Tunisia's Sovereign Risk Alert: When Institutional Decay Meets Fiscal Risk

From Central Bank Independence to Sovereign Sukuk: The Growing Risks to Financial Stability and Market Confidence. An assessment of the economic cost of Tunisia's current ideological experiment.

The World Bank's recent Tunisia Economic Monitor reveals a stark reality: Tunisia's growth has stalled at 0.6% in early 2024, making it the only country in its region failing to recover to pre-pandemic levels. Behind these numbers lies a systematic dismantling of economic institutions under President Kais Saied's administration.

Since July 25, 2021, his government is activekly trying to subordinate the Central Bank, restricted private banking operations, expropriated private business assets, nationalized key economic sectors such as agriculture and commerce and imposed punitive taxation on the private sector.

The human cost has been severe: youth unemployment has soared to 38%, real wages have declined by 35%, and the middle class has contracted dramatically from 70% to just 46% of the population. Foreign investment has plummeted by 62%, while capital flight has surged by 312% since 2020.

Saied's approach reflects a Leninist-inspired commitment to state control, evident in his rhetoric about "unhooking from Western frameworks" and his systematic subordination of market mechanisms to central authority. His administration has dismantled key democratic institutions in less than 2 years: parliament was suspended and dissolved, the independent judicial council was dismantled, and rule by presidential decree became the norm. Most troublingly, Saied has unprecedentedly involved military institutions in what he calls an "economic liberation war," threatening the professional integrity of Tunisia's security forces and actively changing the nature of the Tunisian Economic and State Structure.

This authoritarian turn represents a sharp departure from Tunisia's historical relationship with state economic control. The 1864 tax revolt and the 1960s rejection of Soviet-style collectivization demonstrate a consistent long term pattern of the Tunisian population resistance to centralized economic authority. This history of opposing state overreach provides crucial context for understanding both the current crisis and potential paths forward.

Tunisia's own reform tradition offers proven alternatives to state control. In the 19th century, Khayr al-Din al-Tunisi, who opposed excessive taxation by the regime, demonstrated how economic modernization could strengthen rather than weaken cultural identity. His seminal work "The Surest Path" provided a framework for combining institutional reform with Islamic values, proving that progress and tradition could coexist productively in Tunisia.

Later, during his transformative tenure as Prime Minister (1970-1980), Hedi Nouira achieved remarkable 8.4% annual GDP growth through market-oriented reforms balanced with strategic state guidance. Nouira's approach built Tunisia's modern middle class through careful institutional development and economic liberalization—the very middle class that Saied's policies are now decimating.

The parallels between Tunisia's current trajectory and Venezuela's economic collapse are particularly instructive. Both countries witnessed systematic attacks on independent institutions, aggressive state intervention in the private sector, and the justification of these actions through appeals to "national sovereignty", a claim losing its validity considering these regimes do not even uphold their domestic laws and constitutional orders.

In both cases, the results have been catastrophic: capital flight, collapsing foreign investment, and the decimation of the middle class. When Saied's close advisor declares that "in every just war there are innocent victims," it echoes the rhetoric that presaged Venezuela's economic ruin, hurting the local population.

The World Bank report on Tunisia raises particular alarm about "Tunisia's increasing reliance on domestic sources to fill the external financing gap," warning of "medium-term risks." This seemingly technical observation masks a troubling reality: the regime is forcibly redirecting Tunisians' savings away from productive investment and toward funding a government that has lost international credibility and that deliberately works on wealth and growth erosion, driven by ideological Leninist ideas focused on "unhooking Tunisia from the West".

Tunisian businesses and households are being deliberately starved of credit to prop up a regime that can no longer attract external legal and legitimate financing.

This systematic weakening of institutions is further exemplified by Article 11 of the 2025 Finance Bill, which authorizes 8 billion TND in Islamic Sukuk borrowing without establishing proper institutional safeguards or restructuring mechanisms. The article's broad powers to concede sovereign assets as collateral, without appropriate reforms or institutional oversight, has raised serious constitutional concerns among military, security forces, and state institutions.

Beyond domestic implications, this unilateral move creates significant risks for international financial institutions and partners. For the IMF and other multilateral lenders, it could undermine ongoing program negotiations and debt sustainability frameworks, while potentially triggering cross-default clauses in existing loan agreements. The lack of transparency and proper oversight could create competing claims between traditional creditors and Sukuk holders, leading to complex legal challenges in international courts and potentially violating existing covenants with international lenders.

This unprecedented financial maneuver not only risks compromising Tunisia's sovereign assets but also threatens to further isolate Tunisia from international financial markets and complicate future legitimate borrowing efforts, creating additional instability risks in an already fragile Mediterranean economic environment.

Saied's minority rule, engineered through manipulated electoral laws and systematic elimination of political opposition and dismantling of local municipal councils, has enabled a hostile takeover of the country's economy. The current parliament, elected with less than 10% voter turnout and devoid of opposition representation, rubber-stamps policies that amount to financial mega-expropriation as evidenced by the 2024 Budget Law currently under review.

The regime's alignment with authoritarian models was laid bare when Venezuelan officials were granted observer status in presidential elections while Tunisian civil society observers were excluded.

Addressing this crisis requires immediate action in four critical areas.

• First, central bank independence must be restored through reinstated constitutional protections and an end to political interference from kais Saied in monetary policy.

• Second, judicial independence must be rebuilt, beginning with the enactment of the Constitutional Court, reestablishment of an independent judicial council and the cessation of politically motivated business prosecutions.

• Third, property rights must be protected through clear legal frameworks, an end to arbitrary asset seizures, and reduced punitive taxation.

• Fourth, commercial courts must resume normal operations with transparent dispute resolution mechanisms that comply with international standards.

The implications of Tunisia's crisis extend far beyond its borders. As a strategically located Mediterranean nation, Tunisia's stability is crucial for regional security, economic integration, migration management, and the future of democratic and stable governance in the region.

Countries with strong democratic institutions and rule of law, free from excessive state economic control, have consistently proven to be more reliable partners in addressing common challenges—from migration to security cooperation.

The defense of the rule of law, democratic institutions and economic freedom in Tunisia is not merely a domestic concern but a crucial factor for Mediterranean stability. The international community must recognize that Tunisia's democratic and rule of law restoration is intrinsically linked to the broader project of securing a stable, prosperous Mediterranean region.

Success requires coordinated action from both domestic and international stakeholders within a framework of legal and constitutional continuity.

Inspired by the Tunisian people's free nature and guided by our commitment to democracy and economic freedom, the Third Republic Party has been leading a national dialogue to define a path forward. What we know: Tunisians are ready to pivot from a Leninist regime they did not vote for or chose.

A sovereign, constitutionally sound pivot with a serious financial stabilization package, backed by a security guarantee, could diffuse the political crisis and reinstate market trust in Tunisia and its institutions. Without such restoration of institutional independence and market mechanisms, the country risks continued decline with consequences that will inevitably ripple throughout the region.

Olfa Hamdi is the Leader of Tunisia's Third Republic Party and the country's youngest presidential candidate. An engineer, capital projects’ auditor and project management expert, and former CEO of Tunisair, she brings technical professional expertise and executive leadership to political reform. Her experience includes Tunisian military institution teaching and advocacy for constitutional capitalist democracy, economic freedom, and rule of law in Tunisia. 

[Publication Date: November 30, 2024]