Tunisia: a colossal wage bill that handicaps any economic development

#Tunisia : The State and the UGTT trade union center would have agreed on a wage increase while the IMF demands a freeze. The measure aimed at mitigating the impact of inflation will in fact increase the wage bill and reduce the government’s budgetary leeway.

Between the hammer of the International Monetary Fund (IMF) and the anvil of the powerful Tunisian General Labor Union (UGTT), the Tunisian government seems to have opted in favor of the unions and therefore, i.e. to increase wages for mitigate the loss of purchasing power of citizens very affected by the soaring prices of many products, in particular food products, under the effect of an international outbreak and shortages of many food products. Last August, inflation reached 8.6%.

Tunis has decided to increase salaries, despite the fact that the civil service salary freeze is high on the demands of the International Monetary Fund (IMF) to release a new loan essential to alleviate the financial crisis the country for several years.

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If the amount of the increase and therefore the additional bill to be borne by the State budget is not known – the amount will be determined according to inflation and the financial capacities of the government -, the fact remains no less than it will increase the ratio of the wage bill to the already abysmal Gross Domestic Product (GDP) of the country because of a number of civil servants reaching 680,000 for a population of only 12 million inhabitants, and this, d especially since this wage increase measure will also affect public service pensioners.

Consequently, expenditure on the wage bill which peaks at a record level of 15.6% of GDP in 2022, compared to 10% in 2010, will increase further, regardless of the amount of this increase in wages. This means that there is a risk of moving away from the objective of reducing this ratio to 12%, as the IMF wishes. The country’s wage bill/GDP ratio is one of the highest in the world.

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Already in 2021, with 661,700 public service employees and a total payroll of 20.3 billion dinars, or 35% of the state budget, expenditure allocated to salaries absorbed more than a third of the budget. Since then, the number of public service employees has continued to increase under the effect of essential recruitments in the education and health sectors to currently reach more than 680,000 civil servants.

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And also taking into account the debt service bill, which is colossal because of the country’s indebtedness in recent years, with a debt that has reached a peak of 100 billion Tunisian dinars, or 30 billion dollars, corresponding to a debt ratio of nearly 100% in 2021, the government’s leeway to deal with investment spending will shrink further and negatively impact the country’s economic development.

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Thus, this increase will increase budgetary expenditure in a context of scarcity of revenue due to a difficult economic situation and, by extension, increase the budgetary deficit. This is already high, standing at 9% of GDP, while the government was forecasting a deficit of 6.7% of GDP for 2022.

However, this increase in salaries will be followed by the application of the reforms demanded by the IMF, including the reduction of overstaffed civil servants through voluntary departures and the reduction of recruitment for the sole benefit of priority sectors, the gradual elimination of subsidies on basic products and their replacement by transfers to the poorest, tax reform, etc.

These are structural reforms that Tunisia must put in place to lay the foundations for a solid economy. And the IMF requires the implementation of this package of reforms to grant a new loan to the country. In the meantime, the discussions seem to be at a standstill and the salary increase could soften the position of the UGTT on the other points of the reform, in particular the elimination of subsidies or the freezing of recruitment. It is however obvious that without this IMF loan, Tunisia will find it difficult to obtain other financing from other international financial institutions and above all to be able to exit on the international debt market under better conditions after the lowering of its sovereign rating by all rating agencies (Fitch, Standard & Poor’s, Moody’s, etc.).

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