quantity of hard wheat supplied to the market dropped by 18 percent in the first half of 2023 compared to previous year, contributing to the shortages of cereal products. The system of price control that regulates the markets of wheat and other basic products such as sugar, milk and vegetable oil is a key driver of the increasing indebtedness of the state-owned marketing boards and shortages.

Inflation moderated slightly but it remains high—especially for food.

Inflation started to moderate since the peak of February 2023 (10.4 percent). It declined to 9.0 percent in September on the back of lower global prices and weak domestic demand. However, inflation is still high, particularly for food (13.9 percent), as the drought and the import compression have reduced the supply in domestic food markets.

Growth prospects are highly dependent on the evolution of the drought and on external financing conditions.

The World Bank forecasts a 1.2 percent GDP growth in 2023—a significant slowdown compared to 2021–22—with a slight uptick to 3.0 percent in 2024.

Emigration—including through irregular channels—has become an increasingly important strategy for Tunisians to cope with the difficult economic and social situation in the country.