A modest acceleration in growth to 2.5% in 2018 from 2% in 2017 is not continuing, with weak growth of 1.1% during the first half of 2019. This was driven by a slowdown in agricultural growth (base effect after 9.5% growth in 2018) as well as a contraction in industry (oil and gas, agrobusiness) which was only partially compensated by growth in services. Inflation significantly accelerated between 2017 and mid-2018 (7.8% in July 2018). In response, the Central Bank increased the policy rate to 7.75%, and authorities recently moved to enforce tighter loan-to-deposit ratios among banks and reduce liquidity injections through FX swaps. Consequently, inflation has been decelerating since the second half of 2018, and stood at 6.7% in August. Real Interest rates (except for some deposit rates) are now positive.
Growth is projected to drop below 2% in 2019 before starting to slowly recover, contingent on the completion of pressing reforms to improve investment climate and ensure greater security and social stability. Growth will be supported by expansions in agriculture, manufacturing, and tourism, and the coming online of the Nawara gas field. Inflation is expected to continue declining provided monetary policy remains focused on its central goals. Poverty is projected to hover below 3% using the US$3.2 PPP per day line and below 0.3% using the extreme poverty line.
The 2019 fiscal deficit is projected to reach 5.3% of GDP against an initial Budget Law target of 3.9% of GDP, due to the significantly lower than forecast GDP growth rate, civil sector wage hikes, and double-digit growth in interest payments, all of which will more than offset the substantial increase in revenues. The recent legal decision against the government on the Tunisia Foreign Bank case will require provisioning for penalties. Public debt will peak in 2020 at almost 89% of GDP before starting to decline assuming gov- ernment reform momentum kicks in following the presidential and parliamentary elections slated to take place during the next two months.