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Macroeconomic and Fiscal Impacts of the Libyan Crisis on Tunisian Economy

Beirut, Lebanon

In April 2017 ESCWA issued a study entitled “The Impact of the Libyan Crisis on the Tunisian Economy: an Estimation of the Macroeconomic and Fiscal Impacts of the Libyan Crisis on the Tunisian Economy” laying out the consequences that arise as a result of states having interdependent relationships.
The study represents a joint effort between ESCWA, the World Bank and the Tunisian Institute of Competitiveness and Quantitative Studies. It shows that a civil war in one country has negative repercussions in neighboring countries in both the short and in the long run, especially if they have developed close ties economically, in trade, and financially. The paper illustrates the fact that there is a domino effect, that a conflict or crisis in one country can influence events in neighboring countries.

This paper focuses on the relationship between neighbors Tunisia and Libya and how the crisis in Libya reverberated in and had spillover effects into Tunisia. It analyzes five effects of the violence in Libya on the Tunisian economy: its consequences on the remittances from Tunisians working in Libya; the impact of Libyans in Tunisia on aggregate demand; the effect of the dwindling business environment on private investments; the impact of domestic and regional security challenges and concerns on tourism; and the result of the crisis on government security spending. The main purpose of the paper is to link the fiscal and macroeconomic effects of the Libyan conflict on the Tunisian economy between 2011 and 2015 while also looking at a number of other factors including the results and the costs of Tunisia’s present political transition on its economy.

Geography and the type of relationship play a crucial role. Due to the fact that the two states border each other and have strong ties, the civil war and the deteriorating economic situation in Libya reduced, according to reports, Tunisia’s economic growth by 24 percent between 2011 and 2015. As a matter of fact, according to International Monetary Fund (IMF) Tunisia lost an average of 3.86 growth points in this period.

Furthermore, since Tunisia has a service sector based economy the Libyan civil war has impacted its economic stability in several different areas: private investment and the tourism sector have both suffered (as a result of a decrease in both investor confidence and in the demand for tourism), remittances from Libya have decreased and the purchasing power of residing Libyans and visitors have weakened and dwindled. The Libyan war has also led the Tunisian government to increase government security spending with the fiscal cost of the Libyan conflict for Tunisia estimated at 5.8 million Tunisian dinars. However, simulations demonstrated that financing security spending would increase tax rates including income taxes in Tunisia considerably which could cause some domestic problems. Finally, the war, increased feelings of insecurity and the negative perception and image of the region have harmed Tunisia’s vital business sector and business confidence.

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