Tunisia's economic recovery slowed in 2023, due to a severe drought, tight financing conditions and a modest pace of reform, leaving the country's growth below pre-COVID levels, and making it one of the slowest recoveries in the Middle East and North Africa region, according to the Spring 2024 edition of the World Bank's Economic Monitor for Tunisia.

The report, Renewed Energy to the Economy, forecasts growth rates of 2.4 percent in 2024 and 2.3 percent in 2025-26, assuming easing of drought conditions and some progress in fiscal and pro-competition reforms. The report emphasizes Tunisia’s improved external balance, its narrowing trade deficit supported by favorable international prices, and its external financing needs that remain significant. The report underscores the urgency of addressing the drivers behind the external financing challenges, including energy deficit, debt service, and level of capital inflows.

Despite gains in the tourism and export sectors, Tunisia's economy was affected by the impacts of drought-related losses that led to an 11 percent drop in agriculture, underlining the need for adaptation to climate change. These losses have been compounded by limited domestic demand, penalizing sectors such construction and trade. This has led to a rise in unemployment, which reached 16.4 percent in the fourth quarter of 2023, and a drop in labor force participation.

The report delves into the details of the country’s current economic challenges and opportunities. Despite limited demand, inflation remains at 7.8 percent. In particular, food price inflation stands at 10.2 percent. Most of this inflation can be attributed to rising profits and import prices, underlining the significant impact of competition and trade policies on inflationary pressures. On the positive side the trade deficit fell from 17.5 percent of GDP in 2022 to 10.8 percent in 2023, with the current account deficit also narrowing from 8.6 percent to 2.6 percent of GDP over the same period.

Faced with tighter external financing conditions, Tunisia has increasingly relied on domestic banks — and more recently to the Central Bank - to finance its budget. This shift has heightened financial system vulnerabilities and led to a crowding-out effect, where banks devote an increasing share of lending to the government over the private sector.

"Despite ongoing challenges, there are significant opportunities for Tunisia to transform and strengthen its economy. With strategic investments, particularly in renewable energy, Tunisia could significantly enhance its economic resilience and sustainability,” said Alexandre Arrobbio, the World Bank's Country Manager for Tunisia. “We are committed to helping Tunisia tapping into its rich renewable energy resources, and our report identifies clear pathways to growth and stability. Developing these resources is essential to reducing import dependency and fiscal costs while enhancing energy security and fostering a sustainable economic future."

A major focus of the report is on Tunisia's ambitious plans for renewable energy as a solution to its economic and environmental challenges. The country aims to increase the share of renewables in its electricity mix from the current 3 percent to 35 percent by 2030. At present, 2,200 MW of private generation projects have been launched, which are expected to bring the share of renewables up to 17 percent by 2025. The report highlights the large economic benefits of deepening this transition through an ambitious decarbonization agenda. The total investment required is estimated at US$ 4.5 billion by 2030 and could come mainly from the private sector should adequate regulatory conditions be in place. One of the flagship projects on this agenda is the electricity interconnection between Tunisia and Italy (Elmed). This project aims to improve the resilience of the Tunisia’s electricity system and transform it into a net exporter of electricity. This would significantly reduce the country’s dependence on costly natural gas imports and improve its balance of payments.