(Bloomberg) -- Tunisia was downgraded further into junk by Fitch Ratings, as the cash-strapped North African nation struggles to clinch a final deal with the International Monetary Fund that would secure crucial financing.

The move “reflects uncertainty around Tunisia’s ability to mobilize sufficient funding to meet its large financing requirement,” the ratings agency said Friday in a statement. 

The cut in the long-term foreign-currency issuer default rating to CCC- from CCC+ also shows “the failure to implement prior actions for an agreed IMF program” needed to release “associated bilateral financing,” Fitch said.

Tunisia, hit hard by the pandemic and the ripple effects of the war in Ukraine, made an initial agreement on a $1.9 billion IMF deal last year, but the government has yet to finalize the wide-ranging reforms, including potentially painful cuts in state spending, necessary for a sign-off. 

“Our central scenario assumes an agreement between Tunisia and the IMF by year-end,” Fitch said. “But this is much later than our previous expectation and risks remain elevated.”

President Kais Saied has also criticized what he calls foreign “diktats” on the economy, casting further doubt on an imminent deal. Meanwhile, Tunisia’s 2023 grain harvest is on track to be its smallest in 20 years, potentially necessitating more imports that will pile pressure on its foreign reserves amid worsening bread shortages.

Tunisia’s economic plight is catching Europe’s attention. The birthplace of the 2011 Arab Spring revolts has been a major staging point for illicit crossings of the Mediterranean, both by Tunisians and others from the African continent. Italy’s government is among those afraid a meltdown would spur further migration.

Italian Prime Minister Giorgia Meloni, who has pledged support for Tunisia in IMF talks, is set for her second visit to Tunis in less than a week on Sunday, along with her Dutch counterpart and the president of the European Commission.

Fitch also said:

  • Government financing needs will be about 16% of gross domestic product, or $7.7 billion, in 2023, and 14%, or $7.4 billion, in 2024 — the result of high fiscal deficits and larger debt maturities, both domestically and externally
  • Authorities’ funding plan relies on over $5 billion of external financing, with majority contingent on IMF program that probably won’t be fully mobilized in 2023; in “central scenario,” Tunisia would unlock about $3.5 billion externally, creating large domestic-financing needs
  • Without an IMF agreement, about $2.5 billion of external financing could come in 2023, mainly from Algeria, AfreximBank, project loans from multilateral partners and increase grants from bilateral ones
  • “Alternative financing sources for 2024 are not clear”
  • It forecasts the current-account deficit will narrow to 7% of GDP in 2023, from 8.5% in 2022, with improvement driven by tourism recovery

©2023 Bloomberg L.P.