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Don’t panic! VAT in a nutshell...

Comment
Hamed Fakhro


“In economics, the majority is always wrong”

– John Kenneth Galbraith

The VAT final countdown has reached single digits and there seems to be panic and frenzy in the air.

It reminds me of the Y2K threat of 1999, when most of the world believed all computers would crash.

VAT is a complex subject with some negative and positive angles.

Bahrain’s oil-based economy was generally stable for most of its history until 2011, when we faced the aftermath of the global financial crisis and were hit by the Arab Spring.

We had mismanagement of funds, wastage and didn’t spend enough on developing our exports, services or integrating into the global economy.

But we also built great infrastructure, had a blanket of subsidies and offered free health and education to everyone.

After 2011 the economy stalled because of low oil prices, wars in the region, general global negativity and our inability to spend less than we made from oil.

Our public debt has now ballooned to more than 80 per cent of GDP – a serious problem.

The government must keep spending to keep vital services running (including the government itself) – and needed to borrow money as a result.

Compounding this are low oil prices, mismanagement of public money (as highlighted by the Financial and Administrative Audit Bureau) and a population boom.

Neighbouring countries have agreed to bail us out with $10 billion, but there are strings attached.

We need to rectify our fiscal position and our allies want to be sure we get out of this crisis, just as much as we do.

As a GCC unit some observers believe there is a risk of a domino effect, since one unstable economy could reduce confidence in others.

If the Bahraini dinar was devalued, it would be catastrophic to our economy – and could have implications for our neighbours.

As the government tried to rein in spending it began removing subsidies, which increased the price of petrol, electricity, water and some other items, as transport became more expensive.

We need to ask ourselves a serious question. Do we want the economy to continue in the wrong direction, or do we want to fix it?

Well, that is what the government is doing with VAT.

It’s simply a tax to increase government revenue and make sure we don’t totally collapse.

Do I like it? No. I am used to living in a tax haven with many benefits and subsidies.

Is it necessary? Absolutely. At least our economy can recover, our currency remains stable (one of the strongest in the world) and we can expect a more robust economy in a few years or so.

With a new push towards transparency I hoped there would be a major Cabinet reshuffle this year, but there were only three changes.

I believe we need a major reshuffle every four to eight years to ensure ministries don’t get stagnant – and changes of officials and ministers responsible for gross errors.

Waste also needs to be reined in and accountability assigned.

But while I respect the new MPs in parliament and their energy, their black or white solutions are not the answer and may do more harm than good.

How can the government stay afloat if we cancel or delay VAT?

Remember 94 essential items are not subject to VAT.

Companies with revenues under BD18,500 will not need to register for VAT at all.

Yes, allowances and salaries should be adjusted to help people cope – since buying a car, paying a phone bill or buying school supplies will be taxed.

But the government can’t make money out of thin air.

As long as oil prices are low, our economy will be jeopardised.

The only option is economic diversification, supporting Small and Medium Enterprises and encouraging growth of local business.

Instead of trying to delay VAT, I wish MPs instead voted to impose it at a lower rate initially.

We could have started at 2pc as we got regulations in order and people became accustomed to it.

It could have then increased by 1pc every year, until we reached the 5pc needed.

Those old enough should remember the panic of Y2K, when it felt like the world was going to end.

But it didn’t end. Don’t panic.