'An outrage to the institution on Hedi Nouira Street'

African Manager

07-04-2025

In a long-anticipated decision, the Board of Directors of Tunisia's Central Bank (BCT) has lowered its benchmark interest rate by 50 basis points to 7.5%.
The stated goal: to revive a stagnant economy plagued by sluggish growth and weakened domestic demand. The less visible aim: to smooth tensions through a decision more political than economic or financial!
Balancing the urgency of immediate growth with the need for long-term stability, the BCT is walking a tightrope. Every forward step risks a steep fall if structural reforms, heavily emphasized in February 2025, fail to materialize. In short, this bold gamble risks becoming a cure worse than the disease.
BCT warned of 'strained liquidity' and 'vulnerable banks'
First, some context. Between the pre-Eid week (featuring a meeting between Governor Nouri and President Saïed) and the last week of March (marked by a cabinet meeting on legislation governing the BCT), this decision was closely watched, even expected.
Only the percentage cut remained in question. Now confirmed, the move raises concerns—especially given the BCT's February 2025 warning about over-reliance on domestic financing for the Treasury, citing strained liquidity and a fragile banking system. By easing monetary policy, this rate cut could worsen these vulnerabilities.
Other critical risks loom, including threats to the BCT's core mandates: price stability and foreign exchange reserves.
Despite reserves recently surpassing 100 days of imports (101 days as of March 25), they remain under pressure and could further erode if foreign currency demand rises. Meanwhile, looser monetary policy risks reigniting inflation.
The specter of political interference?
Political pressures also cast a shadow. With the Treasury desperate for funds, the BCT appears to yield to short-term budget support demands under the 2025 Finance Law. This compromises its operational independence and credibility.
Recall the BCT's February 2025 statement, which urged structural reforms over monetary quick fixes. The message was clear—yet ignored.
While the rate cut may offer short-term economic relief, it exposes Tunisia to deeper financial imbalances. Between stimulus and stability, the BCT's move reeks of political maneuvering, a 'perilous game.'
Local media reported last Tuesday that a 'verbal agreement' was struck between the President and the BCT Governor to gradually loosen monetary policy. Though unconfirmed, the BCT's decision tacitly endorses this narrative.
Timing is also suspect. The BCT's Board could have waited until after Eid, allowing time for reflection and the release of consumer price data by the National Statistics Institute.
But with Ramadan and Eid spending looming, the decision's timing seems politically, not economically, driven.
Monetary easing vs. inflation risks
While lower rates may boost credit access for businesses and households, they risk exacerbating financial instability. A lenient policy could further strain banks already grappling with non-performing loans, especially if borrowers—emboldened by lower rates and potential amnesty for bounced checks—default.
Moreover, monetary easing could stoke inflation as import prices remain sensitive to dinar fluctuations. The dinar, already pressured by dwindling reserves, relies heavily on BCT interventions.
Add to this the danger of eroded investor confidence, which could deter foreign capital crucial for recovery.
The BCT's Defense
In its official statement, the BCT justified the decision:
'Recent inflation trends have lowered inflation projections. However, wage hikes in both public and private sectors may raise production costs and spur demand amid stagnant capacity—worsened by persistent drought and slow reforms. Annual inflation is expected to drop from 7% in 2024 to 5.3% in 2025.
Risks remain, including global commodity prices, demand dynamics, and fiscal imbalances. After deliberation, the Board concluded that disinflation has progressed sufficiently. Reducing the key rate to 7.5% reflects our commitment to price stability while supporting growth. We remain vigilant amid rising uncertainties.'
An expert's blunt take
Professor Hachemi Alaya, in his March 30, 2025 'EcoWeek' column, argues that what has been decided is 'an outrage against the institution on Hedi Nouira Street', that 'Tunisian inflation is far from being disarmed', that there is confusion among Tunisian economic and monetary decision-makers because 'access to finance is not reduced to cost.'
'I have gone through all the studies and reports on the obstacles to investment in Tunisia, but nowhere have I found the high level of interest rate,' he pointed out.
For Professor Alaya, the saving grace lies in 'the urgent need for Tunisia to understand that printing money does not create wealth (otherwise there would have been no poor people a long time ago), to limit, if not prohibit, the subscription of Treasury bills by the central bank and commercial banks, and to make the public sector (STB-BNA-BH) a pole dedicated almost exclusively to financing investment'.
For their part, some experts have no hesitation in recommending that the BCT and the banks set up a system of removable interest rates by sector of activity to target those they wish to boost by facilitating access to credit.
Such facilitation would then be selective, depending on the economic choices made by the State (for example, investment or consumption, and the criteria could even be refined), and would avoid a generalized impact on inflation!