W. Ben Salah analyzes current difficulties, problems ahead

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Walid Ben Salah, an accountant, gave Africanmanager an exclusive interview where he spoke of several points, including the increase and on several times of the key rate of the Central Bank of Tunisia, the decline in phosphate production and the recent increase in fuel prices.


Which impact will the latest increase in fuel prices have on the economy?

Energy in general is a direct cost component of several products. It is also a very important cost factor in the transportation of goods and people.

As a result, the increase in fuel prices would have a dual effect on the increase in direct and indirect costs (production and transport) of most goods and services and therefore constitute a significant inflation factor.

The same is true of electricity and gas whose rates will be revised upwards in the coming days.

This situation has a direct negative impact on the purchasing power of the citizen, who is an energy consumer, on the one hand, and who will also suffer an increasingly high inflation due to the increase in prices of most products and services by companies which are likely to cope with the extra cost they will bear, on the other hand.

It should be remembered that the price of unleaded petrol for example, has been the subject of 4 successive increases in the space of one year (since July 2017) and which total 275 millimes, or 17%.

The same is true for electricity tariffs, which are almost constantly increasing by around 7% a year.

The inflation rate for May 2018 reached a historic record of 7.7%, which had never been reached in decades, and the perceived inflation would be much higher than this average proportion published by the INS.

It should also be recalled that the highest inflation rates were recorded in basic necessities, notably agricultural and agri-food products (9.3%) and transport (9.6%), in addition to housing, clothing, health and education (also considered as basic necessities).

The increase in energy prices (fuel, electricity and gas) will also have a negative impact on the profitability and competitiveness of companies (both exporting and non-exporting), especially

those that have entered into contracts for firm, non-revisable prices ( IME, textiles, hotels, for example).

The impact of the latest increases will be felt more and more in the coming months and it would be further increased by further rises according to our projections, given the continuing upward trend in international oil prices, the very difficult situation of public finances and the limited compensation budget determined on the basis of an implausible assumption of $ 54 per barrel, while it has averaged $ 75 in recent weeks; it was already trading at more than $ 60 during the discussion period of the 2018 Finance Act and that, furthermore, the OPEC countries have already decided, at the November 30, 2017 meeting to extend their agreement on the reduction of production in 2018, in order to further support the price of oil.

We should also mention the continued loss of value of our national currency, especially against the Euro (3,137 dinars) and the dollar (2,638 dinars), against a budget forecast for the end of 2018 of 3,050 dinars for the Euro and 2,650 dinars for the dollar.

These exchange differences, which occurred in the first half of the year, further increase the energy import bill for 2018 and encourage further price increases.

Can we also talk about IMF pressures?

Yes, precisely, the increasing pressures of the IMF invite the government, at each review, to control and further limit fuel compensation expenses. But, we must not limit ourselves solely to these factors.

There are also other factors that are rather endogenous.

These include the significant decline in the order of 50% of national oil production due to the aging of fields, the lack of new research and development permits for several years, repetitive production stoppages following strikes and sit-ins, etc.

There is also the significant delay by more than two years since the publication of the texts for the granting of renewable energy exploitation permits, a delay due in particular to certain shortcomings noted in the texts adopted and the resistance of certain parties to development of this sector.

This is not to mention the considerable drop in productivity in almost all public enterprises, especially those operating in the energy sector, which directly affects the energy balance and the compensation budget.

Endogenous factors include the waste of energy at all levels (fuel, electricity and gas), particularly in the public sector.

Added to this are the outstanding outstanding receivables of several hundred million dinars held by several public sector companies (STEG, SNDP, etc.), which significantly aggravate their financial difficulties, especially in the absence of clear and effective recovery strategies (rigorous application of regulatory procedures, initiation and rigorous follow-up of the judicial and litigation process, conclusion of arrangements, rescheduling, assignment of receivables, etc.).

The considerable drop in foreign exchange reserves at 71 days of import and the tightening of the exchange rate policy by the BCT (on the recommendation of the IMF) are also a major factor of difficulty.

As proof, the STEG (whose outstanding receivables is close to one billion dinars) has recently encountered many difficulties in paying its gas import bill due to the drying up of foreign exchange on the foreign exchange market; the amount of funding requested had to be divided among several local banks.

