Bahrain needs a sizable fiscal adjustment urgently, says IMF
Bahraini banks’ strong capitalisation and liquidity will help them weather a slowing in the pace of economic growth.
Following the IMF’s recent mission to Bahrain, Padamja Khandelwal, the IMF Mission Chief pointed out that a sizable fiscal adjustment is urgently needed to restore fiscal sustainability, reduce vulnerabilities, and boost investor and consumer confidence. The adjustment should be designed to minimise the adverse impact on vulnerable groups.
“During 2016, economic activity was solid and inflation remained subdued. Overall GDP growth is estimated at 3.0 per cent, with strong non-oil growth of 3.7 per cent aided by the implementation of GCC-funded projects. Despite significant fiscal measures that were implemented, lower oil prices led to the overall fiscal deficit and public debt in 2016 near 18 per cent and 82 per cent of GDP, respectively. The external current account deficit is estimated at 4.7 per cent of GDP,” said Khandelwal.
According to the IMF, Bahrain’s overall growth has been projected at 2.3 per cent in 2017, continuing to be driven by strong infrastructure spending from GCC funds. Inflation levels in the Kingdom is expected to stay moderate. Owing to the higher expected oil prices and continued implementation of measures to reduce spending and raise non-oil revenues, the fiscal deficit is expected to fall to 12.6 per cent of GDP in 2017 and remain close to that level over the medium term. Furthermore a substantial increase in debt is also projected.
“A sizable fiscal adjustment is urgently needed to restore fiscal sustainability, reduce vulnerabilities, and boost investor and consumer confidence. In this context, fiscal measures in the near term could include the VAT, which is already agreed at the GCC level, and further rationalising spending on subsidies, which disproportionately benefit the wealthy, and social transfers. The wage bill, which is nearly 12 per cent of GDP and among the highest in the GCC, can be reduced in the near term by streamlining allowances and freezing nominal wages,” explained Khandelwal.
Over the medium term, sizable further consolidation can be achieved in the context of a civil service review and will help support the goal of boosting private sector employment of Bahraini nationals. The IMF mission in its concluding statement further added that other measures are also needed to raise non-oil revenue to help finance the provision of government services. This includes reforms to strengthen the fiscal framework that would support the process of fiscal consolidation. The adjustment should be designed to minimise the adverse impact on vulnerable groups.
“Bahraini banks’ strong capitalisation and liquidity will help them weather a slowing in the pace of economic growth. The Central Bank of Bahrain continues to strengthen its regulation and supervision of the financial sector, which will support the continued development and stability of the financial system. The exchange rate peg to the US dollar continues to serve Bahrain well, and will be supported by fiscal consolidation. Measures to reduce the costs of doing business are key to boosting growth prospects and achieving economic diversification in Bahrain. They can help raise productivity and catalyse private investment, thereby contributing to create better paying private sector jobs for nationals and diversify the economy,” Khandelwal added.