Agricultural Trade Balance and Exchange Rate Depreciation: The Case of Tunisia

In spite of the rapid diversification of Tunisia’s production bundle, the agricultural sector remains socially and economically important. Self-sufficiency in some basic food products is also an important national objective that partly guides Tunisia’s agricultural policies. However, Tunisia’s structural reforms have been accompanied by a stabilization of its real exchange rate, which prior to the reforms and in the initial phases of the reforms depreciated quite rapidly. The impact of this change in real exchange rate policies on the net external position of the agricultural sector is ambiguous, partly because it is not clear that the Marshall-Lerner conditions are satisfied, and partly because at the sector level general equilibrium effects may lead to a deterioration of a sector’s net external position following a real exchange rate depreciation. The objective of this paper is to empirically examine the impact of the early depreciation of Tunisia’s dinar (and its stabilization more recently) on the net external agricultural balance. Results suggest that the depreciation of Tunisia’s exchange rate led in the long-run to a decline in the external net agricultural position of Tunisia, potentially jeopardizing other government objectives for the agricultural sector. Thus, the recent stabilization of the real exchange rate has helped, not hurt, the government achieve its non-economic objectives for the agricultural sector.