Font Size

- Aa +

Wed 8 May 2019 10:21 AM

Font Size

- Aa +

Bahrain scraps subsidy reforms despite IMF push to introduce austerity measures

Bahrain's public debt is approaching 114% of GDP as its reserves are expected to remain low

Bahrain scraps subsidy reforms despite IMF push to introduce austerity measures
Lower oil prices since 2014 had widened Bahrain’s fiscal and external imbalances and intensified its macroeconomic vulnerabilities.

Bahrain has ditched a plan to fully reform its subsidy system, officials said on Tuesday, despite the International Monetary Fund (IMF) encouraging the kingdom to introduce additional fiscal consolidation measures, such as the implementation of direct taxes, reduction of VAT exemptions, and phasing out of untargeted subsidies.

The plan had been under discussion since last year, and was meant to merge meat subsidies and living allowance into one package.

Officials said the new system would also grant a larger portion of subsidies to the poorest citizens.

Last year, Bahrain’s king ordered his cabinet to forge an agreement with parliament on the new subsidy system, but the government has since rejected the lawmakers’ proposals.

Lower oil prices since 2014 had widened Bahrain’s fiscal and external imbalances and intensified its macroeconomic vulnerabilities.

The kingdom’s cash-strapped government was rescued by neighbouring Saudi Arabia, Kuwait and UAE last year in a $10 billion bailout deal, after an extended period of lower oil prices inflated the kingdom’s public debt to almost 93 percent of annual economic output.

As part of the deal, Bahrain announced the Fiscal Balance Programme (FBP) in late 2018 to help address the kingdom’s fiscal challenges and balance its budget by 2022.

A government spokesperson said Bahrain was committed to achieving fiscal balance as previously agreed with under the programme. 

“The fiscal balance program introduced in 2018 aims to balance Bahrain’s budget by 2022 without diminishing basic services offered to citizens,” a spokesperson said in a statement. 

Both the plan and the bailout led to a decline in borrowing costs and the implementing of 5% value-added tax, voluntary retirement scheme for public-sector employees, and other measures to reduce expenditure.

Bahrain’s growth decelerated to 1.8 percent in 2018 as a result of declining oil production and slowdowns in retail, hospitality and financial services sectors.

IMF analysis

The IMF report showed Bahrain’s its reserves are expected to remain low, while its public debt is approaching 114% of GDP, with delays in fiscal adjustment, a tightening of global financing and lower oil prices presenting downside risks to its baseline.

The IMF agreed that the exchange rate peg has served Bahrain well and has delivered low and stable inflation. It emphasised that gradually unwinding central bank lending to the government and continued fiscal adjustment will be instrumental in supporting the peg. The IMF underscored the need to rebuild international reserves amid external sector pressure.

The IMF commended Bahrain’s recent measures enhancing the regulation of banks, promoting booming sectors such as fintech and developing a macroprudential framework.

It also encouraged Bahraini authorities to monitor banks’ profitability and exposure to the property market, define an emergency liquidity assistance framework and address gaps in the AML/CFT framework, as well as introduce further structural reforms to support diversification and private sector-led inclusive growth to boost private investment.

Moreover, it praised Bahrain’s recently announced plans to increase female labour participation, ease the cost of doing business and enhance SMEs’ contribution to the economy.