Culled—Proshare
April 1, 2018/BMI Research
BMI View: Inflation will remain elevated in Tunisia over the coming quarters, driven by VAT hikes, persistent dinar weakness and rising commodity prices. The Central Bank of Tunisia will further tighten its monetary policy to mitigate these pressures, hiking rates to 5.50% by end-2018.
Continued inflationary pressures in Tunisia, on the back of a depreciating dinar, tax hikes and rising oil prices, will push the Central Bank of Tunisia (CBT) to continue tightening monetary policy over the coming quarters. Following higher-than-expected readings in the last months of 2017 on the back of rapidly rising food costs, gains in energy prices and persistent dinar weakness, we expect inflation to stay elevated in 2018 and 2019. We now forecast inflation to average 5.8% in 2018 and 4.8% in 2019, up from 4.6% and 4.0% previously. This will encourage the CBT to hike interest rates over the next two years.
Inflation to Stay Elevated on Tax Hikes and Rising Energy Prices
We expect price pressures to stay high over the coming months, owing to rising energy prices, tax increases which will feed through to higher prices for consumers, and to the introduction of cash compensation for the most vulnerable households. Inflation ticked up over the past year, reaching 6.3% y-o-y in December 2017, up from 4.2% a year before.
Price Pressures to Stay Elevated Entering 2018
Tunisia – Consumer Price Inflation, % change y-o-y
The uptick in inflation was driven by rising commodity prices, which pushed prices up in the transportation and housing and utilities components (respectively accounting for 12.1% and 17.0% of the CPI basket), but also by the sharp depreciation of the dinar which increased the cost of imported goods. Lastly, public sector wage hikes provided tailwinds to consumer spending, also having a positive impact on prices.
Further gains in energy prices, and persistent dinar weakness will continue to drive inflationary pressures throughout 2018. While the Tunisian government is now seeking to reduce the public-sector salary bill, other fiscal measures will push prices higher for consumers, including the one percentage point increase in the value-added tax rate, and increased aid for poor families and pensioners, which will support demand-side price pressures, albeit modestly (see ‘Fiscal Consolidation Ahead, But Risks Abound’, January 17).
Further Hikes to Have Limited Impact on Credit Demand
Tunisia – Central Bank Policy Rate & Credit Growth
Further Tightening Ahead
The CBT will seek to mitigate rising inflationary pressures by hiking its policy rate. The CBT started tightening monetary policy in 2017 – raising rates by a cumulative 75 basis points throughout the year to 5.00%. We now forecast the CBT to hike rates by another 50 bps in 2018, to 5.50% by the end of the year, which is an upward revision from our previous forecast of 5.25%.
In addition to containing higher-than-expected price pressures, hiking interest rates will also help in supporting the dinar. The currency officially operates on a crawling peg against a basket of currencies (70% euro, 28% US dollar, 2% yen), but the authorities have been forced to allow the dinar to weaken more substantially over the past two years given Tunisia’s weak external position and limited ability to defend the peg. Supporting the dinar will also be a tool to contain inflationary pressures, which will prove essential for social stability in the country.
