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Tunisia’s Tourism Sector Plagued by NPLs and Structural Issues
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The Tunisian tourism sector, once a major driver of economic growth, is now beset with non-performing loans (NPLs) and structural issues that have left many hotels in financial distress.
Weakness of Public Banks Contributes to the Problem
According to analysts, the weakness of public banks has contributed to the problem by channeling credit to less productive entrepreneurs and freezing liquidity that would otherwise have circulated in the sector. The state-owned banks, which are the largest providers of credit to the tourism industry, have been plagued by lax regulation and ineffective insolvency and creditor rights systems.
Historical Context: Ambitious Tourism Development Program
The sector’s troubles began in the 1980s when the government launched an ambitious program to develop the tourism industry, with a focus on coastal development. To achieve this goal, the government engaged public banks to subsidize the expansion of the sector through below-market land prices, relaxed credit requirements, loan guarantees and preferential interest rates.
Initial Success, Then Decline
While the effort initially seemed successful, with hotel space tripling and tourism revenues growing twentyfold over two decades, the sector began to suffer from critical rigidity. The “beds only” strategy became less relevant as new and more sophisticated competitors entered the market, leaving many hotels struggling to compete.
Terrorist Attacks and Structural Weaknesses
The terrorist attacks in 2001 and 2002 further exacerbated the problem, leading to severe revenue shocks that revealed the sector’s mounting structural weaknesses. Despite this, the government continued to subsidize less qualified investors and add undifferentiated capacity, resulting in a downward economic and financial spiral.
Current State: High NPLs and Debt Burden
As of the end of 2010, the outstanding credit to the sector stood at TND 4 billion (or almost six percent of GDP), with total tourism sector NPLs estimated at TND 1.5 to 2 billion (or approximately 2.5 percent of GDP). However, this figure may significantly underestimate the problem, with 15 out of 21 commercial banks operating in Tunisia exposed to the tourism industry.
Debt Burden Neglects Renovation and Operational Necessities
The heavy weight of debt on many hotel borrowers has led them to neglect renovation and operational necessities, further perpetuating the downward spiral in quality and prices that has hurt the whole sector. Political instability and security concerns have also pushed the sector into a severe recession, with tourism revenues falling by about 40 percent in 2011.
Over One-Third of Hotels in Financial Distress
As a result, over one-third of Tunisia’s hotels went into severe financial distress last year, according to reports. The situation is expected to worsen unless drastic measures are taken to address the sector’s structural issues and NPLs.
Box: The Tourism Sector in Tunisia - A Chronicle of a Death Foretold?
The article highlights the poor performance of state-owned banks, which have contributed to the problem by channeling credit to less productive entrepreneurs and freezing liquidity that would otherwise have circulated in the sector. It also emphasizes the need for policy reforms to encourage innovation, diversification, and quality improvement in the sector.
Sources:
- World Bank report on Tunisia’s tourism sector
- Tunisian government statistics
- Interviews with industry experts