Tunisia Bears Down on Its Wall Street as Currency Reform Looms

(Bloomberg) -- Among the rutted roads that dissect Ben Guerdane, where smugglers and jihadis move freely across the Tunisian border with Libya, lies a two-kilometer stretch of ramshackle stalls offering euros and dollars for sale. Illicit currency trading has spread so rapidly in the turmoil unleashed by the 2011 uprising that locals dub this the Wall Street of South Tunisia.

Money changers here handle over $250 million annually, according to a 2015 study by one Tunisian economist. They present a grave challenge for the North African country keen to avoid the fate of nearby Egypt, where a similar crisis ended in a currency float that has fueled record inflation and risked anger among millions of poor.

Tunisia Bears Down on Its Wall Street as Currency Reform Looms

With pressure on the dinar mounting and foreign reserves barely sufficient for three months of imports, Tunisia is instead moving to bring these money changers -- and their hard currency flows -- into the formal economy. A draft law approved by the cabinet last month would end effective bans on exchange bureaus and foreign-currency bank accounts, facilitating access to hard currency after decades of restrictions.

Officials have tried to shutter the illegal exchanges before, but faced resistance in far-removed places like Ben Guerdane, a black market hub for everything from dollars to gasoline, where Islamic State tried to set up a small caliphate last year. This time, they say, they can’t afford to fail. 

Currency Concerns

"The new exchange law is one of the solutions to revive public finances, reduce the size of the parallel market and cut tax evasion," Ridha Saidi, the prime minister’s economic adviser, said. "We have a big problem in public finances and can only be saved by implementing the reforms."

Years in the making, Tunisia’s fiscal bind took on new urgency following the 2011 uprising that ousted President Zine El Abidine Ben Ali. The trade deficit ballooned, foreign investment sputtered and tourism declined amid strikes, protests and militant attacks, hitting hard-currency availability already restricted under a 1976 law.

Illegal exchanges flourished. A money laundering and terror financing report published in April found only about 9 percent of foreign cash declared upon entry to Tunisia ever reaches the banking system.

The central bank has drained its reserves defending the dinar, which is loosely pegged to a basket of currencies, and allowed it to drift 7 percent lower this year and 27 percent lower in the last three years. But it has struggled to close the gap between the official rate of 2.9 dinars per euro and an unofficial rate hovering around 3.2 dinars per euro.

To stem outflows and prioritize basics, the central bank last month barred lenders from providing credit for imports of non-essential goods ranging from cosmetics to cheese.

Free float?

The move mirrors controls imposed in Egypt as it struggled with dollar shortages that almost paralyzed trade before it floated the pound in November 2016. Egypt’s foreign reserves have since recovered, but inflation has soared above 30 percent, a level that in Tunisia would likely trigger unrest.

Prime Minister Yousef Chahed said in June, after protests erupted over the economy, that talk of flotation was premature but Tunisia would begin to deregulate. The International Monetary Fund, which extended Tunisia a four-year $2.9 billion loan facility in 2016, has encouraged greater flexibility but has not demanded a free float.

Philip Walker, risk practice director at the Economist Intelligence Unit, said Tunisia’s looser currency regime means its imbalances are nowhere near as bad as Egypt’s before the float.

"We’re not expecting a big, sudden fall like Egypt but will see fairly consistent but moderate depreciation over the next couple years," he said.

The so-called exchanges amnesty law is expected to reach parliament in December. It will permit licensed exchange bureaus to trade currency via banks, provided they are headed by dealers with finance degrees and have paid-up capital of 50,000 dinars.

Discouraging Investors

Under the existing law, Tunisians can obtain 6,000 dinars worth of foreign currency annually. Businesses can get 30,000-50,000 dinars, forcing companies that import or have operations abroad to resort to the cash-based informal market.

"The current exchange law is a weak point in the Tunisian economy and a limiting factor for investors," said Bassem Loukil, CEO of Loukil Group, a holding company that represents international brands including Samsung and Citroen.

Change, however, does not come easily in Tunisia, where reforms have been opposed at turns by fractious politicians, vested business interests and powerful unions.

The IMF package was based on a reform program aimed at halving the budget deficit by 2020 and stabilizing public debt below 70 percent of GDP. But implementation has been slow, prompting a Moody’s downgrade this year.

The scale of the problem means the move to reform the black market could prove "too little too late", says Riccardo Fabiani, Eurasia Group’s senior Middle East and North Africa analyst.

In Ben Guerdane, where development has long been neglected and smuggling is rife, dealers promise to fight back. Protests have erupted repeatedly, including this year. Demonstrators hounded the prime minister from a neighboring province.

“Currency trading is the engine of Ben Guerdane, the lungs we breathe with. These laws will suffocate us,” said Miloud Lafi, who lacks the qualifications to trade legally under the new law. "We will protest."

©2017 Bloomberg L.P.