And the impact of the decline in phosphate production …

Like the situation in the energy sector, the decline in phosphate production is a major factor in worsening the trade balance and the current account deficit, which directly affects foreign exchange reserves.

In fact, exports of phosphates and derivatives during the first five months of 2018 fell by 14% at current prices and by 17.5% at constant prices (lower volumes exported).

Tunisia has not been able to benefit from the rise in international sales prices, due in particular to fluctuations in prices and exchange rates.

The situation in the sector is very difficult and is due to a number of factors, including the significant drop in production versus the staggering increase in the workforce and the various cost factors of production, transportation and other services.

As a first factor, I may cite repetitive strikes, sit-ins and production stops.

Phosphate production was around 4 million tonnes in 2017, representing only 50% of the nominal capacity, which is in the order of 8 million tonnes. The target set by the government is to reach 6.5 million tonnes in 2018, a goal that has become very ambitious and difficult to achieve given the repeated production halts that occurred in the first months of the year.

As a second factor, I may note the direct and indirect overstaffing (in particular the employment of 11,000 people through subsidiary gardening companies for an annual cost of the order of 134 million dinars, probably without any proven yield or profitability).

The wages paid for it are much more like disguised unemployment benefits.

In addition to quasi-systematic wage increases with no effective counterpart in terms of growth and no direct link with productivity, the considerable decline in turn constitutes a major factor of deterioration.

Also noteworthy is the significant drop in the supervisory rate in all companies in the sector, which aggravates the lack of competitiveness.

The lack of productivity and competitiveness of the different entities of the Chemical Group is also due to the use of obsolete production equipment and technologies.

The same is true for transport, which cost and stoppage problems, both by rail and by land, are getting worse.

Some investments planned for years have not been made even though the financing would be obtained and the interest charges already accrued, which further aggravates the financial difficulties of the Group in the absence of direct effective counterpart in terms of profitability and cash flow.

By way of comparison, among the restructuring actions implemented by Morocco’s OCP is the change in the production process through the use of new technologies and the automation of phosphate transport, which is now transported by 235 km-long pipeline.

In addition, the Group’s commercial difficulties have been noted due to the loss of several international markets.

The actual performance of the contracts in progress faces significant difficulties at the risk of being lost due to repetitive shutdowns and could result in additional costs (instead of a positive return) following the application of the late penalties mentioned in the agreements and / or recourse to the importation of the production necessary to respect the contractual obligations and which would be paid in foreign currency and according to the selling prices on the international market (double negative impact).

All these factors and obstacles and many others seriously threaten the sustainability of companies in the sector, including the Tunisian Chemical Group (GCT) and the Gafsa Phosphate Company (GPC), which suffered losses of the order of 482 million dinars in 2017 while in 2010 they brought a billion dinars of revenue to the state!

Obviously, the difficulties of all entities in the sector extend to others that are directly and indirectly related to it, such as the agricultural sector (decrease in the supply of chemical fertilizers and other derived products), massive reliance on imports at higher prices, etc.).

The same is true for some economic operators, such as the building and public works which have suffered the full cash pressure of most public companies and especially those of the phosphate sector, thus questioning the image of the state which is relegated to the rank of defaulter and would be behind the financial difficulties of several private sector companies and thereby accumulation of arrears in the banking and financial sector.

What do you think of the latest increase in the key rate of the BCT?

In fact, it is a predictable rate increase. Indeed, among the main missions of the issuing institution, which enjoys the status of independence vis-à-vis the public authorities since 2016, is the control of inflation.

However, it does not have enough room to maneuver. The monetary policy instrument usually used in case of inflationary pressures is to raise the key interest rate in order to control consumption and reduce the gap with inflation.

However, the galloping inflation having reached a record level of 7.7% at the end of May 2018 is not of monetary origin, which would call into question such a decision that was agreed by the IMF teams!

Indeed, at the level of its explanatory note published on June 14, 2018, the BCT itself recognizes, and rightly so, that the surge in inflation is mainly due to the soaring global prices of energy and most commodities, rising inflation among our major partners, rising wages without productivity improvement, persisting trade deficit at unsustainable levels and accelerating domestic demand consumption from the tourism sector.

