FOOD AND ENERGY SUBSIDIES PUT PRESSURE ON GOT

C O N F I D E N T I A L TUNIS 000691 SIPDIS STATE FOR NEA/MAG (HARRIS) STATE PASS USTR (BURKHEAD) USDOC FOR ITA/MAC/ONE (NATHAN MASON) CASABLANCA FOR FCS (ORTIZ) CAIRO FOR FINANCIAL ATTACHE (SEVERENS) LONDON AND PARIS FOR NEA WATCHER E.O. 12958: DECL: 06/25/2018 TAGS: ECON EINV EFIN PGOV EAGR TS SUBJECT: FOOD AND ENERGY SUBSIDIES PUT PRESSURE ON GOT BUDGET REF: A. TUNIS 615 ¶B. TUNIS 522 ¶C. TUNIS 52 ¶D. 07 TUNIS 1528 Classified By: Ambassador Robert F. Godec for Reasons 1.4 (b) and (d). -------------- Summary -------------- ¶1. (C) With the recent spike in world commodity prices, the GOT's subsidy bill has ballooned, straining public finances. The International Monetary Fund (IMF) has praised Tunisia's prudent fiscal management, which has kept budget deficits low, even with subsidies. Yet, as subsidies for energy and food top three billion dinars (US $2.5 billion),Tunisia's top economic officials have begun to question the sustainability of the current subsidy regime. Protests in the mining region of Gafsa over high prices (Ref A), unemployment and corruption underscore the fragile balance between fiscal stability and social stability. In this climate, the GOT has avoided making major changes to its subsidy regime and has tried to limit price increases (Ref B, D). For a country without major resources, Tunisia has weathered the crisis relatively well, but Tunisia has little fiscal room to maneuver. Increased hydrocarbon revenue has helped to offset the subsidy bill, but the GOT has also used privatizations, loans and bonds, and project finance to generate revenue and support large infrastructure projects. End Summary. -------------- Budget Tight, But Manageable -------------- ¶2. (C) The International Monetary Fund have praised Tunisia's prudent fiscal management, which has kept the budget deficit around 3 percent annually. The 2008 budget totals 15.2 billion dinars (US $12.9 billion),an increase of 3.7 percent over the 2007 budget and equal to 31.5 percent of GDP. Current expenditures represent 55.5 percent of budget at 8.5 billion dinars (US $7.2 billion). Tunisia's external debt remains high at 52.5 percent, but debt service remains manageable and the GOT's record of repayment is excellent. ¶3. (C) Nevertheless, with two-thirds of the budget devoted to paying salaries and reimbursing public debt, the GOT faces major public finance constraints. The spike in world commodity prices has caused the GOT's subsidy bill to balloon (Ref B, D). According to Minister for Development and International Cooperation Mohamed Nouri Jouini, the GOT is estimating an annual expenditure of ONE billion dinars (US $850 million) on food subsidies and 2 billion (US $1.7 billion) on energy subsidies. This would represent nearly 20 percent of the GOT budget. According Ndiame Diop, World Bank Resident Economist for Tunisia, stressed that Tunisia has very little fiscal flexibility due in particular to the large percentage of the budget tied up in public sector employment. The GOT spends nearly 48 percent of the budget on salaries, but shows no sign of reducing the public payroll. In 2008, the GOT will hire an estimated additional 12,000 public sector employees, indicative of an effort to absorb unemployment through public sector jobs. In comparison, capital expenditure is 2.6 billion dinars (US $2.2 billion). ¶4. (C) The 2008 budget forecast a revenue of 11.8 billion dinars (US $10 billion),with 10 billion dinars (US $8.5 billion) in fiscal revenue and 1.8 billion dinars (US $1.5 billion) from sources such as petroleum revenue and royalties from Trans-Mediterranean pipeline. The GOT anticipates funding the budget shortfall through bond issues, grants and financial credits. Abdelhak Senhadj, head of the International Monetary Fund's recent Tunisia mission, stated that although the subsidy bill puts pressure on the budget, the GOT has also benefited from increased hydrocarbon revenue. The IMF expects that the GOT budget will remain at no more than a 3 to 3.5 percent deficit. Ndiame Diop, World Bank Resident Economist for Tunisia, stressed that the real problem for Tunisia would be if oil prices dropped, but food prices remained high. With protests in the mining region of Gafsa becoming violent and spreading to a new town (Ref A), the GOT is understandably reluctant to make any dramatic changes to prices. The GOT has already hiked gas prices over 10 times since 2004, but has tried to limit increases for staple food products. The 1984 "bread riots" erupted after a 100 millime (approximately 10 cent) increase doubled the price of bread. Tunisians note that the government has a history of hiking prices in August, when everyone is on vacation and less likely to notice or react. -------------- Subsidies Unsustainable -------------- ¶5. (C) On the sidelines of the June 12 Carthage Investment Forum, Minister Jouini told the DCM he was very concerned about GOT subsidy programs, saying that annual expenditures on food and energy subsidies are not sustainable at this level. He said that he was among those who felt that the government needed to allow prices to rise and that salaries needed to rise as well. Ndiame Diop noted that the Minister of Finance Rechid Kechiche and Jouini are "on the same page" on subsidies, with both expressing concern. Jouini told the DCM the money saved by the government could be used to address socio-economic problems and increase