Currency Market Targeted as Unrest Returns to Arab Spring Cradle

(Bloomberg) -- Tunisian Prime Minister Yousef El-Shahed is targeting the foreign-currency black market as his government bids to boost state coffers and promote growth, after the slumping economy triggered some of the biggest protests since the Arab Spring.

The government plans to allow Tunisians to hold foreign currency in their bank accounts to encourage transactions to come though official channels rather than the black market, Shahed said in an interview in Tunis. The measure is included in draft legislation on the exchange rate being studied by ministers, which will be incorporated into next year’s finance law.

Shahed was speaking hours after officials said Tunisia had received $314 million from the International Monetary Fund -- the second installment of a $2.9 billion loan. The fund has called on Tunisia to tighten monetary policy to fight inflation, and has said that “greater exchange-rate flexibility would help narrow the large trade deficit.” 

Talk of fully floating the dinar is “premature,” Shahed said, adding that the foreign-exchange measures would help to attract investment and meet IMF recommendations. The Tunisian dinar is loosely pegged to a basket of currencies, with the euro having the heaviest weighting.

The prime minister said he doesn’t expect Tunisia to follow Egypt, which lifted currency controls in November.

Tunisia has largely avoided the violence that engulfed its neighbor Libya since both countries toppled their rulers in 2011. Its new constitution has been heralded as a model for the Arab world and it has held successful elections.

Tourism Hit

Yet the nation’s tourism industry, a key source of foreign exchange, has been decimated by four major terrorist attacks, and social tensions are festering amid low economic activity and high unemployment, creating a vicious cycle that’s hard to break.

Protests have flared in recent months, halting production at oil and gas installations in the impoverished and underdeveloped south, where locals are demanding more investment and greater job opportunities -- youth joblessness, a perennial challenge for the government, remains at about 30 percent. A state of emergency imposed after a militant attack in the capital in 2015 was extended on June 14 for four more months, following violent clashes between protesters and security forces at a pumping station in Tataouine in May.

While the right to protest is constitutionally enshrined, it shouldn’t be “at the expense of production and productivity,” Shahed said late on Tuesday. “It’s not reasonable to disrupt production in a country that seeks to create growth.”

Higher Rates

To protect foreign reserves and to tackle the trade deficit, which expanded by 57 percent to 3.87 billion dinars ($1.6 billion) in the first quarter, Tunisia’s government has restricted the import of some goods. The central bank raised its benchmark rate by 75 basis points over the past two months to its highest level in more than 5 years to curb inflation and boost the dinar. The currency has weakened by about 8 percent against the euro since mid-April.

El-Shahed said the government is optimistic about growth levels, noting a rebound in tourism and a “promising agricultural season.” He said authorities are projecting an expansion of more than 2.5 percent in 2017, and from 3 to 3.5 percent next year. That will depend on security, social stability and political stability, he said, noting that Tunisia’s situation is “still fragile.”

Other measures the government is taking include cutting the public sector wage bill, reducing subsidies and restructuring public banks. El-Shahed said that the process was underway and that the privatization of lenders was still “under study.” The government may give up its few stakes in 13 private banks this year, which aren’t providing “significant profits,” he said.

“We’ve put the train on the tracks,” Shahed said. “We have to be careful not to go backward.”

--With assistance from Tarek El-Tablawy

To contact the reporter on this story: Jihen Laghmari in Cairo at jlaghmari@bloomberg.net.

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Caroline Alexander, Stuart Biggs