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UPDATE 2-Tunisia central bank warns buying treasury bonds risky to inflation and currency

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TUNIS, Oct 27 (Reuters) - Tunisia’s central bank warned on Tuesday that government plans to ask it to buy treasury bonds, a move that carries economic risks including boosting inflation, reducing its reserves and causing a drop in the value of local currency.

The government is likely to ask the central bank to buy bonds for the first time in order to finance a record budget deficit expected in 2020, the finance minister said last week.

The country’s public finances are in a critical situation, with a budget deficit expected to reach 14% of GDP in 2020, the highest in nearly four decades, which will increase expenditures by about $4 billion.

The central bank signal will likely reduce the government’s options to finance the fiscal deficit and may put it in trouble as Parliament prepares to discuss the revised budget for 2020.

“We do not have many options to finance the budget gap... we will not raise taxes, we will not sell the state’s stakes in public companies,” Finance Minister Ali Kooli said last week.

Kooli said Tunisia would have to ask some of its creditors to allow delayed payment of some debts.

“This bill should be revised and the deficit should be at 7% or 8% with urgent reforms related to subsidies and state firms and reducing government expenditures,” Taoufik Rajhi, the former minister of economic reforms, told Reuters.

He added that the reforms should lead to a program with the International Monetary Fund (IMF) that allows the country to issue bonds in international markets.

According to a 2021 budget draft seen by Reuters, Tunisia faces debt payments worth 16 billion dinar ($5.8 billion), which is a record.

Debt service in 2020 was around 11 billion dinars, compared with 3 billion in 2010 before the revolution that toppled former President Zine El Abidine Ben Ali in 2011. ($1 = 2.7369 Tunisian dinars)

Reporting by Tarek Amara; Editing by Marguerita Choy and Lisa Shumaker