Bahrain needs to urgently implement further fiscal reforms as economic vulnerabilities have increased in the Gulf kingdom in the wake of the oil price decline, according to the International Monetary Fund (IMF).
IMF executive directors said that, although economic activity and financial market conditions have remained positive, "additional sizable and frontloaded fiscal adjustment is urgently needed".
They said in a new research note that sustained fiscal efforts will be needed over the medium term to put debt on a downward path and rebuild policy space.
Directors recommended measures to contain current expenditure, including the wage bill and further reducing energy subsidies, while raising non-oil revenue, including through the VAT and exploring other revenue measures.
They stressed the importance of minimising the adverse impact of these measures on vulnerable groups. Directors encouraged authorities to put in place a comprehensive fiscal financing and debt management strategy to mitigate risks, and welcomed recent steps to establish a public debt management office.
The IMF said Bahrain’s overall GDP grew 3 percent in 2016, supported by strong growth of 3.7 percent in the non-oil sector aided by the implementation of GCC-funded projects.
Average inflation remained moderate at 2.8 percent while bank deposit and private sector credit growth slowed.
Despite the implementation of significant fiscal adjustment, lower oil prices meant that the overall fiscal deficit reached nearly 18 percent of GDP and government debt rose to 82 percent of GDP. The current account deficit widened to 4.7 percent. International reserves have also declined.
The IMF said real GDP growth is expected to slow to 2.3 and 1.6 percent in 2017 and 2018, reflecting the ongoing fiscal consolidation and weaker investor sentiment.
The fiscal deficit is projected to improve to 12.2 percent of GDP in 2017 owing to higher oil prices and continued reduction in spending. Over the medium term, the fiscal deficit is projected to narrow only slightly because of rising interest payments that offset some of the revenues from the planned implementation of the VAT, the IMF added.
Directors agreed that the exchange rate peg remains appropriate for Bahrain, noting that it has delivered monetary policy credibility and low inflation.
Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.