Months of political stalemate finally came to an end as Tunisia’s Islamist-led government resigned transferring power to caretaker Prime Minister Mehdi Jomaa. Jomaa just announced his new cabinet, which is tasked with fostering the proper conditions necessary for transparent and credible elections to be held in 2014. This is a daunting task in the face of existing political and social polarization. Prime Minister-designate Jomaa, who inherited a stagnating economy with rising unemployment and fragile security, is expected by Tunisians and the international community to promote economic activity and combat armed jihadist groups, challenges yet to be addressed by the transitional government that has managed the country in the last three years.

In the decade prior to the January uprising that ousted President Zine El-Abidine Ben Ali, Tunisia was growing at an average rate of 4.5 percent a year. In 2011, as political instability ensued, the Tunisian economy contracted by 2 percent from 3 percent a year earlier. Combined with external shocks as a result of declined demand from Europe and Tunisian workers returning from Libya, the country’s finances deteriorated sharply. Coupled with a worsening security situation and increased cross-border smuggling, external balances weakened and the current account deficit widened from 4.8 percent of GDP in 2010 to 7.4 percent in 2011. Tourism and foreign direct investment declined by more than 30 percent and the unemployment rate skyrocketed to almost 20 percent, with youth unemployment doubling.

In 2012 following constitutional assembly elections, the Tunisian economy showed signs of recovery registering a growth rate of 3.6 percent of GDP. Although tourism and agricultural production somewhat improved, Tunisia’s economy remained vulnerable to the effects of the European crisis and failed to grow at a higher level necessary to absorb the expanding labor force.

As macroeconomic indicators continued to worsen and the aspirations of Tunisians to find employment and improve living conditions failed to materialize, the interim government came under significant populist pressure. In response, the Islamist Ennahda-led government adopted expansionary fiscal policies by increasing allocations for wages and food and energy subsidies. State expenditures for subsidies alone increased from 8.4 percent in the 2010 to account for 16 percent in the 2013 state budget.

High unemployment remains a major obstacle to economic growth, particularly with 200,000 college graduates who have yet to be integrated into the labor market. With unemployment hovering at 17 percent, growth in 2013 remained slow reaching 3 percent of GDP. To address unemployment, the government continues to hire public workers resulting in a growing fiscal burden estimated to consume 36.5 percent of the 2013 budget (table 1).

Table 1. Budget expenditures by economic classification as share of total expenditures
Year	2010	2011	2012	2013
Wages/Salaries	37.9	37.0	37.2	36.5
Goods/Services	4.7	4.1	4.3	3.7
Public interventions (exc. Subsidies)	4.9	5.1	5.9	5.6
Subsidies	8.4	13.8	15.6	15.7
Capital expenditures	24.2	22.8	20.5	20.5
Net lending	-0.9	-1.2	-1.5	0.0
Debt service	20.2	17.4	17.7	15.8

Source: Tunisian Ministry of Finance. First appeared in IBP Policy Note: Key Challenges and Opportunities for Budget Transparency in Tunisia, Anja Linder, 2013.

In an effort to rein in spending and raise government revenues, the transitional government, headed by outgoing Prime Minister Ali Larayedh, tried to generate revenue by introducing taxes and reforming the subsidies system, only to withdraw such measures following public outcry. Prior to resigning, the Larayedh government imposed taxes on agricultural and public vehicles, but decided to suspend proposed reforms in response to mass protests, leaving the incoming prime minister with the burden of containing government spending while managing public discontent.

In the last three years, public spending has increased rapidly as the transitional government continued to cover social benefits postponing economic reforms. Last year, the budget deficit reached an alarming 7.5 percent of GDP, an indication that the government must contain expenditures. Other indications came from international lenders who had stepped in to assist the political transition in Tunisia. In 2013 the African Development Bank had cancelled a loan for $300 million citing instability. Similarly, the International Monetary Fund (IMF) as part of a two-year $1.74 billion loan Stand-By Arrangement (SBA) signed in April 2013 continues to withhold a second tranche worth $500 million pending economic reforms.

With some traction on the political front, the question remains whether Mehdi Jomaa will be able to fix Tunisia’s economy? It is unlikely that Jomaa’s caretaker government will be willing or able to impose austerity measures, precisely the kind of unpopular reforms recommended by international lenders. Given the evolving political landscape and the fragile support for the caretaker government, Jomaa’s government will be wise to focus on the following measures to help spur economic activity in the short-to-medium term:

• Work towards improving the deteriorating security apparatus. There is a growing problem of radical Islamist violence targeting tourist destinations that is tarnishing Tunisia’s reputation as a safe country, which is adversely affecting tourism and investment.
• Restore production output of traditional sources of income. Besides tourism, Tunisia is well-known for its main natural resource, phosphate. But with continued sit-ins and strikes, factories are operating below capacity and Tunisia is losing its traditional competitive edge over Morocco.
• Reestablish the confidence of donors and international financial institutions. The recently witnessed deterioration of relations between Tunisia and international financial institutions along with successive downgrades in sovereign ratings are a strong indication that donors are taking a wait-and-see attitude to political developments in the country. Unfortunately, Tunisia is not in a position where it can afford to run high budget deficits and not turn to donors for financial assistance.
• Continued dialogue with labor unions as a way to minimize strikes and sit-ins. Tunisia’s main labor union, the Tunisian General Labor Union (UGTT), has emerged as a prominent player in social and economic activities. UGTT has been able to exert substantial political pressure through successive strikes and protests in order to increase salaries and subsidies, arrest privatization, and recruit workers in the public sector. To mitigate the negative economic effects factory closures and low-capacity operations yield, Jomaa’s government should maintain dialogue with UGTT and the employers’ union (UTICA) while managing the political transition.

Mehdi Jomaa will undoubtedly face an uphill battle to maintain political stability while working to jump-start Tunisia’s economy in a fiscally-sustainable way. In looking at the past three years of Arab transitions, one of the lessons learned is the link between necessary economic reforms and the need for transitional governments to mitigate civil unrest. Only through an inclusive and transparent process that guarantees economic prosperity and opportunities for youth and the wider labor force can the Jomaa administration hope to achieve its goals. Despite the difficulty, however, Tunisian resolve in setting aside ideological difference to deliver a progressive constitution suggests that its citizens may have the political and economic maturity to weather this storm.

Svetlana Milbert is the assistant director for economics at the Atlantic Council’s Rafik Hariri Center for the Middle East.

Image: New Tunisian caretaker Prime Minister Mehdi Jomaa. (Photo: Wikimedia)