Tunisia, which has ghosted the International Monetary Fund and feuded with Europe over aid for its languishing economy, has turned olive oil exports into a money spinner to help keep default fears at bay.

Cultivated in Tunisia for millennia, olive groves dotting the North African country’s plains have emerged as a financial backstop during a global production squeeze caused by back-to-back droughts in key European growers.

Coming off a record haul in 2023, revenues from sales of olive oil abroad almost doubled to about 3.4 billion dinars ($1.1 billion) in the first half of the export year that ended in April — according to the country’s olive oil agency ONH — far exceeding what Tunisia is earning from tourism and its crucial phosphate and fertilizer industry.

It’s a windfall that helped the current-account balance narrow dramatically last year to reach a deficit of 2.5% of gross domestic product, the smallest in nearly two decades and down from close to 9% in 2022, according to IMF estimates.

“Tunisia’s economy shows some resilience, despite ongoing challenges,” Alexandre Arrobbio, the World Bank’s country manager for Tunisia, said in a report. “Increased exports in textiles, machinery, and olive oil, coupled with growing tourism exports, have helped to ease the external deficit.”

A niche industry that provides a staple of home kitchens around the world can hardly on its own measure up to the challenges facing Tunisia, with the equivalent of almost $8 billion needed this year to service foreign liabilities alone. 

As talks stalled with the IMF over a $1.9 billion rescue package negotiated more than a year and a half ago, Tunisia has been leaning on its central bank for direct financing of its budget and debt repayments, an unorthodox path championed by President Kais Saied that’s been draining currency buffers.

Still, what Saied calls “this blessed tree” now looms large for Tunisia’s financial survival, alongside funding received from the likes of Saudi Arabia and Afreximbank. 

At the start of this year, Tunisia’s bonds traded in distressed territory and the country was ranked among the emerging nations most exposed to debt risk in Bloomberg Economics’s default vulnerability scorecard.

A turnaround since then has seen the spread on Tunisia’s bonds over Treasuries fall to the lowest in more than four years. Credit default swaps, a gauge of country risk, are at less than half their record level in March 2023.

Tellimer, a brokerage focused on emerging markets, is urging caution after the debt rally, “with Tunisia’s longer-term prospects likely to remain weak without a renewed reform push.”

The boom in Tunisian olive oil exports has benefited from a stretch of record prices that started after a devastating drought in Spain and only began to stabilize at the start of this year.

The industry has persevered in Tunisia through the upheaval wrought by climate change and the Arab Spring revolts. Employing over a million people, it makes up about a third of Tunisia’s agricultural output and 40% of its farm exports.

Planted areas expanded by a third since 2002, helping Tunisia navigate the fallout of climate change and drought on output. 

Olive oil exports delivered bumper proceeds for the country despite a decline in domestic output, contributing to an improvement in the current account last year that helped Tunisia accumulate more than $1 billion in foreign currency reserves, according to economists at JPMorgan Chase & Co.

At the same time, Tunisia exports about 90% of its olive oil in bulk, cutting into profits. The current account is still on track to run an annual deficit of around $2 billion in the coming years, with foreign currency reserves now only sufficient to cover 109 days of imports.

The government has a 50 billion-yen ($321 million) bond that matures in October and a $1 billion eurobond coming due next January.

“Tunisia’s economy has muddled through over the past year,” Tellimer said. But it warned that “reserves will likely decline gradually over the medium term without any material policy adjustments.”