Cash-strapped Tunisia is considering an unexpected move to borrow billions from its central bank to address budget deficits and as well as its economic crisis. In a closed-door emergency meeting, the parliament’s finance committee reviewed the government’s request to borrow funds after revising laws aimed at ensuring the central bank’s autonomy. The move, seeking to weaken the bank’s independence, has raised concerns about potential inflation and a loss of confidence in institutions.
The government, led by President Kais Saied, is seeking permission for the central bank to directly purchase up to 7 billion Tunisian dinars ($2.25 billion) worth of interest-free bonds to alleviate a budget deficit of 10 billion dinars ($3.2 billion). This approach, however, has sparked worries in Tunisia, where inflation and shortages of basic goods have become commonplace. Critics fear it could jeopardize the central bank’s independence, lead to inflation, and create apprehension among foreign lenders and investors.
The move comes at a time when Tunisia is struggling to secure loans from traditional creditors, including the International Monetary Fund (IMF), who proposed $1.9 billion bailout remains pending. While the IMF acknowledges that buying securities like bonds can support monetary policy, it strongly cautions against central banks financing government spending.
Economist Aram Belhadj, a professor at the Faculty of Economics and Management in Tunis, warns that modifying the central bank’s status to finance the government budget exclusively is an ill-advised approach with potential risks, including inflation, for the country’s economy and its international relations.
While borrowing from the central bank can provide short-term relief for the budget, ensuring subsidies for essential goods, critics argue that it may destabilize confidence in the currency and its value, particularly in the context of recent shortages and queues for basic necessities.
Fitch, maintaining Tunisia’s CCC- credit rating in December due to its debt and the risk of default, warned against a borrowing program enabling the central bank to directly finance the government. The agency cautioned that such a move could undermine the central bank’s credibility, increase pressure on prices, and impact the exchange rate.
The government’s request comes amid challenges in securing alternative funding sources, with negotiations over the IMF bailout plan deadlocked. President Saied’s reluctance to implement recommended reforms, such as cutting subsidies or public sector wages, has strained the situation. As the country approaches presidential elections, concerns about political pressures leading to expansionary monetary policies and potential economic downturns have been raised.