It’s been seven years since Mohamed Bouazizi’s self-immolation sparked Tunisia’s Jasmine Revolution, leading to the overthrow of longtime ruler, Zine al-Abidine Ben Ali, and subsequent efforts to democratize the country. The economy, however, remains stagnant and arguably faces worse conditions now than in 2010: Between 2010 and 2017, unemployment rose from 13% to 15.7%, inflation increased from 4.4% to 5.2%, the currency depreciated more than 70%, and corruption remains widespread. Efforts to stimulate economic growth are greatly hindered by a continued security threat, and the government’s challenge to balance contradictory policy demands from Tunisia’s powerful labor union (UGTT) and the IMF.
Moving into 2018, executives are likely to face a more challenging operating environment and pressured customer demand, requiring more attention to the market to maintain their competitiveness. Below are the challenges businesses will need to overcome to achieve their targets for this year:
Higher costs and new regulations:
- Weakening dinar – A widening trade deficit and weak levels of foreign exchange reserves will continue to put pressure on the dinar, which already depreciated 7.4% between January and December 2017. It is likely the government will intervene less and less in the currency, allowing it to gradually depreciate. However, executives should still monitor the risk that the central bank could move suddenly from a tightly-managed floating regime to a free-floating regime, which could result in an immediate 13-18% devaluation in the currency to meet the black-market rate.
- Capital controls – The government has also begun to impose stricter capital controls for importers of foreign goods to protect the country’s supply of foreign currency. In October 2017, the central bank asked banks to halt credit to importers of 220 products deemed non-essential, from cosmetics to food items. As the country’s supply of foreign currency remains under pressure in 2018, executives are likely to face even more restrictions to FX, complicating import operations.
- Higher taxes and tariffs – Businesses and their customers will face a 1% increase in the VAT, a new 1% social security tax on companies and their employees, and higher tariffs for some imported goods. Executives must determine how much of these extra costs they will absorb, and how much can be passed on to customers. In light of higher tariffs, and the above two points, executives should also evaluate the financial health of their local partners and whether they will need additional support to continue operations at full scale.
Demand under pressure:
- Government – Businesses are likely to face a price-sensitive government in 2018. Failing to sufficiently cut its wage bill, and faced with large debt payments and higher inflation, government demand is likely to decelerate. With the government still subsidizing the price of fuel despite implementing fuel price hikes on January 1, the subsidy bill is likely to be pressured by higher oil prices; the government assumes an average oil price of US$ 54 per barrel in 2018, whereas FSG expects oil prices to average US$ 58 per barrel.
- Consumers – Consumers are also facing higher living costs this year. Fuel price hikes and the VAT increase were implemented January 1, and a weaker currency makes imported goods more expensive for Tunisians. As a result, consumers will be more selective with their purchases, likely concentrating on purchases of essential goods.
- Business customers – Businesses in the B2B space are also likely to face a deceleration in demand. Policy uncertainty and rigid labor laws are likely to limit growth in greenfield investments, while the hike in interest rates in 2017 raised borrowing costs, making it difficult for SMEs to make significant investments. Executives should focus on larger customers who may be more financially able to make purchases, and explore options to provide more flexible payment terms to customers.
While 2018 will be a challenging year, there are still actions executives can take to sustain their competitiveness in Tunisia. Maintaining frequent communication with local partners and determining whether support is needed will be key in 2018 amid tightening liquidity. Tunisia still possesses a high GDP per capita compared to other North African markets and has a substantial middle class, so executives should ensure their distributors are capturing the resilient customer segments. Specifically, B2B firms can target export-oriented customers who will benefit from solid European demand, or B2C firms can target the recovering tourism sector. Additionally, executives can ensure their marketing strategy attracts hesitant customers and offer discounts and promotions to boost sales. Finally, closely monitoring the market will allow executives to sufficiently prepare for risks and take advantage of positive developments.
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