World Bank: Tunisia's Growth & Tax Prospects

TUNIS, November 12, 2024 - Tunisia's economy experienced a 0.6% growth in the first half of 2024, a limited increase of its performance in 2023, according to the latest edition of the World Bank's Economic Monitor. Positive signals emerged, including an improvement in the external balance and a reduction in inflation. At the same time, while agriculture shows signs of recovery, some key sectors, including oil and gas, garments, and construction, continue to struggle.

The report, entitled "Equity and Efficiency of Tunisia Tax System", forecasts growth of 1.2% for 2024. The current slowdown of the economy comes in the context of a long-term decline in growth over the past decade, with limited investment and saving rates. The report underscores the urgency of scaling up investment to support growth and facilitating competition.

One sector where investment and competition are starting to increase is renewable energy, where Tunisia is advancing its ambitious program. This includes the construction of 500 megawatts of capacity through solar projects in Kairouan, Sidi Bouzid, and Tozeur. The government plans to add another 1,700 megawatts awarded by 2026, aiming for renewables to constitute 17% of the electricity mix and save 1 million tons of oil equivalent in gas imports-about 30% of total gas imports in 2023.

Tunisia has managed to contain its current account deficit, mainly thanks to improved terms of trade, including declining energy import prices and increasing olive oil export prices, and a rebound in tourism. The trade deficit narrowed by 3.4% in the first nine months of 2024 compared to the previous year, and it now accounts for 7.8% of GDP, down from 8.8% in 2023. Inflation fell to 6.7% in September 2024, marking its lowest level since January 2022, although food inflation remains at 9.2%.

Tunisia is increasingly turning to domestic financing sources, with domestic debt rising from 29.7% of total public debt in 2019 to 51.7% by August 2024. This development turns a growing share of banks' funding to government needs and away from the rest of the economy. It also presents risks for the currency and price stability.

The second part of the report reviews Tunisia's tax system and it emphasizes the importance of achieving more balance between labor and capital taxation to foster a more equitable approach. The current heavy tax responsibility on labor - including large social security contributions even for low-income earners - may encourage informality, discourage hiring and reduce wages. Additionally, the report highlights the need to enhance transparency within the system to ensure fairness and accountability. The introduction of an annual property tax and the increase in taxes on fuels in 2023 were positive steps, and Tunisia could achieve better outcomes by rebalancing its tax structure and strengthening its carbon tax mechanism, thereby fostering a more balanced and sustainable economic framework.

"Despite persistent challenges, Tunisia's economy continues to demonstrate resilience, and new opportunities are emerging," said Alexandre Arrobbio, World Bank Country Manager for Tunisia. "The World Bank remains committed to supporting Tunisia in addressing the challenges underscored in the report, especially to support growth and private sector development."

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