Reverting back to 2021, we can see how economies and financial sectors globally transformed in response to the spread of the Covid-19 pandemic.
For example, a multitude of fundamental and monetary policies were changed to deal with record inflation levels, and stimulate the economy.
We witnessed the introduction of many expansionary monetary policies since the pandemic, with many policy rates in major economies set ‘close to zero’ to specifically enhance money supply and avoid economic activity being exhausted by the pandemic’s impacts.
Bahrain followed a similar move in March 2020 when it reduced the base rate by 75 basis points.
Drastic drops in base rates actually had significant impact on economies in 2021, as there was a strong resurgence in economic activity regardless of the escalation of the pandemic across the world and the spread of Omicron.
However, the early decision to cut policy rates accompanied by other fiscal and monetary measures has paved the way for economies to reach record levels in GDP, labour markets, consumer confidence and income levels.
Although Omicron spread rapidly across the globe, once again threatening growth and development, multiple early measures were implemented worldwide such as vaccination/booster campaigns which have minimised the impact that the variant was projected to have on economies.
However, the real challenge now is how economies and financial sectors will act towards new variants and escalating virus outbreaks, whilst trying to maintain record economic levels and prevent any economic downturns.
This comes in light of major economies currently enacting contractionary monetary policies such as quantitative easing and raising policy rates.
For example, the Reserve Bank of New Zealand and the Bank of England have recently been involved in reversing bond purchases and increasing their base rates. In addition, the US Federal Reserve has also started tapering in its previous Federal Open Market Committee meeting and is expected to increase rates several times in 2022 as the economy strengthens.
This will also dictate Bahrain’s stance on raising rates in 2022 which will be critical to the economy as it recovers at a rapid pace with excellent economic numbers across many levels.
Bahrain is currently in an excellent economic situation with reference to the recent update of the Fiscal Balance Programme by the Finance and National Economy Ministry, with the nation currently working steadily on achieving its economic goals, such as diversification, improving budgets, and increasing non-oil revenues.
The recent increase in VAT (value-added tax) to 10 per cent will significantly help Bahrain in achieving its expected economic results.
Additionally, Bahrain should also currently work on accelerating its financial sector initiatives and make it well-equipped for future economic threats. Bahrain has started this is by introducing e-cheques which is a milestone for the financial sector in Bahrain.
There are many other ways in which Bahrain can advance its financial sector regionally and internationally.
Recently, there has been tremendous growth in digitisation, ESG compliance and integrating technologies. Bahrain has already started the digitisation process with its Central Bank Digital Currency framework.
The CBB has also just completed a test of the JPM coin which facilitates Bank ABC to launch real-time payments for Alba addressing the cross-border payments segment.
Bahrain could continue to explore digitisation and look further into such markets including the digital assets market in order to keep pace with the rapid shifts in the respective markets.
Bahrain should also consider advancing its ESG compliance in the financial sector and introduce advanced elements of sustainable finance into the economy. It could consider introducing green bonds designed to finance green projects, which are dedicated towards sustainable and socially responsible projects in diverse areas such as renewable energy.
This will greatly help Bahrain in achieving its Economic Vision 2030 goals and a sustainable advanced economy.
However, Bahrain needs to be cautious whilst considering any further economic changes, or introducing policies. These need to be studied carefully studied to understand their impact across many levels, in order to minimise any future impact on the economy through external factors such as the pandemic.
There are many trends across the economic and financial sectors that Bahrain needs to study extensively in order to take its economy to the highest levels internationally across multiple fields.
2022 will certainly be an interesting year as we analyse how economic and financial policies will change in response to the pandemic, and we must also pay careful attention to how trends in the financial sector will change along with economic changes.
Mr Al Sarraf is a businessman-engineer who is an Executive Master of Business Administration, member of the Institute of Engineering and Technology, UK, and member of the Bahrain Society of Engineers.