A compensation system under pressure!

Tunisia has been facing a major economic crisis for several months. The obstacles and challenges that had arisen since the 2011 revolution have increased significantly, making the daily life of the average Tunisian a real ordeal. Shopping or refueling has become a challenge for the middle class.

The most marginalized categories, for their part, thank Habib Bourguiba and his ministers for having established a policy of compensation for food and the responsibility of the state with regard to the welfare of the citizen and the preservation of a minimum of living conditions and social dignity.

Nevertheless, the issue of compensation has become the star of the moment. The situation of public finances and the weight represented by the budget for compensation can only push towards the implementation of deep structural reforms. The crisis caused by the spread of the Coronavirus and the difficult global context exacerbated by the Russian-Ukrainian conflict have shown the failure of the system.

The World Bank’s semi-annual report, published on September 7, 2022, titled “Managing the crisis in times of uncertainty”, focused on the disastrous consequences of the war in Ukraine for the Tunisian economy. He recalled that Tunisia imports a large part of its energy and food needs.

The increase in prices on the international markets has led to a significant increase in the trade deficit. The report cited the 56% increase in the trade deficit during the first six months of 2022. It reached 11.8 billion dinars or 8.1% of GDP. The need for energy and agricultural products, especially wheat, constantly puts Tunisia under pressure. The value of the agricultural and agri-food trade deficit has increased from 1.25 billion dinars to 2.7 billion dinars between 2010 and 2021, that is, 116% in almost 10 years.

Although several sectors such as tourism or finance have shown a stabilization of the situation, or even an improvement, in performance compared to the period 2019-2021, the increase in the price of wheat and oil products creates additional pressure on public finances due to the state’s involvement through the compensation system. “Tunisia’s subsidy policy aims to protect consumer purchasing power by controlling and keeping retail prices stable on a range of products and services”reminded the World Bank in its publication.

The compensation system has been well thought out since Tunisia’s independence. It gave birth to the General Compensation Fund in 1970. This is an administrative structure whose main purpose is to protect consumers from fluctuations in the international prices of imported foodstuffs.

To ensure that things run smoothly, the state has given itself a monopoly on certain goods such as rice, coffee, sugar or even wheat. Transactions concerning the latter, as for all grains, are carried out by the Grain Office (OdC) or under its supervision. At first glance, you can say that Tunisia, through OdC, has succeeded in the incredible challenge of maintaining low prices for grain and derived products. Their consumer prices are among the lowest, yet their consumption is one of the highest in the world.

The World Bank has mentioned overconsumption of wheat. She indicated that according to the available data in 2017, Tunisia was the second country in the world with the lowest price of bread. At the top of this ranking is Ukraine, which exports more than 70% of its annual production and is one of the largest wheat producers in the world.

By maintaining low prices for bread and cereals, Tunisia is putting itself under pressure and further complicating the situation with public finances. The World Bank has also reminded that no revision of the price of bread or other agricultural foodstuffs has taken place since 2011. In return, Tunisia should continuously deposit more money into the compensation fund.

For example, the compensation framework for food between 2010 and 2022 went from 730 million dinars to 2,569 million dinars. The World Bank provides additional food compensation of around 3% of GDP. The government is paying a high price for the system not working, and the balance of payments is beginning to show signs of distress due to the explosion in the import bill.

Despite the increase in remittances from emigrants and, to a lesser extent, tourism receipts, the current account deficit worsened significantly during the second quarter of 2022. It reached a historic record of 2.6 billion dinars in the month of May 2022 alone… The accumulated deficit of previous years has increased the public debt, which increased from 68.2 to 107.8 billion dinars between 2017 and 2021, i.e. an average annual increase of 12%… Inflationary pressures have increased significantly, mainly coming from world markets and the rise in administered prices… The inflation rate was particularly high for food (9.8% in June), despite price controls on a wide range of of them … With expected growth of 2.7 percent, the economy appears to be on a slightly lower growth path than previously predicted noted the World Bank.

According to available figures, nearly 74% of national grain requirements come from imports. To meet its needs, Tunisia must acquire the necessary quantities on the international markets, while suffering from price increases and lack of availability of grain due to the war in Ukraine, since 50% of imports come from this country. In addition, the official authorities continue to pay compensation and guarantee overproduction and overconsumption of wheat and cereal products. According to the World Bank, the compensations reserved for grain should increase by 63% to reach 3.6 billion dinars. The same source has prepared an assessment of the compensation scheme for grain and grain products. The assessment recalled that Tunisia was also supplied with wheat on the local market, but that it purchased this product at a fixed price that was significantly cheaper than on the international markets. OdC then continues to provide compensation to the turbines to guarantee continued overproduction. He supplies them with the wheat at a lower price than the purchase. In addition, the board allocates cash to processors based on the quantities produced. The latter sells the processed wheat to bakeries. This operation includes another transfer of the compensation. The bakery buys the flour at a heavily subsidized price to the point that the acquisition price is directly negative, i.e. that the mills not only pay the bakeries to buy the flour, but also the bakeries are subsidized to pay for their inputs (water, electricity) but also labour). State monopolization, excessive control of prices and the various stages of production have discouraged investors and put an end to the spirit of competition. Grain processors exhibit lower dynamism and productivity than all other food processors. The system increasingly penalizes farmers who have given up growing wheat. This system had harmful consequences for the Tunisian economy, and the costs became unsustainable for the state budget in the form of subsidies and imports. ” By setting the margins for each actor in the value chain, the system deprives producers of any incentive to compete and innovate. The main way for grain producers to increase their profits is to negotiate higher margins and volumes with the government. What favors overproduction and lobbying over productive investment and productivity gains continued the World Bank.

The World Bank bulletin believed that the compensation system had become very expensive, not only in relation to the budget but also in relation to the trade deficit. The same source believed that this system was less and less capable of handling shocks, as illustrated by the current situation. The World Bank has raised the possibility of replacing subsidized consumer grain prices with transfers to households. She believed this could improve the efficiency of the sector, reduce budgetary and import costs and strengthen the resilience of the food system. The same source estimated that a system of cash transfers to households would reduce overconsumption and food waste and would provide consumers with a greater variety of choice and substitution options in terms of goods consumed. Thus, the wheat sector may experience a decrease in consumption and imports. This will reduce the pressure on public finances and reduce the national debt. ” This reform is politically and socially sensitive. The timing and sequence of its implementation should be carefully considered concluded the World Bank.

Sophie Ghoubantini

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