MANAMA: Bahrain’s economic growth continues to be resilient, says the International Monetary Fund (IMF) noting 3.8 per cent output growth in 2017.
In a report capturing the conclusions of its 2018 Article IV Consultation with the kingdom, the IMF’s executive board said the growth was underpinned by a resilient non-hydrocarbon sector, with robust implementation of GCC-funded projects as well as strong activity in the financial, hospitality and education sectors.
However, it flagged downside risks to the outlook stemming from the rise in fiscal and external vulnerabilities, tighter global financing conditions, delays in fiscal adjustment, and lower energy prices.
Against this background, the fund has called for additional sustained efforts to improve fiscal and external positions, preserve financial sector resilience, and support diversified, inclusive growth.
Welcoming continued fiscal reform efforts by the Bahraini government, including subsidy reforms, cutting of non-productive spending, and raising of non-oil revenues by introducing a value-added tax by 2019, the IMF, however, called for a comprehensive package of reforms to reduce fiscal deficits over the medium term, observing that public debt is expected to increase further over the medium term and reserves are projected to remain low.
Additional steps are needed to put public finances on a sustainable trajectory, striking the right balance between revenue and expenditure measures while protecting the most vulnerable.
IMF directors emphasised the need to introduce direct taxation, including a corporate income tax, while containing the public wage bill and targeting subsidies to the poorest.
They looked forward to the newly-established debt management office developing a contingent financing strategy to mitigate financing risks and costs.
Directors also encouraged authorities to strengthen their macro-fiscal framework and increase fiscal transparency and accountability, securing public support and awareness, and enhancing market confidence.
Bahrain’s banking system remains stable with large capital buffers, said IMF directors also agreeing that the exchange rate peg remains appropriate for the economy, as it delivers a clear and credible policy anchor, keeping inflation low and stable.
On the flip side, they underscored the importance of fiscal adjustment in supporting the peg and rebuilding international reserves, and ensuring external sustainability.
The IMF board has recommended gradually unwinding central bank lending to the government.
Welcoming the Central Bank of Bahrain’s continued efforts to implement the 2017 FSAP recommendations to further strengthen the regulation and supervision of the financial sector, the directors emphasised the need to develop a well-defined emergency liquidity assistance framework, deepen the interbank market, and enhance the supervision of Islamic banks and insurance companies.
The fund has also encouraged close monitoring of the build-up of household debt.
While Bahraini initiatives to promote fintech have been welcomed by the IMF, the fund underscored the importance of monitoring risks and continued efforts to strengthen the Anti-Money Laundering and Countering Financing of Terrorism framework.
IMF directors commended initiatives to streamline business regulations to promote private sector development, diversification, and job creation, and welcomed recent developments in enhancing SMEs’ access to finance, as well as recent labour market reforms to increase flexibility and promote employment in the private sector.
They called for further structural reforms to boost productivity and competitiveness through more privatisation plans and public-private partnerships, and measures to strengthen the education system and support greater female labour force participation.