Tunisia raises rate 50 bps as dinar falls sharply

April 27, 2017

By CentralBankNews.info
    Tunisia’s central bank raised its key interest rate by 50 basis points to 4.75 percent at an extraordinary board meeting to help ease rising inflationary pressures following a sharp fall in the dinar’s exchange rate and said it was closely following those pressures so it could “undertake the appropriate actions on time.”
     It was the first change in rates by the Central Bank of Tunisia (CBT) since October 2015, when the rate was lowered by 50 basis points. The bank’s board met on April 25.
     The central bank also raised the minimum savings rate that banks can offer by 50 points to 4.0 percent to boost the incentive to save and thus liquidity in the financial system. Tunisia’s banks are in need of liquidity given a weak level of savings in the country, the central bank said.
     The rate hike comes a week after Tunisia’s finance minister said the central bank would reduce interventions in the foreign exchange market so the value of the dinar gradually declines in an effort to boost exports and lower imports, and thus reduce the trade deficit.
     But last week’s sharp fall in the dinar appears to have surprised the central bank, which said economic data “in no way justify the fluctuations recorded on the exchange market,” and talks between the IMF and the government “were globally positive and encouraging.”
     The central bank added it did not have an exchange rate target in mind, nor was it floating the dinar but would carry out “well-calibrated interventions” to smooth our sharp fluctuations in the exchange rate while seeking to “contain the trade deficit slippage,” ensure financing of imports and preserve foreign currency reserves.
     The International Monetary Fund (IMF) last week released some US$319 million as part of an overall fund facility for Tunisia of some $638.5 million that is aimed at boosting economic growth and jobs at a time of high fiscal and external deficits.
     The government and IMF are also working to increase social spending and strengthening the country’s social safety net to “protect the vulnerable in these challenging times,” the IMF said.
     The IMF also said on April 17 that tighter monetary policy would help counteract inflationary pressures, give further flexibility to the exchange rate and narrow the trade deficit.
      On April 18 the finance minister told local radio that the central bank would reduce its interventions in the foreign exchange market while still preventing a sharp slide in the dinar and avoiding what he described as Egypt’s “brutal devaluation” of its pound last year of over 30 percent.
      On April 20 and 21 the dinar fell by almost 9 percent to 2.52 to the U.S. dollar but it has rebounded this week and was trading at 2.46 today, down 6.5 percent since the start of this year.
      Tunisia’s inflation rate rose to 4.8 percent in March from 4.6 percent in the two previous months while Gross Domestic Product in the fourth quarter of last year rose by an annual 1.1. percent, down from 1.2 percent in the third quarter.
      It its statement, the IMF said growth was expected to double this year to 2.3 percent “but will remain too low to significantly reduce unemployment, especially in the interior regions and among the youth.”
     The official unemployment rate was 15.5 percent in the last quarter of 2016.

     The Central Bank of Tunisia issued the following statement:

 “The Executive Board of the Central Bank of Tunisia held on 25 April 2017 an exceptional meeting to examine the recent trends on the exchange market which recorded, over the last week, increasing pressure in line with operators’ increasing demand for foreign currency, yielding thus a sharp depreciation of the dinar, notably against the dollar and the euro.

When examining the above-mentioned trends, the Board affirmed that the objective data as well as the available economic and financial indicators can in no way justify the fluctuations recorded on the exchange market and the sharp depreciation of the dinar against the main foreign currencies, especially that the discussions that were recently held between the Tunisian Authorities and the IMF mission in the framework of the extended credit facility review, were globally positive and encouraging.
Moreover, the Board underlined that the adopted monetary and exchange policy do neither target devaluation of the national currency, nor a target exchange rate and not even a floating of the national currency, but proceeds rather through ordered, well-calibrated interventions to smooth out the sharp variations of the exchange rate while seeing to boost the exchange rate role to contain the trade deficit slippage on the one hand, and ensure financing of the necessary imports and preserve an appropriate level of foreign currency reserves on the other hand.
As for trend in prices, the Board noted that inflationary pressures post an upward trend compared to the previous months. It should be mentioned that preliminary available data indicate risks of an ongoing pressure on the short term.
When examining the bank liquidity situation, the Board pointed out that banks’ needs remain at high levels  given a weak level of national savings, and discussed as a result the means likely to boost savings in order to reduce pressure on the economy’s liquidity.
In the light of what was stated previously, and in considering the pressure recorded recently on the exchange market, following exaggerated speculative position-taking or unfounded worries, yielding liquidity shortage, the Board pointed out that the Central Bank continues to adopt the required flexibility in its monetary and exchange policy conducting in a way to ensure the market liquidity.
Meanwhile, the Board insists on the efficiency of these policies to curb the current deficit slippage and calls for rationalizing the use of foreign currency resources and refraining from all unwarranted practices which are detrimental to sound functioning of the foreign exchange market and likely to threaten its stability; which might affect more globally the macroeconomic balances.
The Board wants also to reassure both the operators and the public with respect to the pursuit of a regular functioning of the foreign exchange market and the ongoing monitoring of the Bank to ensure smooth running of transactions while maintaining the foreign currency reserves at comfortable levels.
After deliberations, and to reduce inflationary pressure risks on the one hand, and boost savings and boost liquidity on the other, the Board decided to raise the key interest rate of the Central Bank of Tunisia by 50 basis points, bringing it to 4.75%, and to increase the minimum savings remuneration rate by 50 basis points, to bring it to 4%. Hence, the Central Bank will continue to closely follow up trends in the economic situation, and particularly the inflationary pressures in order to undertake the appropriate actions on time.”

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