IMF calls for Bahrain to make more spending cuts

24 August 2017

Fiscal consolidation and weaker investor sentiment will stunt growth in the kingdom in 2018, says the IMF

The Washington-based IMF has called for Bahrain to continue cutting spending while also introducing new taxes such as VAT in order to offset the increased economic risks caused by the fall in oil prices.

In its latest Article IV consultation with Bahrain published on 22 August, the IMF calls for Manama to reduce the government wage bill and to further cut energy subsidies, while raising non-oil revenue, including through VAT and other revenue measures.

It also called the privatisation of state industries and utilities.

But the fund warns the kingdom to take steps to minimise the impact of these measures on ‘vulnerable groups’.

As well as continuing its fiscal consolidation drive, the fund underscored the need for a strong communication campaign to explain the authorities’ adjustment plans to help strengthen public awareness and support and maintain market confidence.

The IMF report highlights Bahrain’s positive economic and fiscal performance in 2017 following a tough 2016, but it said that economic growth in Bahrain would slow to about 1.6 per cent in 2018 down from 2.3 per cent in 2017 as a result of  “ongoing fiscal consolidation and weaker investor sentiment” in the kingdom.

Fiscal improvement

Despite the slowdown in headline economic economic growth, the fund praises Manama’s drive for tighter fiscal discipline. It reports that Bahrain’s fiscal deficit will fall to 12.2 per cent of GDP in 2017, down from 18 per cent in 2016, owing to higher oil prices and continued reduction in spending.

But it says the deficit will narrow only slightly over medium term because of rising interest payments that will limit the revenue gains from the planned implementation of the VAT in 2018.

 2012 2013 2014 201520162017
 Nominal GDP ($bn) 30.7 32.5 33.4 31.131.934.2
 Real GDP groth (%)3.75.4 4.4 2.93.02.3
 Real oil GDP growth (%) -8.5 15.3 3.0 -0.1-0.1-0.6
 Real non-oil GDP growth (%) 7.1 3.1 4.7 3.63.72.9
 Inflation, Consumer Price Inflation (%) 2.8 3.3 2.7 1.82.81.3
 Fiscal balance (% of GDP) -5.5-9.7 -1.6 -18.4-17.8-12.2
 Current account balance (% of GDP) 8.4 7.4 4.6 -2.4-4.7-3.6

The fund commended manama’s initiatives to streamline business regulation and called for additional structural reforms to promote competition and stimulate private investment, including by privatising state-owned enterprises and promoting greater diversification.

The current account deficit is estimated to fall to about 3.5 per cent of GDP in 2017, down from 4.7 per cent in 2016, and is projected to narrow gradually over the medium-term.

It says that Bahrain’s fiscal and external vulnerabilities have increased in 2016 in the wake of the oil price decline with the fiscal deficit climbing to 18 per cent and governemnt debt rising to 82 per cent of GDP in 2016 as well as a decline in international reserves

Privatisation needed

GCC funded projects have boosted Bahrain’s non-oil growth in recent years, with headline gdp growth reaching 3 per cent in 2016, supported by strong growth of 3.7 percent in the non-oil sector.

Bank deposit and private sector credit growth slowed. The banking sector remains well capitalised and liquid, says the fund.

The fund said that the exchange rate peg to the US dollar remains appropriate for Bahrain, noting that it has delivered monetary policy credibility and low inflation. Average inflation remained moderate in 2016 at about 2.8 per cent.

Strong fiscal adjustment, sizable external financing, and structural reforms are needed to support the peg and strengthen the international reserve position, it said.

Liquidity stress tests suggest that most banks’ liquidity positions are relatively robust, but some wholesale banks and foreign branches hold few liquid assets.

The fund welcomed the central bank’s efforts to strengthen the regulation and supervision of the financial sector, including steps to introduce quantitative liquidity requirements for banks and to develop a macroprudential framework.

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