MANAMA: Bahrain’s GDP is expected to grow at 3.2 per cent this year, with a recovery in oil production, continuation of GCC-funded projects, and rising refinery and aluminium production capacity, the International Monetary Fund (IMF) has said.
In a statement after annual consultations with the government, Bikas Joshi, who led an IMF mission to Manama, said continued efforts to improve the business climate should help economic diversification and create jobs in the kingdom even as inflation remains subdued.
Fiscal steps which the government has already announced and implemented since 2015 would cut the deficit to 11pc of gross domestic product in 2018 from 14pc last year and around 18pc in 2016, he added.
Reviewing Bahrain’s economic performance for last year, the IMF official said output remained resilient, growing at around 3.8pc.
This was underpinned by the non-hydrocarbon sector, with robust implementation of GCC-funded projects as well as strong activity in the financial, hospitality, and education sectors.
Higher oil prices increased hydrocarbon revenues by 15pc.
Mr Joshi, however, cautioned that a credibly large policy package – comprising both revenue and expenditure measures, while protecting the most vulnerable – is urgently needed for fiscal adjustment.
“The implementation of a value-added tax (VAT), as planned, would be important. Additional revenue measures – including consideration of a corporate income tax – would be welcome,” he said.
According to the IMF, the government also needs to target subsidies better and address the large wage bill.
Reforms to strengthen the fiscal framework, including by operationalising the debt management office, would be crucial.
Bahrain’s public debt increased to 89pc of GDP, while the current account deficit remained unchanged at 4.5pc.
Reserves remain low, covering only 1.5 months of prospective non-oil imports at end-2017.
“Over the medium term, the deficit is projected to remain sizeable, with a rising interest bill as public debt continues to increase.
“Without further measures, non-oil revenue is expected to stagnate and growth to slow. The decline in oil prices since 2014 and absence of buffers have led to a rise in fiscal and external vulnerabilities,” said Mr Joshi.
On a more positive note, the IMF said Bahrain’s financial sector remains stable, thanks to large capital buffers.
“The banking system remains well-capitalised and liquid. Continued efforts to strengthen the regulation and supervision of the financial sector would further bolster the system,” said Mr Joshi.
Fintech presents opportunities for Bahrain, where global experience can be brought to bear in addressing possible risks.
The IMF also did not see any immediate changes to Bahraini dinar’s peg to the dollar, which it said “continues to provide a clear and credible policy anchor” and would be further supported by fiscal consolidation.
The fund has emphasised that structural reforms remain key to supporting the kingdom’s growth and diversification, given the fiscal constraints.
Legal reforms to streamline regulations should reduce costs of doing business and catalyse private investment.
Improving access to financing for small and medium enterprises and further reforming the labour market would help further diversify the economy and make the non-hydrocarbon sector more resilient, the IMF said.
The mission led by Mr Joshi visited Manama from April 30 to May 15 this year to conduct discussions for the 2018 Article IV consultation.
The mission will submit a report to IMF management and executive board, which is tentatively scheduled to discuss the consultation next month.
avinash@gdn.com.bh
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