High oil prices along with fiscal and monetary easing has helped limit the impact of domestic unrest and the crisis in the euro zone on Bahrain's economy, the International Monetary Fund (IMF) said on Wednesday.
In a new report on the Gulf kingdom, the IMF said the country's break-even oil price reached $114 a barrel in 2011 — the highest level in the GCC —compared to just $80 in 2008.
It added that expenditure commitments were increased permanently through wages — a 15 percent salary increase was awarded for all civil servants in August.
However, the IMF's executive board also said the impact on the 2011 budget had been offset by a sharp increase in oil revenues reflecting high global oil prices.
The Article IV Consultation said disruptions caused by protest activity during the first half of 2011 weighed on growth which was expected to reach about 1.8 percent for the year.
It noted that weaknesses in the financial and tourism sectors weighed most on economic growth.
"The macroeconomic impact of the unrest has been cushioned by the largely unaffected oil and aluminum sectors — the former contributing over 85 percent of fiscal and external receipts," the IMF added.
The report also said inflation turned negative during 2011, largely due to falling real estate rents, while profitability of listed companies recovered, but smaller banks and companies reported increasing non-performing loans.
It added that the impact on financial markets had been more limited, but capital outflows increased significantly resulting in a decline in official reserves.
"In light of the continued risks posed by the external and internal challenges, policies should be geared to restoring confidence in the economy, including by finding a lasting resolution to the social unrest, promoting growth, and securing a sustainable fiscal position," the IMF said.
"Directors considered that further measures to diversify the economy, improve the investment climate, and strengthen the labour market are essential for sustained growth and employment," its report added.
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