Therefore, all these factors are hardly related to monetary policy. Most of these are exogenous factors that fuel imported inflation. And to which I would add the tax increases on all local and imported products and services as well as the continuous and unprecedented depreciation of the value of the dinar because of a desired exchange rate flexibility in application of the recommendations of the IMF, but that is not sufficiently explicit and especially far from being mastered.

This situation directly affects the cost not only of products and services intended for consumption, but also of the various local production factors, such as investments, raw materials, semi-finished products, etc.

What is the consequence of the lack of effective measures to control imports?

The lack of effective measures to control imports, including unnecessary consumer products and / or similar locally manufactured products, is also a major factor in the trade deficit and inflation.

The development by the BCT of a list of products, strongly contested (in the absence of published rational choice criteria), the importation of which must be carried out on the own funds of economic agents has probably not shown efficiency to lower imports since it is fundamentally limited in scope, on the one hand, and easily circumvented by economic agents and the banking system, on the other.

On the contrary, it has contributed to favoring the dominant and even monopolistic commercial and competitive position of certain importers with sufficient means and financial support to the detriment of other economic operators.

In addition, can we claim to control inflation by increasing the key interest rate while several economic factors are out of control and here I am aiming for an informal and underground economy of more than 1/3 of GDP which is a refuge for most consumers and allows them to maintain a credit elasticity at a more or less sustainable level so far.

I should also note, in the same way, the lack of effective measures to control the distribution channels, including essential products (agricultural, agri-food, etc.), price regulation, fight against unfair competition as well as monopolistic and fragmented intermediation situations favoring exaggerated margins, often without real counterpart, undeclared and out of control.

It follows from the above that the increase in inflation is not of monetary origin.

Rather, it is due to economic and social factors (increase in wages without an effective counterpart in terms of production and productivity), the resolution of which is mainly the responsibility of the government through a perfect coordination with the BCT.

Among these factors is direct and indirect import, which is a prominent component: direct import, as far as consumer products are concerned; and indirect for locally produced goods, but whose components and other factors of production (equipment, raw materials and semi-finished products, energy, etc.) are mostly imported, which is the case for almost all of our products, all sectors combined. The question must be asked: what is the real added value of our national production?

Moreover, although the BCT raised its key rate four times in one year, inflation continued to go up at an increasingly steady pace, rising from 4.8% in May 2017 to 7.7%. % in May 2018; which confirms our analysis and our previous conclusions.

On the other hand, the successive increases in the key interest rate which went from 4.25% in May 2017 to 6.75% in June 2018, i.e. a rate increase of 250 basis points or 59% could have the opposite effect and constitute themselves an inflation factor.

With a 100 basis point corridor, the MMR would be over 7.5% over the next period. All things

being equal, this situation translates into an increase in interest payments of around 30% for both businesses and households, and may affect their repayment capacity (unsustainable debt) and thereby increase the outstanding amount of unpaid debts and claims classified in the banking and financial sector.

In addition, it should be noted that 72% of outstanding loans granted by banks at the end of 2016 are for businesses and 28% for individuals (more than half of which are in the form of real estate loans).

The significant increase in the cost of investment and the financial expenses of companies, whose need for working capital financing and cash flow deficits continues to increase, would be reflected in the selling prices of the various products and services. and, as a result, fuel more inflation.

And what effect on the debt service?

It goes without saying that the increase in the key interest rate would also have a negative effect on the State’s debt service and on the cost of the resources of the financial institutions and more particularly the leasing companies which, by the regulations in force , exclusively finance investment and do not collect deposits, and whose interest margins are eroded and the cost of risk increases.

Finally and in anticipation of an inflation rate of 8% for the whole of 2018, as presented in the Explanatory Note of the BCT, on the one hand, and in the absence of urgent concrete effective actions allowing to control of the above-mentioned real inflation factors, on the other hand, the BCT would pursue, in line with the IMF recommendations, its same monetary policy adopted so far, i.e. increasing its key rate in order to narrow the gap with the rate of inflation, which in this case would be of the order of 125 basis points.

In this perspective, I do not believe that inflation will be under control for the foreseeable future; on the contrary, it would probably beat new records.

Moreover, the consequences would be more and more severe on the cost of resources, the financing of the operation of businesses and investment, the debt sustainability of professionals and individuals, the profitability and the economic competitiveness of companies, the purchasing power of citizens, the servicing of the public debt, etc.


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