Tunisia Takes Aim at Sagging Dinar With IMF-Backed Rate Hike

  • Rate decision comes shortly after IMF mission visited Tunisia
  • Central bank says move not aimed at future devaluation, float

Tunisia raised its benchmark interest rate to the highest level in about 18 months, as the government looks to stem a decline in the dinar and implement reforms under an IMF loan program.

The regulator raised the key rate by 50 basis points to 4.75 percent, bank spokesman Zied Mouhli said by phone Wednesday. The move was the first change to the rate since the end of October 2015, and came shortly after an IMF mission visit this month aimed at finalizing a review of Tunisia’s loan agreement.

A higher rate “is likely to strengthen the dinar and improve the exchange rate against foreign currencies,” Central Bank Governor Chedly Ayari said in comments carried by the state-run TAP news agency late on Tuesday.

The dinar has slumped 5.4 percent against the dollar and 7.4 percent against the euro -- the currency of its main trading partners -- since the IMF said April 17 that the nation should adopt a more flexible exchange rate, and traded at 2.6904 to the euro as of 2:14 p.m. in the capital Tunis. The IMF, which is lending the country $2.9 billion over four years, also recommended tighter monetary policy to curb inflation.

“It seems the IMF has pushed them to go ahead with a move to a more flexible exchange rate regime,” said Jason Tuvey, Middle East economist at London-based Capital Economics, who expects the dinar to fall to 3 per euro by year-end. “The interest rate hike is an effort to support the currency by attracting capital inflows. But they’re not under the same pressure that Egypt was six months ago, so they can probably afford to devalue the dinar more steadily.”

Tunisian authorities have been struggling to revive the economy, which has stumbled since the 2011 ouster of President Zine El Abidine Ben Ali kicked off a wave of regional uprisings. Officials want to boost investment and private-sector growth in order to lower a surging youth unemployment rate of more than 30 percent. Their efforts have been hindered by terrorist attacks that have hammered the vital tourism sector and political turf wars.

In a statement after the meeting, the central bank’s board said that its monetary policy approach “doesn’t target a devaluation or a particular exchange rate, or a flotation of the national currency, but relies on studied and coordinated intervention.”

Twelve-month dinar forwards pared some losses, appreciating 0.5 percent. That reflects bets on the currency to weaken to 3.0323 per euro over the life of the contracts, down from 2.80 per euro before the IMF issued its recommendations. The lender’s board is due to review its delegation’s assessment of economic policy changes in Tunisia by early June, before deciding on whether to release a $308 million second portion of its loan.

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