Global volatility, rising energy prices to worsen Tunisia’s

Tunisia's economic outlook has darkened considerably as a confluence of external shocks—global market volatility and elevated energy prices—converge to constrain North Africa's third-largest economy. With crude oil prices remaining elevated and geopolitical tensions sustaining upward pressure on commodity markets, Tunisia faces a critical test of its post-IMF adjustment program, threatening inflation control and fiscal consolidation gains achieved over the past two years.

## How are rising energy costs pressuring Tunisia's budget?

Tunisia imports approximately 90% of its oil and gas requirements, making it acutely vulnerable to price swings. Energy subsidies—a longstanding fiscal drag—consume roughly 2-3% of GDP annually despite partial reforms. When global oil prices spike, the government faces an immediate squeeze: either absorb costs (widening the deficit) or pass them to consumers (stoking inflation and social unrest). Current Brent crude trading near $85/barrel means higher import bills precisely when Tunisia is trying to reduce its budget deficit from 7.5% (2023) to below 4% by 2026 under its IMF Stand-By Arrangement.

## What does global volatility mean for Tunisia's foreign exchange reserves?

Tunisia holds approximately $10.8 billion in foreign exchange reserves—equivalent to roughly 5 months of imports, a healthy buffer by regional standards. However, sustained volatility and capital outflows triggered by risk-off sentiment across emerging markets can erode this cushion quickly. A currency depreciation spiral would amplify import costs (including energy), feed inflation expectations, and force the central bank to maintain higher interest rates longer, dampening domestic investment and credit growth. The dinar has already weakened 3-4% YoY against the dollar.

## Why does inflation matter more now than before?

Tunisia's inflation—currently hovering around 6.5%—remains above the central bank's target of 4%, driven largely by energy and food costs. Unlike demand-driven inflation (which monetary policy can control), energy-driven inflation is structurally difficult to manage without either fiscal transfers (expensive) or real wage compression (politically risky). With unemployment above 16% and youth joblessness near 35%, further purchasing power loss could destabilize social cohesion, undermining investor confidence and the government's ability to sustain unpopular but necessary reforms.

The broader context: Tunisia is mid-recovery from a decade of post-2011 political instability and economic stagnation. Tourism, a major forex earner, has rebounded but remains volatile. Manufacturing export competitiveness depends on energy costs and currency stability. Without both, the country risks sliding back into current account deficits and debt sustainability concerns.

**Market implications:** Higher energy costs directly depress corporate profit margins (especially cement, chemicals, and textiles—key exports). Portfolio investors are already repricing risk; Tunisia's sovereign CDS spread has widened 40bps since Q4 2024. The IMF's next review mission (scheduled Q2 2025) will be critical; any breach of deficit or inflation targets could trigger program suspension, accelerating capital flight.

The window to lock in higher external financing at current rates (before spreads widen further) is narrowing. Policy space is constrained: the central bank cannot ease aggressively while inflation remains sticky, and the government cannot abandon subsidy reform without breaching IMF targets.

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