internal investment on infrastructure. In effect, costs have to be moved away from the government and onto employers. In the area of fuel subsidies, Jouini noted that gasoline was not much of a problem since the price was not subsidized much but that diesel, bottled gas, heating oil and electricity were all major losers. ¶6. (C) Jouini added that it was unfair for someone such as himself to be paying only 8 percent of the cost of a university education in the same way as a lower income Tunisian. He agreed with a suggestion by the Canadian Ambassador that there needed to be a social safety net for the poorest while removing subsidies for those with higher income. Jouini added that a fundamental problem is that Tunisia is still a developing economy and people want to live like Europeans and compare themselves to France when the economy has only a GDP of 40 billion dinars. Later he noted that raising prices and salaries could effect export industries, but he thought, the impact could be absorbed if handled properly, although it would be difficult. ¶7. (C) Financial consultant Ezzeddine Saidane stressed that budget cuts will have to be made and would likely come at the cost of infrastructure and social services. Saidane said that the government had "missed their chance" to reform the subsidy system and that there was no way to deal with the problem now. Tunisia's education and healthcare systems have been a great source of pride, with high literacy rates (74 percent),low infant mortality, and a long life expectancy. In recent years, however, Tunisians have begun to grumble that the quality of education and healthcare services have both declined. Despite these complaints, the GOT continues to devote about 5.5 percent of the budget to healthcare and around 23 percent to education and training. -------------- Making Ends Meet -------------- ¶8. (U) Despite the growing burden of subsidies, Tunisia has been able to keep the budget balanced and still undertake many large infrastructure projects. As both the World Bank and IMF have noted, rising oil prices have both harmed and helped Tunisia. Even as high oil prices have made energy subsidies extremely costly, the GOT has benefited from a significant increase in hydrocarbon revenue. For 2008, the GOT estimates that it will gain about 1.2 billion dinars (US $1.02 billion) in revenue from taxes on oil companies, oil and gas royalties, and profit from oil activities. This would represent a nearly 45 percent increase in revenue over ¶2007. ¶9. (U) Privatization has been a welcome source of revenue in recent years. The GOT's ongoing program to privatize state-owned companies has boosted foreign exchange reserves and allowed the GOT to reduce external debt. 2006 was a banner year with the privatization of a 35 percent stake in Tunisie Telecom bringing in a record US $2.25 billion. In 2007, there were five privatizations totaling of 430 million dinars (US $360 million) in revenue, with three more privatizations underway. There is continued speculation about when an additional 15 percent of Tunisie Telecom will be privatized, but thus far this has not been announced. ¶10. (C) The GOT has made increasing use of concessions for large infrastructure projects, even creating a new position for a megaprojects czar within the Presidency. Economic consultant Mourad Bsiri notes that the use of build-own-operate-transfer (BOOT) projects and long-term concessions reveals that GOT coffers are essentially empty. Yet, project finance has allowed the GOT to undertake many large infrastructure projects at no cost to itself. The GOT recently awarded the concession for the Enfidha airport to Turkish TAV Holding for 400 million euros and 40-year operation lease. Qatar Petroleum won the concession for the new Skhira oil refinery, estimated to be US $2.5 billion investment. A slew of major Gulf infrastructure investments have been announced over the past two years (Ref C),with the investors receiving the land for little to no cost from the GOT. The GOT has already launched an international tender to build a deepwater port in Enfidha and has announced an upcoming tender for a desalination plant near Djerba. ¶11. (U) Even as the GOT has reduced external debt levels, it has continued to undertake new loans from donor institutions. In May, the European Investment Bank granted Tunisia a 200 million euro loan to support small and medium enterprises and a 60 million euro loan to state-owned Tunisian Electricity and Gas Company (STEG) for development of the natural gas network. On June 11, the African Development Bank approved a US $263 million loan for road development. Tunisia has also floated bonds on the international market, the most recent being a US $248 million samurai bond issued in August 2007. -------------- Comment -------------- ¶12. (C) The high price of food and energy subsidies has put pressure on the GOT budget, but thus far, Tunisia has weathered the crisis well and has managed to keep the deficit low. Yet, even Tunisia's top economic officials are expressing concern with the mounting subsidy bill. While it is clear that these funds could be better spent, the GOT is unlikely to make any drastic changes when tensions are already high over unemployment and inflation. For now, the GOT will remain between a rock and the hard place. End Comment. Please visit Embassy Tunis' Classified Website at: http://www.state.sgov.gov/p/nea/tunis/index.c fm GODEC