Tunisia is funding a 32% bigger deficit next year by leaning harder on domestic borrowing, crowding out SMEs

Tunisia is working through its 2027 draft budget — and what’s in it shows the government is going with the same choice for the fourth year in a row despite economic slowdown: Leaning hard on domestic borrowing to finance state needs.

The budget in numbers: The draft fills a TND 14.6 bn deficit — 32% larger than this year’s — through a TND 9.8 bn zero-interest facility from the Central Bank of Tunisia (BCT) and TND 19.8 bn (USD 6.6 bn) of domestic borrowing. Real GDP growth is penciled in at 3.1%, which the three economists and analysts we spoke with all told us Tunisia has not hit in years. Tax revenues projected at TND 49.6 bn (USD 16.5 bn) will carry 91.4% of state revenue, with no new wealth, land, or property tax to broaden the base.

The alternative is familiar, and so is the reason it’s off the table. The IMF staff-level agreement rejected in April 2023 would have required cutting food and fuel subsidies, freezing public sector hiring, and taking a politically painful tariff adjustment up front — a package Saied’s government decided it could not survive. “Bilateral borrowing was linked to concluding an agreement with the IMF; with the negotiations stalled, bilateral borrowing stalled with it,” Amine Bouzaiène, researcher specialized in tax policy and founder of the Ali Ben Ghedhahem Center for Tax Justice, tells us.

So the BCT is writing the government’s checks, and the banks finance what’s left. The TND 9.8 bn (USD 3.3 bn) interest-free advance for 2027 marks the fourth consecutive year the central bank has stepped in, with the cumulative total at around TND 25 bn (USD 8.3 bn) across 2024, 2025 and 2026, Jalel Ben Romdhane (LinkedIn), an independent Tunisian expert in alternative finance and financial markets, tells us.

Domestic borrowing has ballooned over the last few years, Director of Programs at Al Bawsala Firas Zakraoui tells EnterpriseAM. Domestic borrowing provisions are at TND 19.9 bn (USD 6.6 bn) in the 2027 budget, barely changed from TND 19.1 bn (USD 6.4 bn) in the 2026 Act, but the government now accounts for 75.5% of Tunisia’s public debt stock, up from 74.8% a year ago and 39% in 2021. The share held externally has fallen by more than half in five years.

What the choice costs

The negative side of the trade-off lands on Tunisia’s SMEs, which make up 80-90% of the country’s economic fabric. These are mostly family-owned firms with one to four employees, generating stable household income rather than high margins, Zakraoui tells us. They are the first to feel it when banks reroute their balance sheets into treasury paper, and they have been feeling it for a while. “With the economic and social problems individuals and companies are going through, and with the summer’s major crises — repeated power and water cuts that weren’t announced and caused significant losses, especially for small enterprises — we are seeing a decline in the ability of these actors to request financing from banks,” he says.

Banks prefer the state, and the math is simple. Treasury paper pays well — above the 7% benchmark interbank rate — and under Tunisia’s bank capital rules, lending to the state is treated as risk-free, meaning banks don’t have to set aside any capital against it. Lending to an SME requires capital for every TRD. On a return-on-equity basis, lending to the state is unbeatable. Local lenders are earning “substantial and stable profits that have made them unmotivated to play their fundamental role in financing the economy,” Bouzaiène says.

The budget includes provisions that aim to address the blow to SMEs: The draft includes a four-year corporate tax holiday for firms newly incorporated next year, with the state covering social security (CNSS) contributions on a sliding scale (100% in year one, dropping to 25% by year four). Alongside the tax package, the state has also reserved 8% of bank lending capacity for zero-interest SME loans routed through its own channels.

But these measures are not enough and fall far short of the scale on which sovereign paper is absorbing banks’ lending liquidity, Ben Romdhane says. The measures are “modest and limited in funding once distributed among economic actors,” Zakraoui agrees.

And what makes it worse is the government’s support program for cooperative companies, a program introduced by the government in 2022 that Zakraoui says has crowded out traditional enterprise support. “Honestly, no one in Tunisia clearly understands them. State institutions have abandoned supporting traditional companies and redirected their entire focus to societal companies to align with the president’s priorities,” he says.

What’s achievable, what isn’t

The budget is targeting TND 49.6 bn (USD 16.5 bn) in tax revenues, and that goal is within reach, largely because the base is largely unchanged and there are no new major enforcement endeavors to account for. There are no new tax measures, and no serious attempt at the informal economy — which Ben Romdhane estimates at 38-40% of GDP, with foregone revenue of TND 12-25 bn (USD 4-8.3 bn) a year, and TND 28-29 bn (USD 9.3-9.7 bn) in banknotes circulating outside the banking system. The steps that it takes are limited in scope: raising duties on alcohol, travel, and digital competition.

