Tunisia Central Bank Urges Cuts After Nixing Bond Hopes

(Bloomberg) -- The governor of Tunisia’s central bank on Wednesday urged authorities to look for additional ways to cut spending in a draft budget bill, hours after the regulator effectively quashed hopes it would bolster finances by buying local debt.

The central bank, in a statement released late Tuesday, said a government plan for it and commercial lenders to help finance the revised 2020 draft budget by buying bonds would help stoke inflation and pressure liquidity.

The bank’s decision drew criticism on Wednesday, and threatens to raise the stakes for Prime Minister Hichem Mechichi in a country where political bickering has helped stunt efforts to revive the economy for around a decade.

Speaking to lawmakers on Wednesday, central bank Governor Marouane El Abassi said the government should look to cut or postpone unnecessary spending and speed up the recovery of due payments, independent radio Mosaique FM reported.

Abbasi said intervention by the regulator could deepen the crisis by stoking inflation and hurt the livelihood of Tunisians, the station reported. Any additional support by the central bank can’t exceed 3% of gross domestic product and 12% of the Treasury’s resources, he said, and would require parliamentary approval.

In a nod to the possible political fights, Abbasi warned that revising the central bank law would impact Tunisia’s sovereign rating.

The decision places the government in a difficult position. Finance Minister Ali Kooli said last week authorities may ask the central bank to buy bonds for the first time to help cover a record budget deficit.

The government is in talks with the International Monetary Fund for a new loan, but that effort is unlikely to conclude soon, he said.

The tourism-reliant economy has been hammered by the repercussions of the Covid-19 crisis, leaving Mechichi’s government with a budget gap of over 13% of gross domestic product, quadrupling an earlier forecast of a 3% deficit.

The bank said that the draft finance bill’s increased reliance on domestic borrowing would impact macroeconomic stability and inflation. It said local financing is expected to increase to 14.3 billion dinars ($5.2 billion) in the draft bill compared to the original projection of 2.4 billion dinars.

With inflation worries a key concern for authorities, Mechichi told a national body that monitors prices that “solutions must be found” to control rising costs, according to a government statement.

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