MANAMA: Bahrain’s economic growth is expected to stabilise at three per cent in the medium-term, the International Monetary Fund (IMF) has said.
A statement by the international financial institution on the kingdom said economic activity is projected to rebound moderately and the fiscal and external positions will improve considerably in the near-term.
It came after the executive board of the IMF concluded the 2022 Article IV consultation with Bahrain and endorsed the staff appraisal without a meeting on a lapse-of-time basis on June 24.
The IMF has forecast that over the medium-term growth is set to stabilise at 3pc after the Bahraini economy grew by 2.2pc in 2021, driven by 2.8pc growth in non-hydrocarbon GDP.
The kingdom implemented a strong vaccination campaign that covered all residents, one of the fastest globally, and allowed the broad reopening of the economy in summer 2021, it noted.
The support package provided relief to the private and banking sectors, helping to contain job losses and corporate strains.
A gradual post-Covid-19 recovery is underway, while the renewed fiscal reform momentum, with the recent doubling of the VAT rate to 10pc, and high oil prices are mitigating Bahrain’s fiscal and external vulnerabilities.
The recovery was supported by a strong performance in non-hydrocarbon manufacturing as well as by the retail trade and hospitality sectors.
With the economic recovery and higher oil prices, the state budget deficit narrowed to 6.8pc of GDP in 2021, while the overall fiscal deficit narrowed to 11.1pc of GDP and debt declined slightly to 129pc of GDP.
The current account improved markedly and posted a surplus of 6.7pc of GDP in 2021 and international reserves increased to about 2.4 months of prospective non-oil imports.
The IMF notes that the Bahrain authorities are strongly committed to their reform agenda outlined in the Economic Recovery Plan and the revised Fiscal Balance Programme (FBP), including ambitious reforms to reduce the fiscal deficit and public debt.
Fiscal reform should proceed to put debt on a firm downward path. Staff welcomed the renewed fiscal reform momentum and recommended that the authorities take advantage of the current favourable macroeconomic and financing conditions to legislate a set of fiscal measures in the upcoming 2023/24 Budget Law in line with their FBP.
The pace and composition of the medium-term adjustment could be balanced to support both growth and fiscal sustainability while reducing reliance on oil revenue and increasing spending efficiency.
Any oil revenue windfalls should be used to rebuild buffers. Improving fiscal transparency, including by phasing out extra-budgetary spending, can reduce reform implementation risks.
Monetary policy should continue to be tightened in line with the Fed. The exchange rate peg remains an appropriate monetary anchor and the Central Bank of Bahrain (CBB) should continue to follow the Fed tightening cycle to stem capital outflow pressures.
Phasing out the foreign exchange overdraft at the CBB, together with fiscal consolidation, would support the external position and thus the peg.
In the longer run, monitoring foreign exchange balance sheet risks and further deepening domestic financial markets would help prepare for a more independent monetary policy in the post-oil economy.
avinash@gdnmedia.bh
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