The TND 49.6 bn tax will come mostly from indirect levies and wage earners. Indirect levies (VAT, consumption duties) make up 58% of total tax revenue, hitting lower and middle-income households hardest. Wage earners carry roughly 70% of direct personal income tax. Large corporations pay effective rates of 2 to 4%, after hundreds of tax breaks have delivered neither the needed investment nor jobs, Bouzaiène says. “The real margin lies in large corporations’ effective rates of 2% to 4%, in capital-income taxation, and in enforcement.”

The expanded wealth tax has so far been cosmetic. Broadened in the 2026 Act from real estate to include some commercial and financial assets, the tax’s projected annual yield this year is TND 11 mn (USD 3.7 mn) — against TND 14.4 bn (USD 4.8 bn) from personal income tax and TND 13.2 bn from VAT, Bouzaiène tells us.

Far less reachable is the 3.1% real GDP growth forecast, our sources agree. The Institut National de la Statistique recorded 2.6% real GDP growth in 1Q 2026 and 2.3% in 2Q, after the government had already revised its 2026 forecast down from 3.2% to 2.7%. A 3% rate is “among the lowest in the Arab and African regions, and does not suffice to emerge from economic stagnation,” Bouzaiène says. Ben Romdhane calls the 3.1% target “a pace Tunisia has not sustained in years.”

The deficit figure itself is contested, and the gap between readings matters. Ben Romdhane flags a 7.3% of GDP reading in the Reuters count against 5.6% from the African Development Bank. “The divergence between deficit readings is less a technical dispute than a reminder that outcomes will depend on execution,” he tells us.

The USD 80 oil assumption is where the budget breaks. Brent is near USD 110. Each USD 10 move above USD 80 adds roughly TND 590 mn (USD 196.7 mn) to the 2027 subsidy bill before FX effects. At current prices, the overshoot is around TND 1.8 bn (USD 600 mn), Ben Romdhane says. “The oil hypothesis is the one most likely to require revisiting — perhaps through a corrective finance act before the year is out,” he adds.

A bigger subsidy bill, no structural fix

Subsidies have tripled since the pandemic and are holding at the top. The 2027 budget earmarked some TND 11.85 bn for subsidies, of which TND 7.1 bn (about 60%) goes to energy — TND 3.68 bn for electricity and TND 3.41 bn for refined products. “Our annual average for price subsidies — fuel, basic commodities, public transit — was TND 4.1 bn across the decade to Covid,” Bouzaiène says. That tripled in the two years after the Russia-Ukraine shock, reaching around TND 12 bn.

The tariff adjustment Saied can’t take in the main budget is being deferred to a mid-year corrective act. Cooking gas carries a 75% subsidy rate, which means any attempt at a broad price adjustment at the start of the fiscal year would be politically costly in a way the government has decided it won’t absorb. “Generalized price adjustment is politically out of reach for now… the adjustment has therefore been deferred, most plausibly to a corrective finance act in the course of 2027,” Ben Romdhane says.

The overall read

Ben Romdhane calls the budget coherent with what Tunisia can actually do under the following conditions. “The bill is internally coherent with its constraints: limited external market access, a narrow formal tax base, and incompressible current spending,” he tells us.

Bouzaiène says that’s exactly the problem. The 2027 draft stops short of carrying forward the reforms Saied promised earlier when he took over, such as expanding the personal income tax scale from five to eight brackets, raising the rate from 35% to 40% on income above TND 70k, or increasing the general corporate tax rate from 15% to 20%, he tells us. “The 2027 budget is disappointing because it restricts the margins for public investment needed to achieve energy and food sovereignty, support public enterprises, and secure the social role of the state,” he adds.

What’s next

The budget will be tested on two fronts in 2027. The first is whether the Brent gap forces the mid-year corrective finance act Ben Romdhane expects. That could see Tunisia reduce tariffs on various services like cooking gas and electricity.

The second front has a longer-term horizon, and it shows the sharpest incoherence in Tunisia’s economic policies. The government’s own 2027-2030 development plan projects tax revenues climbing from TND 49.6 bn in 2027 to TND 56 bn by 2029 and promises major capital projects, none of which are reflected in the 2027 budget’s allocations. “The two documents read as if they were drafted in two separate ministries without the slightest coordination between them,” Zakraoui says.