MONEY is often considered the lifeblood of any economy, with its scarcity impeding the flow of goods and services.
This is where central banks around the world play a crucial role, acting as doctors who strive to maintain a balanced flow of money into the economy.
However, the Federal Reserve, as the primary driver of global monetary policy, has faced significant challenges since the outbreak of the Covid-19 pandemic.
The quantitative easing policy pursued by the Fed has resulted in unprecedented levels of inflation in many countries. Attempts to counteract this by modifying policy to reduce inflation and withdraw surplus funds from the market have had a disruptive impact on the global economy.
Bahrain, which is deeply integrated into the global economy and has its currency pegged to the US dollar, has not been immune either to these challenges or global economic developments.
Although inflation rates have remained relatively stable, compared to other countries, the levels of liquidity in the market have been negatively affected by several factors. These include a decline in government spending as part of efforts to achieve financial balance, a significant increase in Bahrain’s public debt, which now stands at nearly BD17 billion, and the interest payments on this debt, which amounted to over BD700 million last year alone. In addition, the country has had to borrow at high interest rates to meet its growing financial needs.
When a government seeks to achieve fiscal balance and rationalise spending, the private sector and banks in particular can step in to inject sufficient funds into the market. However, Bahraini banks, despite having high levels of liquidity, are generally strict in their lending practices and charge high interest rates. This is a trend that is reflected in banks throughout the region and the world.
The liquidity pipeline in Bahrain appears to be partially blocked, particularly in these times of economic difficulty. As an example, many contractors are struggling and may be forced to declare bankruptcy and exit the market entirely due to project owners failing to pay their dues. Disputes between contractors and project owners have become increasingly common in the Bahraini market.
Considering these challenges, it is advisable for individuals and businesses not to start any project unless they have sufficient funding from their own resources or at least 80 to 90 per cent of the liquidity needed to implement the project.
It is not wise to rely heavily on borrowing or to assume that the financial dues of the project can be paid from the money generated by its sale. In these difficult times, it is important to exercise caution and avoid taking unnecessary risks.
The Gulf state economies primarily rely on the sale of oil by their governments. This, in turn, injects the resulting money into the economy through two main channels: salaries and projects. The higher the amount of this pumping, the faster the economy moves, and the greater the level of well-being.
The employees spend their salary on various things such as food, drink, travel, car and home payments, and their children’s education. Business owners in industries such as restaurants, commercial complexes, travel and tourism offices, schools, and contractors who win government projects may keep a portion of the profits for themselves, but they also employ staff and rent office space, cars, and equipment, thereby contributing to the economy.
It is important for both the government and private sector to find practical solutions to inject more liquidity into Bahrain’s economy. This can be done through initiatives such as the “liquidity fund” or other innovative approaches, which will increase the amount of money flowing into the economy and contribute to its health and recovery.
akram@fp7.com
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