Tunisia adjusts interest rate to stabilise currency
'We should focus on exporting more, which is the hardest thing to do.' Tunisian economist Hafedh Zaafrane
Boosting the dinar. The Central Bank in Tunis. (Reuters)
2017/04/30 Issue: 104 Page: 19
The Arab Weekly
Tunis - Tunisia has taken measures to stabilise its currency after the dinar dropped to historic lows in April, losing more than 8% of its value in less than a week.
The Central Bank of Tunisia raised its key interest rate to 4.75% on April 26, up 50 basis points, while raising the minimum rate for savings to 4% and injecting $100 million into the market.
Central Bank Governor Chedly Ayari said the move was likely “to strengthen the dinar… improve the exchange rate against foreign currencies and make the national currency more attractive in terms of investment and savings.”
The dinar’s sharp decline came after Tunisian Finance Minister Lamia Zribi predicted a gradual drop in the dinar’s value, setting off alarms in the private sector.
Zribi on April 18 said the central bank would implement policies to gradually reduce the dinar’s value to avoid “a brutal devaluation like that in Egypt.”
Some experts speculated that the dinar, which traded at 2.38 to the US dollar as of April 26, could drop to as low as 2.84 to the dollar this year, others cautioned against being “overly dramatic.”
“Turning this into a huge scandal is baseless,” said Tunisian economist Hafedh Zaafrane. “While the (decrease in value) may have been accelerated in the past week, the overall rate at which the dinar is decreasing is similar to last year.”
Zribi, in clarifying remarks on April 25, said “the dinar would soon stabilise.”
Tunisian Prime Minister Youssef Chahed has pointed to the country’s growing trade deficit as the source of the dinar’s fluctuation, saying that restricting some imports could help address the financial shortfall.
“The fall of the dinar reflects this enormous trade deficit but there is no need to panic,” Chahed told local media in Sfax. “We will take some decisions… We will limit some random imports. We have a lot of unnecessary imports.”
However, with the country’s high rate of unemployment, struggling tourism industry and illegal imports escaping millions in taxes, many fear that recovery could be a long way off.
“To be honest, I’m not optimistic,” said Mohamed Ali Touati, managing director of a company in Sousse who attended the Tunisia 2020 international investment conference in November.
“While we got a lot of investments from the conference, which is really good, we are also seeing an increased presence of foreign producers operating and selling in Tunisia… We are now even importing juice from Turkey. Do you not think we have juice from Tunisia?”
Some, however, questioned the benefit of cutting imports at a time when the economy is underperforming.
“Halting imports makes no sense,” said Zaafrane. “We should focus on exporting more, which is the hardest thing to do.”
“Tunisia cannot afford to be an isolationist country right now,” said Josh Richardson, country manager at the Tunisia division of Harvest Group, an international consulting firm. “It needs to open up its influence and continue to do business with Europe and the rest of Africa.”
While the dinar’s dip has been favourable to foreign businesses operating in Tunisia, as well as Tunisian exporters and recipients of overseas remittances, many are concerned that regular consumers will bear the cost and the overall economy will suffer.
“Purchasing power will obviously take a hit,” said Zaafrane, “but things are not as catastrophic as some are making it out to be.”
If the currency continues to slide, consumers are likely to invest in hard goods, such as housing, vehicles and electronics, said Richardson, who noted that the upturn in demand can be healthy but risks driving consumer inflation.
Concern over the declining value of Tunisia’s currency is not new. The dinar has been steadily declining since Tunisia’s 2011 uprising and a series of terrorist incidents that damaged the once booming tourism industry.
While officials announced a 5-year development plan in November that detailed ways to secure a target growth rate of 4% per year, implement dozens of education and infrastructure projects and create 400,000 jobs, objectives are yet to be met.
On April 17, the International Monetary Fund agreed to release a delayed $320 instalment of Tunisia’s $3.2 billion in loans.