MIDEAST MONEY-Sliding foreign reserves threaten crisis for Tunisia
* Tunisia pushing economic reforms under IMF supervision
* But surge in trade deficit cutting reserves
* Below level which central bank considers adequate
* Politics hinder external financing as elections loom
* Central bank lays plans for more flexible currency
TUNIS/DUBAI, July 3 (Reuters) - A slide in Tunisia's foreign reserves may undermine its currency and push the country into a balance of payments squeeze resembling the crisis in neighbouring Egypt.
Since revolutions swept the Arab world in 2011, Tunisia has done more than most countries to reform its economic policies, aiming to repair state finances and lure foreign investment.
Unlike Egypt, it has mustered the political will to agree on an emergency loan programme with the International Monetary Fund, making socially explosive changes favoured by the IMF such as cutting fuel subsidies. It is laying plans for more reforms, including changes to taxes and bank regulation.
But these steps may still fail to save Tunisia from Egypt-style currency turmoil, as its trade deficit expands and foreign reserves drop below the level which the central bank (CBT) considers safe.
"The very weak state of foreign currency reserves shows the serious situation of the Tunisian economy," said Moez Joudi, a financial analyst and economics professor in Tunis. "The problem may become similar to Egypt's economic crisis."
Since President Zine al-Abidine Ben Ali was toppled in January 2011, political violence and industrial unrest in Tunisia have been less heated than in Egypt and its Islamist-led government has been more conciliatory to the secular opposition.
But key earners of foreign exchange have not fully recovered since the revolution. Tourism revenues were 988 million dinars ($595 million) in the first five months of this year, down 8 percent from the same period in 2010, the tourism ministry said.
Foreign investment inflows totalled 394 million dinars in the first quarter of 2013, down 17 percent from the first quarter of 2010, according to the investment promotion agency.
Meanwhile Tunisia's trade deficit has surged, partly because Europe's economic slump has hurt export growth. The deficit was 4.74 billion dinars in the first five months of 2013, up 5 percent from a year earlier and 32 percent higher than it was in the same period of 2010, official data shows.
The result has been a protracted slide in the central bank's foreign currency reserves, to 10.473 billion dinars in late June - equal to 94 days of the country's imports. That compares with 100 days a year ago and around 140 days in late 2010.
Central bank governor Chadli Ayari has said that for safety, Tunisia needs to maintain foreign reserves covering at least 100 days' imports. The reserves are now not far from Egypt's crisis level of just under three months of imports.
Tunisia has not so far suffered the foreign exchange shortages that plague Egypt, where imports of food and fuel have been disrupted by financing difficulties.
But there are signs that pressures are growing. When Tunisia agreed in June to import 450,000 barrels of oil a month from Libya, economics minister Ridha Saidi said payment would be deferred but did not say for how long.
Financial markets are becoming concerned. Five-year credit default swaps used to insure against a default by Tunisia's central bank have hit a post-revolution high of 386 basis points, up from 345 at the end of last year and 176 in 2011.
Political tensions are hurting Tunisia's ability to finance itself. The government has been planning to cover part of its projected budget deficit of $3.2 billion this year with its first issue of Islamic bonds or sukuk, raising $700 million.
The sukuk could potentially attract large amounts of Islamic funds from the wealthy Gulf. But parliament, preoccupied by acrimonious debate on a new constitution, has not begun considering legislation to permit the issue.
With elections expected towards the end of 2013, officials now say privately the sukuk issue may have to wait until 2014.
For now, Tunisia can probably limp along. Under last month's $1.74 billion IMF deal, it is to obtain $150 million immediately and the remainder over the next two years.
It is also getting hundreds of millions of dollars in financial support from the United States and other countries. However, most of this aid is in the form of loans which Tunisia will eventually have to repay, and it does not directly address the root causes of the country's widening external deficit.
The central bank has tried to address one of the causes by making it more expensive for commercial banks to extend consumer loans. But in a letter to the IMF, published last month, the government conceded this policy had failed to dampen imports as much as it had hoped. World Trade Organization rules limit Tunisia's ability to control imports with tariffs, it noted.
So in the long term, a major depreciation of the dinar may be needed to achieve an external balance by throttling imports and convincing investors the currency is fairly valued.
The dinar has fallen 10 percent versus the U.S. dollar since the end of 2011, and would have fallen further if the CBT had not sold dollars to support it. In last month's IMF letter, the bank said it was preparing to make the exchange rate "more flexible".
An electronic platform will be introduced and market-making banks chosen before weekly auctions of foreign exchange begin in early 2014, the letter said. Egypt's central bank has used auctions to manage depreciation of its currency this year.
"A more flexible exchange rate regime will help preserve CBT foreign exchange reserves, facilitate external adjustment, and support demand for money by reducing the liquidity absorption due to interventions in the foreign exchange market," CBT said.
(Editing by Susan Fenton)