Rising international prices have exacerbated economic vulnerabilities

The war in Ukraine and rising commodity prices have exacerbated the vulnerabilities of the Tunisian economy in the first months of 2022. The impact of the war began to be felt as the trade deficit widened by 56 percent in the first six months of 2022 reaching 8.1 percent of GDP.

The increase in international commodity prices has created additional pressures on public finances, mainly through subsidy spending. Our simulations suggest that energy subsidies and food subsidies in 2022 would increase relative to the 2022 Budget Law by 2.8 and 0.4 percentage points of GDP respectively. The increase in subsidies translates into pressure on public debt, which between 2017 and 2021 had already increased from 66.9 to 82.4 percent of GDP.

Inflationary pressures increased significantly, mainly from global markets and higher administered prices (the inflation rate rose from 6.7 percent in January 2022 to 8.1 percent in June 2022).

With a challenging global environment, the economic recovery appears weaker than previously forecast

With a projected growth rate of 2.7 percent, the economy appears to be on a slightly lower growth path than previously expected. This is compounded by the worsening budget and trade deficits resulting from higher global commodity prices. The shortage of cereals on international markets could lead to new risks of poor availability on the domestic market.

Rising commodity prices increase the urgency of decisive reforms, including the food subsidy system

As the war in Ukraine has created further challenges for the economy, the Tunisian government has announced a program that includes several measures to support the economy and social inclusion. One of the more timely proposals of this programme concerns the price adjustments of subsidized basic products while compensating vulnerable populations for the price increase.

Part B of the Bulletin highlights the importance of this type of reform in the context of the cereal subsidy system, which dominates food subsidies. Tunisia has long held a policy of keeping cereal prices artificially low. Part B shows how this subsidy structure has maintained low and stable prices for consumers.

But at the same time this has led to large losses for the State, for the entire wheat value chain and for the food security of Tunisians. The low prices paid to wheat farmers have increasingly led them to abandon wheat production. The price control system has reduced investment and competition incentives for cereal processors, which as a result appear to be less dynamic and productive than all other food processors. The structure of subsidies has also encouraged overproduction—at the processor level—and overconsumption—at the household level—of cereals, generating significant leakages and waste.

The cost of the universal subsidy system has become unsustainable for the state in terms of subsidies and imports. The system, as currently designed, is ill-prepared to deal with shocks. Indeed, Tunisia’s current difficulties in obtaining sufficient wheat have led to shortages of cereal products and uncertainty about future supplies.

Replacing subsidized cereal consumption prices with transfers to households would improve the efficiency of the system, reduce the fiscal and import costs, and strengthen the resilience of the food system. The timing of such politically and socially sensitive reform, including its sequencing, would need to be carefully considered.