#Tunisia : The Central Bank of Tunisia sharply raised its key rate during the meeting of its Board of Directors held on May 17, 2022. This decision aims to counter inflation and encourage savings. However, these effects on investment are likely to be adverse.
The BCT, which has not touched its key rate since January 2021, thus joins many central banks which have opted to tighten their monetary policies in order to cope with inflationary pressure. A sign that galloping inflation is part of a dangerous trend that must be slowed down, if we do not want to relive the effects of the price rises of 2017 and 2018. We must at all costs avoid inflation at two figures that threatens the country.
One of the consequences of this increase is the increase in the deposit facility and marginal lending rates to 6% and 8% respectively. And at the same time, the BCT also raised the minimum rate of remuneration for savings by 100 basis points to 6% to encourage savings to the detriment of consumption.
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Behind this decision, the monetary authorities wish to attenuate galloping inflation by further encouraging the population to save. According to the BCT’s note, inflation has accelerated in recent months, reaching 7.5% in April 2022 year-on-year, after 7.2% in March, the highest inflation rate recorded. in Tunisia since 1991 (8.19%). The rise in prices thus reached its highest level since the end of 2018. A situation which is explained by the acceleration in the price increases of manufactured products by 9.3% and food products by 8.7% year-on-year. The increase in food prices was mitigated by subsidies affecting certain basic necessities.
This inflationary pressure should remain at a high level in 2022 and 2023, according to the projections of the BCT due to the combined effects of imported inflation and the repercussions of the adjustments expected in administered prices within the framework of the reforms of the subsidy system. . Regarding this last point, it should be noted that since the beginning of the year, fuel prices have been readjusted upwards twice. Suddenly, the monetary institution shows its concern and stresses the importance of economic policies to avoid an inflationary drift which would further reduce the purchasing power of citizens by reducing wages in real terms, just as it would harm the recovery of economic activity and would accentuate the external imbalance.
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Regarding this last point, in addition to the widening of the current account deficit (-2.7% of GDP) during the first 4 months of the year, due to the deterioration of the trade deficit following the surge in the prices of imported products (hydrocarbons , cereals, oilseeds, etc.), the country’s foreign exchange reserves stood at 23.65 billion Tunisian dinars, now providing only 124 days.
Note that Tunisian inflation is globally imported. It is above all the result of the almost generalized surge in international commodity prices in the wake of the war between Russia and Ukraine, which has led to disruptions in global supply chains with the consequences of a surge in hydrocarbon prices, the rise in maritime freight costs and the surge in the prices of agricultural products, in particular cereals (wheat, corn, etc.) and oilseeds.
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Still, if savings are encouraged, the high level of the key rate following its increase to 7% can have a negative impact on economic growth by discouraging investment because of the increase in the cost of rent that it entails. Policy rates are the rates at which the central bank lends short-term cash to financial institutions. Raising them translates mechanically into a rise in central bank rates. A situation that could seriously disrupt the economic recovery and therefore growth. After all, it was already very soft in Tunisia and the authorities certainly preferred to preserve consumers’ purchasing power. At the end of the first quarter of 2022, GDP recorded an increase of 2.4% year-on-year, thanks in particular to the industrial sector, which strongly contributed to the recovery in the volume of exports.
Faced with this situation, the BCT calls for the acceleration of structural reforms essential to put the national economy back on the track of sustainable growth. However, the implementation of these reforms is delayed by the absence of an agreement between the Tunisian authorities and the International Monetary Fund (IMF). But the financial institution demands structural reforms in return for the release of a large loan estimated at 4 billion dollars, essential to relieve Tunisian finances, put to the test by a structural crisis aggravated in recent years by the insecurity (terrorist attacks), political instability (frequent changes of governments), the Covid-19 health crisis and the effects of the Russia-Ukraine war.