TUNIS, Tunisia – After a disastrous year in which revolution, social upheaval and strikes scared away tourists and crippled industrial production, Tunisia's economy is slowly climbing out of a deep recession that saw it shrink by 2 percent in 2011.
Tunisian economic recovery is vital to the success of the democratic transition of this North African country of 10 million people that touched off the Arab Spring in 2011. The country, however, needs political stability to allow the economy to recover, while at the same time it needs the economy to calm social tensions.
When fruitseller Mohammed Bouazizi set himself on fire in December 2010 and galvanized a nation, it wasn't just a dictatorship he was protesting but a dead-end life with no prospect of real jobs — something that is still a problem in Tunisia.
"This fragile political climate and subsequent political noise which are already embedded in our baseline scenarios underpin Moody's negative outlook for Tunisia," said the prominent ratings agency in a report in June that applauded the nascent signs of recovery while expressing concern over social tensions, including riots.
Although squabbles at the top of Tunisia's government worry international donors, the European crisis devastating the economies of Tunisia's largest trading partner also threaten economic recovery.
After last year's contraction, the $46 billion dollar economy, which cannot rely on the vast oil resources of its wealthy neighbors Libya and Algeria, is predicted to grow by a modest 3.5 percent in 2012.
"There is an economic recovery, it is not as strong as we would want, largely because of Europe and also because of the political uncertainty that continues," central bank Governor Mustapha Kamel Nabli told The Associated Press in an interview shortly before he was fired by the president.
On June 27, President Moncef Marzouki abruptly announced Nabli's dismissal, apparently without the necessary agreement of the powerful office of Prime Minister Hamadi Jebali.
In an interview with AP a few days later, Ridha Saidi, the deputy prime minister for economic affairs, said Nabli had not been dismissed and they were seeking a compromise. Saidi admitted the issue was part of a broader disagreement between Marzouki and Jebali over how their respective offices shared power.
Yet it was the same Saidi who two weeks later, was tasked with presenting the case for Nabli's dismissal in front of the assembly that finally voted him out Wednesday.
"It gives a bad signal to domestic economic players as well as foreign ones and that's not good for the recovery of the economy," warned Nabli afterwards in an interview with French network France 24, saying he was dismissed for political reasons. "There is a clear will to take control of all the institution of the state."
While Tunisia has yet to receive the billions in economic aid promised by various international conferences, it did get a $100 million grant from the U.S. in March as well as a $400 million bond that guarantees Tunisia can borrow at favorable rates on the international market.
There has also been talk in the U.S. Congress of starting negotiations next year on a U.S.-Tunisia free trade treaty to support the democratic transition.
In the short term, Tunisia needs to revive its tourism sector, which makes up 7 percent of GDP and directly employs 400,000 people.
In 2011, tourists stayed away in droves, leaving empty beaches and deserted bazaars in their wake. Now they appear to be returning, and in the first five months of 2012 much of the ground lost has been made up and receipts are at 87 percent their 2010 levels.
In the winding alleys of Tunisia's old city, Juma Ben Salem sells heavily brocaded gowns and said that finally business is looking up.
"It's getting better, it's steadily going up again. Not 100 percent, but it's not bad and it's certainly better than nothing and that's what we had last year," he said on a calm Sunday when the narrow streets were mostly empty of visitors. "All we need is some calm and stability."
Even on quiet days, the tour buses are back, disgorging crowds of Italian, Spanish and Russian tourists, though on the beaches near Tunis most of those enjoying the sun appeared to be locals.
"Tourism needs stability and people have to feel safe and at ease, but unfortunately we are in a transitional phase and there are still problems of security," said Jalel Bouricha, president of Yadis Hotels.
One constant complaint of Tunisians, especially those in the poorer interior, is that little has improved for them in the 18 months after the uprising that overthrew President Zine El Abidine Ben Ali. Unemployment remained at 18.1 percent in the first quarter of 2012, unacceptably high despite dropping from 18.9 percent in the previous quarter.
Some 34 percent of those with college degrees are unemployed, according to government statistics.
Tunisia's new government, led by the moderate Islamist Ennahda Party, finally launched in May and June a long-anticipated series of infrastructure projects — especially in the impoverished interior.
"The recovery is based on the role of the state to re-energize the economy with public spending on infrastructure and community facilities," Saidi, the deputy prime minister for the economy, told AP. "We must adopt a policy of expansion to relaunch the economy and accept a budget deficit of 6 percent just for 2012."
The government is increasing spending — and its deficit — in the hope that it will create jobs and encourage investment through improved infrastructure. Saidi estimates that the new projects will create 20,000 jobs, with another 25,000 to be created within the government.
Tunisia is also borrowing to pay for its unemployment benefit program, which it hopes will help calm social unrest. Saidi said the program cost about $370 million last year, money the state can ill afford.
Saidi wants to retool the program to include training for degree holders so that they are more attractive to private-sector employers — but risks further social unrest if he ultimately decides to end it.
The government has forecast a modest growth rate for 2012 of 3.5 percent, a dramatic improvement over last year's contraction, but not much better than 2010.
Before his dismissal, Nabli of the central bank predicted two scenarios for the country: a rapid recovery in the coming years that will create the jobs needed, or a drawn-out process of anemic growth that risks foundering in social upheaval.
"The question is how quickly we will reach a level of growth that will create jobs," he said. "There is a good probability for either scenario. I say it can go 50-50 either way."