Political instability threatens return of FDI to Tunisia

Tunisians’ worst fears were realized today when armed militants attacked the country’s famous Bardo Museum, resulting in the death of at least 17 tourists and two Tunisians. In my recent trip to Tunis, those I spoke to in the business community expressed their fear of such an attack and how it could derail the country’s economic recovery.

Today’s attack is likely to mute business and consumer confidence and negatively impact tourism, which is a major driver of economic growth and employment. How the government reacts and whether such attacks continue will determine whether foreign investment returns to Tunisia this year.

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(Above: Tunisia’s skyline)

Socio-political reforms are prioritized over reforming business regulations

After a popular revolution and a number of transitional governments, Tunisians are poised to move forward with a new political system that appeals to a wider segment of society. The process of reshaping both the political and economic structures in the country has different effects on ordinary citizens and businesses. In visiting Tunisia, one can simultaneously feel the proactive and enthusiastic drive for change among citizens, but also the wait-and-see mode of businesses that are worried about political instability.

Historically, Tunisia has attracted a large number of foreign investors, and for good reasons.

The country has an educated and skilled workforce as well as experienced and expanding local businesses. Tunisia’s dynamic and open consumer culture is supported by a relatively well-developed retail structure. The country’s large and successful tourism sector expands the country’s consumer population as well as business-to-business (B2B) demand in addition to supporting overall economic growth. Both its beautiful natural landscape and relatively well-developed private healthcare sector attract foreigners, and lastly, Tunisia is strategically located between Europe and Africa, positioned as a gateway to the Libyan market.

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(Above: Tunisia received around 7 million tourists a year until the revolution in 2011)

However, there are many structural challenges for doing business in Tunisia. The Tunisian market is small, and accessing it requires a local partnership in which the foreign company only owns 49 percent of the commercial entity. Unpredictable regulatory implementation poses a significant challenge for companies without an entrenched presence. Additionally, the absence of a proven and fair judicial system limits avenues for resolving business issues.

Due to the instability and the uncertainty that followed the Jasmine Revolution in 2011, the Tunisian government has to show an extra effort to gain the trust and confidence of foreign businesses and improve the investment environment. However, the current government has too many problems to solve, which will delay the process for ensuring the business environment is improved for foreign investment. Foreign companies should watch for how the government approaches four different issues that could impact the flow of FDI into Tunisia: municipal elections, security, cost of living, and the reform of traditional power structures.

Arranging municipal elections

In addition to discontent caused by unemployment, a major driver of the revolution has been the sentiment among non-coastal populations of being marginalized and neglected. In order to maintain support from the people, the government needs to prioritize the process of decentralization. To address this priority, the government is organizing municipal elections in which elected representatives will be empowered with financial and independent authority. The exact time of the elections has not yet been specified, and the electoral process and future legal and financial autonomy of the municipalities are not yet clear. However, the Tunisian budget is likely to reflect a more decentralized fiscal structure from 2016 onwards.

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(Above: The central municipality building in Tunis)

Security

In each of my meetings in Tunisia, the rising security threat from Libya was cited as the most pressing concern for Tunisians. In Libya, the absence of a unified state and the increasing presence of militants swearing allegiance to the Islamic State create a significant security threat for Tunisia’s borders. The potential return of the 3,000 Tunisians fighting in Syria and Iraq with the Islamic State of Iraq and Syria (ISIS) also poses a threat to the country’s security.

This dynamic is leading the Tunisian government to focus spending on border security as well as on measures to protect airports and major cities from armed attacks. However, the attack on Bardo Museum was the first terrorist attack on a civilian target in Tunisia since 2002, and this has inevitably intensified the feeling of insecurity amongst Tunisians and reduced their confidence in the government’s ability to prevent such attacks.

Meanwhile, the increased military control at the Algerian and Libyan borders has started to restrict smuggling, which is a good thing for multinational corporations, but less smuggling activity also reduces the income of Tunisians in non-coastal areas of the country. This dynamic would increase pressure on the government to demonstrate that it is improving the lives of Tunisians in non-coastal areas where unemployment is the highest in the country.

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(Above: Informal trade makes up between 30 percent and 40 percent of the Tunisian economy)

Cost of living

The conflict in Libya is not only a security threat but an economic one as well. I have heard in all of my conversations in Tunisia that the cost of living is increasing, and part of this is caused by the instability in Libya. The Libyan conflict is leading to both a shortage in goods and an increased demand in Tunisia’s domestic market.

There are currently around one million Libyans living in Tunisia. For a population of 10 million people, an addition of another million is causing a significant increase in the demand for goods. And as production in Libya deteriorates, Tunisians find it more attractive to sell their goods in Libya for a slightly higher margin.

After a downward trend since mid-2014, inflationary pressure is increasing (inflation reached 5.5 percent in January 2015). This increase in domestic prices is pressuring the government to improve the overall economic environment in order to increase production and investment in the country as well as opportunities for employment.

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(Above: Amidst the run down old town of Tunis, the newly constructed commercial buildings can be seen)

Dismantling traditional power structures

One way of increasing employment opportunities is to encourage the expansion of the private sector, and attracting multinational corporations can be one way of doing that. However, liberalizing the business environment with new investment regulations and instituting a fair judicial system will require the government to tackle corruption and favoritism within the public institutions as well as the large Tunisian businesses. This will take time and requires sensitive policy making to appease all sectors of society while reforms are being implemented.

The current government in Tunisia is very new. The cabinet was approved only in February 2015, meaning most Tunisians, whether they be civil society representatives, business leaders or students, are watching anxiously to see how the government performs in the next few months to evaluate the direction of government policy as well as its competency in guiding the country’s complex transition. The government must address several issues to improve the daily life of Tunisians and re-attract foreign investment, and 2015 will be a key year in setting the medium-term outlook for such issues in Tunisia.


The above has been an FSG On the Ground Insight from Zeynep Kosereisoglu, CEE/MENA analyst at Frontier Strategy Group, currently on a research trip through Northern Africa.  For more insights on Tunisia and the rest of the CEE/MENA region, follow Zeynep on Twitter @izeynepk.

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