Bahrain needs to make big spending cuts, says IMF

International Monetary Fund says Gulf kingdom has to act to restore stability to its budget and improve investor confidence

Bahrain needs to make significant spending cuts to restore stability to its budget and improve investor confidence as the smallest economy among Gulf Arab monarchies tries to manage the impact of lower oil prices, the International Monetary Fund said.

The Washington-based lender said on Monday the drop in crude prices has largely offset “significant fiscal measures that were implemented,” causing the budget deficit and public debt in 2016 to stand at 18 percent and 82 percent of gross domestic product, respectively.

“A sizable fiscal adjustment is urgently needed to restore fiscal sustainability, reduce vulnerabilities, and boost investor and consumer confidence,” the IMF said in a statement after concluding regular consultations with Bahraini authorities.

Bahrain, a close Saudi ally and the home of the US Fifth Fleet, has been more vulnerable to slumping oil prices than richer Gulf Cooperation Council states after authorities increased spending in response to the global recession in 2009 and civil unrest two years later. The country’s 2016 budget deficit of 1.5 billion dinars ($4 billion), which is larger than its foreign exchange assets, spurred the government to tap both domestic and international markets to fund spending last year.

The central bank’s foreign exchange assets fell 11 percent in January to 725.9 million dinars from December. Overall, they’re down 68 percent from a peak of 2.24 billion dinars in November 2014, according to data compiled by Bloomberg.

“We expect reserves to drop to about $1 billion by year-end on the financing of the currency account deficit,” said Carla Slim, Dubai-based economist at Standard Chartered. “This is well below reserve adequacy levels in the context of a fixed-exchange rate regime.”

The IMF said fiscal measures could include valued-added taxation and further rationalizing of spending on subsidies and social transfers. “The wage bill, which is nearly 12 percent of GDP and among the highest in the GCC, can be reduced in the near term by streamlining allowances and freezing nominal wages,” it said.

Economic growth is projected at 2.3 percent in 2017, which will be “driven by strong infrastructure spending from GCC funds,” the IMF said.

Related:
Join the Discussion

Disclaimer:The view expressed here by our readers are not necessarily shared by Arabian Business, its employees, sponsors or its advertisers.

NOTE: Comments posted on arabianbusiness.com may be printed in the magazine Arabian Business

Please post responsibly. Commenter Rules

  • No comments yet, be the first!

All comments are subject to approval before appearing

Further reading

Features & Analysis
Saudi shake-up strengthens king's powerful son

Saudi shake-up strengthens king's powerful son

Royal decrees saw a number of allies of Deputy Crown Prince Mohammed...

Filipino expats in Gulf look to hardman Duterte

Filipino expats in Gulf look to hardman Duterte

President on tour of region as more than a million Filipino workers...

Qatar’s love affair with the UK is at stake

Qatar’s love affair with the UK is at stake

GCC country plans to increase its investment in the United Kingdom...

Most Discussed
sponsoredTracking