Tunisia paves the way for an agreement with the IMF, according to Fitch

Rating agency Fitch Ratings said Thursday that it expects Tunisia to reach an agreement with the International Monetary Fund in the second half of 2022, on the grounds that official creditors are ready to back the country after approval via referendum. on the new constitution on 25 July.

According to the preliminary results of this consultation, 94.6% of voters approved the country’s new basic law, despite a low participation rate estimated at 30.5%.

The new constitution reaffirms the distinct rights of citizens, political parties and trade unions. However, it increases presidential powers over the legislative and judicial process. Rating agency Fitch Ratings believes this should strengthen the president’s ability to push forward his legislative agenda, but at the cost of undermining the balance of power within the country’s political system.

The rating agency believes the risk to the IMF deal revolves around the role and response of the influential UGTT. He stresses, however, that the weakening of the parliament strengthens the position of the trade unions as the main alternative center of power to the presidency.

During formal negotiations with Tunisia, which began earlier this month, the IMF said good progress had been made on the parameters of a reform program. The IMF has repeatedly stated that it would prefer to involve trade unions in reform plans. However, the deal can now be reached without a deal with the unions, as the new constitution provides a firmer basis for legislative action, Fitch said in the statement.

“The union expressed its willingness to collaborate with the government on reforms, but opposed the key elements of the proposals and expressed concern about the new institutional set-up. Strong social opposition could delay a deal with the IMF or diminish the government’s ability to keep the reform agenda on track, “Fitch Ratings said in a statement.

International support

Fitch Ratings said they believe official creditors are ready to provide support to the country as they believe such support will improve stability in the region and help contain migration flows across the Mediterranean.

Recent funding from the European Union and the World Bank in favor of Tunisia has made it possible to relieve the country of the tensions induced by the high prices of oil and cereals linked to the Russia-Ukraine war. However, Fitch Ratings said financial support from many partners is contingent on an agreement with the IMF.

The EU has declared that the parliamentary elections to be held by the end of the year will be decisive for the return to normal functioning of the country’s institutions.

General context

The war between Russia and Ukraine and its consequences on commodity prices have amplified Tunisia’s economic burden caused by the COVID-19 pandemic. The country’s annual inflation reached 8.1% in June, down from 7.8% in May, according to official data.

In June, S&P Global Ratings said the banking systems of Tunisia and Turkey were the most vulnerable to the stress of external financing. S&P then said that the risk in Tunisia is more linked to the country’s political transition and its potential impact on talks with the IMF.

In early June, Tunisian Commerce Minister Fadila Rabhi said Tunisia would begin cutting food and fuel compensation in 2023 and distribute financial aid to low-income people as the country grew, preparing for discussions with the IMF.

It should be remembered that two weeks ago Fitch Ratings announced that it has placed Tunisia’s long-term issuer default ratings (IDR) in foreign currency (FC) and local currency (CCC) as well as its debt instruments under observation of the criteria. UCO (Under Ctriteria Observation) following the conversion of its sovereign rating criteria into definitive criteria.

Under the new nomenclature, ratings can change as a direct consequence of the final criteria. It does not indicate a change in the underlying credit profile and does not affect existing outlook.

Fitch says it will resolve the UCO status within six months. The results will depend on Fitch’s assessment of the appropriate notch based on the new criteria. All issuers with UCO status will not see their rating changed upon termination.

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