Recovery Distant as Tunisia’s Economy Struggles under Debt

Should a newly democratic country be liable for money borrowed by a dictator?

By Sarah Hartwick, staff writer

Photo by Marek Aureliusz Szlak

Amid fresh protests, Tunisia is negotiating with the International Monetary Fund for a $1.7 billion US loan meant to help it cover budget deficits. The loan would come with changes to the budget. Tunisia is already trying to scale back government subsidies and tighten spending, which in turn has spurred fresh protests.

But according to the Ibn Khaldun Institute, part of the Tunisian Community Centre in the U.S., it is precisely this ongoing cycle of debt that is strangling Tunisia’s economy and causing political turmoil.

“The country is in a bad shape,” says director Mondher Smida. “The political arena is not going to improve, the economic conditions are not going to improve because of the debt. The problem is, with that debt, we do not know which part of it is legitimate and which part of it is not legitimate.”

Ibn Khaldun has launched an online petition seeking to have the international community re-evaluate Tunisia’s debt based on the idea of ‘illegitimate debt,’ a term that implies lenders should have some responsibility when they give out loans that could be used for human rights abuses.

The current unrest is nothing unusual for Tunisia. In February, opposition leader Chokri Belaïd was assassinated. Two weeks later, Prime Minister Hamadi Jebali resigned after his plans to make an apolitical cabinet failed.

And although the country’s growth rate moved from -1.8 percent in 2011, in the wake of dictator Zine al-Abidine Ben Ali’s ouster, to 2.5 per cent in 2012, today the country still suffers from high unemployment and inflation rates.

A slow recovery is normal for countries that dealt with major instability and regime change, according to an IMF working paper published in March by Padamja Khandelwal and Agustín Roitman. In the past, countries that had similar experiences have taken four or five years on average to regain their economic footing. In addition to their domestic troubles, the countries of the Arab Spring are grappling with lower trade demand from Europe. The paper advises the Arab Spring countries to adjust their spending policies and seek foreign financing in order to continue to keep control over their existing debt.

“[The debt] is strangling the country,” says Smida. [pullquote]“With that debt, they cannot move very far. Without the debt, you’re still going to have a long road ahead, but if you don’t address the debt, you are definitely keeping people in a hole that they cannot get out of.”[/pullquote]

As of 2012, CIA Factbook lists Tunisia as $24.49 billion US in external debt. That may not seem like much compared to Canada’s external debt of over $1 trillion US, but for a country with a small population and a GDP less than one-tenth of ours, it’s an alarming number. This year’s budget has set aside nearly 16 per cent of spending towards servicing foreign debt.

The United States has discussed debt relief for both Tunisia and Egypt over the past year, but Smida says he feels that the discussion needs to become an examination of where the money went. If it went into the pockets of Ben Ali’s government, if it was requested for corrupt projects, then, Smida says, the people of a newly democratic Tunisia shouldn’t be liable for those loans.

“Having an open and inclusive debate about economic policy is an essential part of a transition towards democracy – even though it adds to the uncertainty for investors in the short term,” Chatham House researcher Jane Kinninmont writes in a paper entitled “Bread, Dignity and Social Justice”.  Although her research focuses on post-revolution Egypt, the same point could be made for Tunisia.

The years following the Arab Spring revolutions have been economically difficult and politically unstable, but Kinninmont writes that despite the hardships, these countries have the opportunity to redistribute economic wealth and make good the promises of the revolution.

Relieving some of the debt found to be illegitimate or restructuring debt payments could free up Arab Spring economies like Tunisia.  They could support their own small- and medium-sized businesses, investing in their own country rather than catering to foreign debts, says Smida.

And even beyond the economic potential of waiving some of the debt, opening a discussion about the illegitimate portions of Tunisia’s debt would send a strong message of support to the citizens who fought hard to establish democracy.

“The best investment you can make in Tunisia is in the Tunisian people,” says Smida, “and that will have to come mostly from the Tunisians themselves. If you don’t free them to do what they want to do, they cannot get on their feet.”

Sources:

The IMF
Tunisia: Lack of Trust and Murderous Rivalries
Tunisia’s New Prime Minister
CIA Factbook on Tunisia

Photos courtesy of Marek Aureliusz Szlak