Faced with alarming unemployment rates and budgetary constraints, a delegation of Tunisian policymakers and businesspersons led by Prime Minister Mehdi Jomaa travelled last week to Bahrain, Kuwait, Qatar, Saudi Arabia, and United Arab Emirates (UAE) in pursuit of financial support and renewed trade relations. The Tunisians hope to attract much-needed foreign direct investment (FDI) from the Gulf and to strengthen trade relations between the countries. Given the deteriorated economic conditions facing Tunisia since the uprising in 2011, such aid and trade would help stabilize and potentially invigorate the ailing economy. But will the oil-wealthy neighbors come through and, if so, at what price?

When the Jomaa-led interim government took office at the beginning of the year, it inherited a stagnating economy with limited political space for undertaking structural reforms. The interim government recognized the challenges it faces in light of a tight and diminishing fiscal framework and rising populist demands, hoping wealthy Gulf States can provide the kind of budgetary support granted to Egypt.

Tunisia had already reached out to international financial institutions to help ease its fiscal crisis. It secured $1.2 billion in loans from the World Bank and is due for a third tranche of $225 million from the International Monetary Fund (IMF) as part of a $1.7 billion Stand-By Arrangement (SBA) signed last June. The Europeans also agreed to lend €113 million since 2012 through the European Bank of Reconstruction and Development (EBRD), while the African Development Bank (AfDB) has an operational budget of $2.1 billion dedicated to financing projects in the country.

But international lenders have conditioned assistance and loan programs on the government’s trimming of public subsidies and state expenditures to cut the budget deficit, which reached an alarming level of 8.4 percent of GDP in 2013. This year, the budget deficit is projected to remain high at around 8 percent of GDP and will require the government to address pressing and unpopular budgetary reforms: reducing subsidies and wages. Attempts to increase taxes on vehicles late last year ended with the decision being revoked after social protests and anti-austerity riots broke out. Clearly, Tunisia hopes Gulf donors might be willing to provide monetary assistance to postpone painful reforms.

Meanwhile, the Tunisian government plans to issue $1.8 billion in new foreign bonds with guarantees from the United States and Japan, and a $435 million Sukuk (Islamic bonds) to generate revenue. Ensuring the flow of local and foreign investments will prove crucial to meet the country’s financial demands. However, even with foreign assistance, Tunisia’s external financial needs are estimated at TND 12-13 billion for 2014, leaving a shortfall of at least $3 billion.

Tunisia has great potential to attract FDI and develop labor-intensive sectors, specifically agriculture, tourism, and industry. But to attract foreign investors, Tunisia will have to undertake swift investment reforms that reduce administrative barriers to entry, allow access to credit, and improve transparency and governance. The previous transitional government undertook some reforms in the financial and banking sectors as well as the tax system to lure investors. It also created the new ministry of governance in 2012 to combat corruption, but has fallen short in reviving much-needed investment.

Despite these reforms, Tunisia ranks 51out of 189 countries in the World Bank’s 2014 Doing Business Report, down one place from 2013. Similarly, in the 2013-2014 Global Competitiveness Report Tunisia ranks 83 out of 148 countries primarily due to the inefficiency of the labor market to generate employment and the difficulty in starting a business. Nonetheless, Tunisia’s geographically strategic position would allow it to conduct business and trade with its African and Middle Eastern neighbors, diversifying away from traditional European partners. Jomaa’s trips to the Gulf and his earlier visits to Algeria and Morocco indicate recognition of the potential to open up Tunisian markets to those markets.

One sector that remains underutilized and disproportionally concentrated in coastal areas is tourism. Before the 2011 uprising, tourism contributed to 8 percent of GDP and employed 500,000 Tunisians. Since then the tourism sector collapsed, but new efforts are underway to restore the sector and attract as many as 7 million tourists by end of year, according to the newly-appointed Tourism Minister Amel Karbou. The tourism sector can greatly benefit from investment, particularly in infrastructure and real estate.

It is unclear whether Gulf countries will follow through on their pledges to support Tunisia’s transition, or merely pay lip-service to its political transformation. Last year, Qatar National Bank deposited $500 million to support Central bank of Tunisia foreign reserves but has seen no new support since the Ennahda government stepped down. Other Gulf states announced large infrastructure projects for Tunisia, but many of them have either stalled or been cancelled.

Considering the $12 billion in financial support to Egypt from Kuwait, Saudi Arabia, and the UAE, the Gulf states clearly have the capacity to help Tunisia meet its financial needs. If any assistance were to come, it would most likely depend on a political agenda and not on structural reforms. In the case of Egypt, Saudi Arabia, Kuwait, and the UAE rewarded the removal of Islamist President Mohamed Morsi in July 2013 and the crippling of Egypt’s Muslim Brotherhood—a group they view as an existential threat. In Tunisia, the inclusion of Ennahda—historically a Brotherhood-inspired Islamist party—will serve as an obstacle to any forthcoming aid from the Gulf, particularly from Saudi Arabia who classified the Brotherhood as a terrorist organization. What is uncertain, however, is whether the Gulf sees any political or economic gain in providing such assistance at all.

Svetlana Milbert is assistant director of the Atlantic Council’s Rafik Hariri Center for the Middle East focusing on the economics of the Arab transitions.

Image: Tunisian Prime Minister Mehdi Jomaa meets with Saudi Foreign Minister Prince Saud Al-Faisal in Riyadh. (Photo: TAP)