Tunisia central‑bank financing signals fiscal stress ahead

Tunisia’s finance ministry is signaling deep fiscal distress by preparing to request up to US$3.7 billion of exceptional direct financing from the Central Bank of Tunisia (BCT) in 2026. This move is necessary because the draft budget projects spending to rise to 63.5 billion dinars (approximately US$20 billion) against revenue of only 52.6 billion dinars, leaving a massive funding gap.

With public debt forecast above 80% of GDP and external financing heavily constrained due to a stalled International Monetary Fund (IMF) program, the government's reliance on domestic monetary funding places inflation expectations, banking sector liquidity, and institutional credibility under extreme pressure.

Structurally, monetary financing—the practice of a central bank directly funding government deficits—fundamentally undermines central-bank independence, risks sharp currency devaluation, and crowds out private credit. This move effectively forces the BCT to inject money to finance the deficit, a classic cause of stagflationary pressure and a critical credit-supply chokepoint.

The immediate burden falls on the banking system, which already faces structural weaknesses, including high non-performing loans (NPLs) and limited capital buffers. An additional burden of monetized debt will further divert bank lending from the real economy and toward absorbing sovereign claims. This dynamic increases the likelihood of a broader credit crunch and reduces overall productivity.

From a macro lens, economic growth (which was approximately 3.5% in 2024) is highly likely to slow further in 2025/26 as the banking sector retrenches and investment suffers. Inflation is expected to drift upward; if the dinar weakens and import costs rise, real household incomes will shrink, further contracting discretionary fiscal space.

For international investors, this move raises sovereign risk significantly: market pricing will reflect this via spreads over comparable emerging market (EM) peers potentially widening by 100–150 basis points (bps). Local currency bond yields may rise more than 50 bps, and the dinar could depreciate by 6–8% if market confidence falters quickly. Furthermore, reliance on the BCT impairs Tunisia’s future ability to secure concessional external financing, raising the long-term cost of borrowing and further isolating the country financially.

Implementation risk is extremely high. If the crucial IMF program remains stalled, Tunisia’s external liquidity will continue shrinking, leading to a possible debt-rollover crisis by 2027. A credible forward path would require sustained external financing of more than US$4 billion per annum or a return to private-credit growth of more than 6% year-on-year (y/y).

Failure to achieve either will significantly raise default probability, potentially leading to a sharp crisis similar to historical episodes of high monetized debt in emerging markets. This reliance on the central bank signals a deep lack of political consensus on painful fiscal adjustments necessary for sustainable financing, compounding the fundamental economic issues.

Investors should monitor key indicators over the coming months: banking sector credit growth, where the target needs to be greater than 4%; the non-performing loan ratio, which needs to be kept less than 12%; and the dinar’s nominal annual depreciation rate.

The ability to avoid significant currency turbulence is a critical test of the BCT's remaining authority and reserves. If the NPL ratio stays above 15% and the dinar depreciates more than 5% y/y, Tunisia’s sovereign yield spread may breach 600 bps by mid-2026, confirming severe and sustained market stress and likely leading to a re-evaluation of the country's long-term sovereign viability.