Exchange Reform in Tunisia

Currency Exchange Reform in Tunisia: Between Liberalization and Debt Sustainability

As Tunisia faces mounting economic challenges, a bold step has been taken: the drafting of a new foreign exchange code aimed at gradually liberalizing capital flows. But can such reform succeed without compromising the country’s financial stability? This is the central question explored in the policy paper titled “Currency Exchange Reform in Tunisia: Liberalization Under the Constraint of Debt Sustainability”, authored by Professors Mr. Zouheir Bouchaddakh and Mr. Mohamed Ben Abdallah.

Published by the Friedrich Naumann Foundation for Freedom Tunisia and Libya office, in collaboration with  Laboratory for International Economic Integration (LIEI), the paper offers a critical analysis of Tunisia’s current debt situation and the implications of loosening foreign exchange controls in a vulnerable economic context.

Context: A Legacy of Tight Controls

Tunisia’s current foreign exchange regime, dating back to 1976, has long imposed strict limits on capital movements. While partial reforms in 1993 introduced convertibility for current transactions, financial liberalization lagged behind. Over the past decade, calls from economic actors for easing capital restrictions have grown louder. The newly proposed exchange code, adopted by the Council of Ministers in March 2024, aims to implement a gradual liberalization of capital accounts without the backing of international financial institutions.

A Debt Burden That Can't Be Ignored

Public debt in Tunisia has increased significantly, especially in the post 2011 era. Expansionary fiscal policies, adopted to meet growing social demands, have contributed to a rising debt to GDP ratio. The authors underline that while debt can fuel development if invested wisely, it becomes unsustainable when financing unproductive expenditures.

The reform must therefore walk a tightrope: attracting capital and boosting economic activity, without undermining the country's capacity to manage and service its debt.

Key Features of the New Code

The proposed reform introduces several major changes:

• Freedom of currency transactions: Gradual liberalization, with some limits retained.

• Redefinition of residency criteria: From 2 years to 6 months abroad.

• Facilitation of foreign investment: No prior authorization from the Central Bank for most operations.

• Permission for cryptoasset transactions: Under declaration and repatriation conditions.

• Startup and freelance incentives: Special provisions for digital entrepreneurs, including access to foreign currency accounts and international platforms like PayPal.

Risky Business: Impact on Debt and Capital Flows

The paper highlights both the opportunities and risks of such liberalization:

• Short-term pressure on foreign reserves due to increased capital outflows.

• Long-term benefits depend on the volume and stability of incoming foreign direct investment (FDI).

• Debt management complications could arise from deregulated access to foreign loans and the risk of exchange rate volatility.

• Startup ecosystem gains may come at the cost of reduced control over foreign currency flows.

International Lessons

Drawing on global examples from India’s gradual liberalization to Turkey’s rapid reforms the paper stresses the need for a balanced and tailored approach. Countries like Morocco and Chile succeeded through phased liberalization combined with robust financial safeguards, while Egypt’s experience post 2016 revealed both gains in reserves and rising inflation.

Policy Recommendations

To ensure the success of the reform while maintaining debt sustainability, the authors recommend:

1. Strengthening public finances: Through tax reform, efficiency in public spending, and reducing fiscal deficits.

2. Stimulating economic growth: Via investment, innovation, and job creation policies.

3. Improving institutional capacity: Especially in public debt and foreign exchange management.

4. Establishing continuous monitoring mechanisms: To evaluate and adjust the reform based on its real-time impact.

Tunisia’s foreign exchange reform marks a significant step toward modernizing its financial framework. However, liberalization must be measured, transparent, and closely monitored to avoid undermining economic stability. The policy paper urges a strategic balance between openness and prudence, growth and risk to ensure that the path toward financial freedom does not come at the cost of debt distress.