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Tunisia wants to borrow billions from its central bank to address deficits. Experts call that risky

Critics allege that Saied has sought to undermine Tunisia's institutions since assuming power, and argue that the move could hasten inflation.

TUNIS, Tunisia (AP) — Cash-strapped Tunisia wants to take the unprecedented step of borrowing billions from its central bank to address budget deficits and bandage its economic crisis, a step that experts warn could bring inflation and lessen faith in institutions.

In an emergency meeting behind closed doors, parliament's finance committee on Wednesday considered a request from President Kais Saied's government to borrow the funds after it previously overhauled laws designed to guarantee the bank's autonomy.

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Those laws added the central bank to a growing list of institutions that critics say Saied has sought to undermine since taking power in the North African nation, along with briefly suspending parliament and rewriting Tunisia's constitution.

His government wants the central bank to directly buy up to 7 billion Tunisian dinars ($2.25 billion) in interest-free bonds to help plug a 10 billion dinar ($3.2 billion) budget deficit.

But in Tunisia — where inflation and shortages of basic goods have become routine — the request is raising concerns about maintaining the bank's independence from politics, causing inflation and further spooking foreign lenders and investors.

It comes as Tunisia finds itself unable to borrow from traditional creditors, including the International Monetary Fund, whose proposed $1.9 billion bailout package remains in limbo.

Though the IMF has said purchasing securities like bonds may serve a monetary policy purpose at times, it has warned countries that central banks should not finance government expenditures.

"Amending the status of the Central Bank of Tunisia just to allow it to finance the government's budget and nothing else ... is a misguided approach that brings with it numerous risks — notably inflationary — for the country's economy and relationship with its partners," said economist Aram Belhadj, a professor at the Faculty of Economics and Management of Tunis.

Borrowing from the central bank may fund the budget in the short term, retaining subsidies for everyday goods like flour, electricity and fuel. But with shortages of key goods and bread lines in recent memory for Tunisians, the decision could further destabilize trust in the currency and its value, said Raouf Ben Hedi, an analyst at Tunisia's Business News.

Because of Tunisia’s debt and its likelihood of defaulting, Fitch upheld Tunisia's CCC- credit rating in December. The ratings firm at the time warned that a borrowing scheme allowing the central bank to directly finance government "would endanger the credibility of the central bank and raise pressure on prices and the exchange rate."

The government's unprecedented request comes as other sources of financing are scarce.

As Tunisia's presidential election approaches later this year, negotiations over the IMF's bailout package remain at an impasse due to Saied's reluctance to curb subsidies or reduce public sector wages. He has criticized the institution's recommended reforms as "foreign diktats" and fired his finance minister, a key proponent of the proposed reforms.

"Political pressures can lead to expansionary monetary policies during election periods, which is the case for Tunisia," Ben Hedi said, warning that such policies could lead to recessions.

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