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Banking on Tunisia's Revolution

By Marc Champion
December 19, 2012 10:06 AM EST

If anyone enjoys a sense of clarity about what will happen in Tunisia over the coming months, you'd hope it would be the governor of the central bank, Chadli Ayari. With admirable candor, he says he does not.

Speaking today at his office in the bank's concrete bunker-like headquarters in central Tunis, Ayari said he was sanguine about the fiscal deficit of 6.6 percent of gross domestic product that the government ran this year. That's up from last year and is in part the result of about 4.5 percent of GDP worth of cash, fuel and food subsidies handed out since the 2011 revolution to cushion the shock to living standards.

With growth expected to rebound to 3 percent this year (after a 2.5 percent fall in 2011), the deficit is manageable he says -- for now. "We at the central bank are not very happy when we see the deficit shooting up, or when we see inflation going up," said Ayari, who was economy minister under Tunisia's first post-independence leader, Habib Bourguiba. After the transitional period, meaning later next year, Ayari said he'll have to look again.

For now, he has the opposite problem of central bankers in most developed economies who are struggling to boost demand: Tunisia has too much consumption and too much bank lending to finance it. That is driving up the current account deficit, which was 6.9 percent of GDP over the first 10 months of the year, with external debt and inflation running between 5 percent and 6 percent.

So Ayari has been squeezing the banks to cut lending to consumers in the hope that Tunisians will buy fewer imported cars and other goods he describes as unnecessary and for some a hedge against future currency devaluation. He's forcing commercial banks to deposit at the central bank an amount equivalent to 50 percent of every loan they make to finance consumer spending.

Consumer loans reflect just one part of Tunisia's wider problem -- a lack of investment since the revolution. The banks prefer to lend for consumption than for investment because they get a higher and less risky return, Ayari said. At around $1.5 billion this year, foreign direct investment is also far too little, he said. Tunisian companies are sitting on cash, waiting for legal certainty and political stability.

In fact, everything in Tunisia is waiting on politics. A draft constitution has been sent out for public discussion but has yet to be debated by the Constitutional Assembly, which doubles as Tunisia's parliament. Once the constitution is passed, the assembly then needs to pass a new election law, a task expected to be just as contentious. And once that is adopted, there will need to be elections, for which no date has yet been set.

In some ways Tunisia's problems are a reverse image of Egypt's. The coalition government in Tunis may be led by a Muslim Brotherhood offshoot, Ennahda, but unlike in Egypt, Islamists did not win a majority in parliament, and the president, who is from a different, secular party, is virtually powerless. As a result, the constitution is taking too long to draft, rather than being bulldozed through as President Mohamed Mursi did in Cairo. In the long term, Tunisia may be better off for that, but in the meantime the uncertainty is troubling.

Until the elections, reforms that would help the deficit -- such as cutting subsidies and pensions -- are politically impossible, or at least highly unlikely, given that any party seen as responsible would suffer at the polls. Also on hold are about 1 billion Tunisian dinars or more worth of sukuk, non-interest bearing Islamic bonds that the government plans to issue for the first time. Preparations for organizing the issue have barely started, Ayari said, predicting that the bonds will be issued in the second half of next year.

Impatience is growing on the streets, resulting in some protests that ended in violence. Fringe radical Salafist groups have made headlines by attacking secular targets such as art galleries, while refugees, arms and insecurity have spilled across the border from Libya. For the brave, this is perhaps the moment to invest in Tunisa. A new investment code is due to take effect as early as January.

Still, in the face of a slump in southern Europe, Tunisia's dominant export market, the large-scale foreign and local investment needed to revive the economy has not materialized. "The private sector in Tunisia, which should be an investment partner, is absolutely out of the picture," Ayari said.

(Marc Champion is a member of Bloomberg View's editorial board. Follow him on Twitter.)

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