Press Release No. 19/65

IMF Staff Completes 2019 Article IV Mission to Bahrain

March 5, 2019

• The Fiscal Balance Program (FBP), accompanied by $10 billion in regional support, marks a major step in Bahrain’s reform agenda and has alleviated near-term financing constraints.
• Supplementary measures beyond the FBP would ensure a sustainable position and reduce vulnerabilities over the medium term.
• Sustained structural reforms can help expand the economic potential and enhance inclusiveness in the longer term.

An International Monetary Fund (IMF) mission led by Mr. Bikas Joshi visited Manama from February 19–March 3, 2019 to conduct discussions for the 2019 Article IV consultation. The mission will submit a report to IMF management and Executive Board, which is tentatively scheduled to discuss the Article IV Consultation in April 2019.

At the conclusion of the visit, Mr. Joshi issued the following statement:

“Economic activity was subdued in 2018. Oil output is expected to have declined by 1.2 percent, while non-oil output growth decelerated to 2.5 percent, driven by slowdowns in retail, hospitality, and financial services sectors. Continued implementation of GCC-funded projects has supported growth in the construction sector. Overall growth in 2018 is estimated at 1.8 percent, with inflation edging up to 2.1 percent, mainly driven by higher food and transport prices. With higher oil prices, the reduction in utility subsidies, and the new excise taxes, the overall deficit in 2018 fell to 11.7 percent of GDP, from 14.2 percent in 2017. Public debt increased to 93 percent of GDP. The current account deficit widened to 5.8 percent, while reserves remained low, covering only about one month of prospective non-oil imports at end 2018.

“Economic growth is anticipated to remain around 1.8 percent in 2019. The authorities’ Fiscal Balance Program, underpinned by the 2019-20 budget, has provided a commendable framework to arrest the decline in fiscal and external buffers since 2014. The introduction of a value-added tax in January 2019 is a particularly significant step, as are plans for cost recovery in utilities and further means-tested subsidy reforms. The measures envisaged under the FBP are expected to further reduce the fiscal deficit over the medium term, but public debt will continue to increase.

“Thus, additional reform efforts, anchored in a more transparent medium-term agenda, will be needed to ensure fiscal sustainability and support the currency peg, which continues to provide a clear and credible monetary anchor. Further revenue measures, including a direct taxation system such as corporate income tax, could be considered and spending reforms should be designed to protect the most vulnerable. The implementation of the Voluntary Retirement Scheme (VRS) is expected to reduce the public wage bill over the medium term. The ultimate impact on public service delivery and public finances should be carefully assessed based on public sector restructuring plans and contingent liabilities of the VRS.

“The banking system remains stable. Ongoing efforts at supervisory and regulatory vigilance, and to further enhance the AML/CFT framework, are welcome. Bahrain has been a leader in fintech, promoting opportunities while revising regulations and collaborating with other regulators.

“Sustained structural reforms would help support inclusive growth and further economic diversification. This requires developing a dynamic private sector, while transforming the role of the government without sacrificing necessary public services. Targeted education and labor market reforms would help promote opportunities and improve productivity. Efforts to place greater emphasis on vocational education and retraining are welcome, particularly as technology is rapidly changing the nature of work. Reforms to streamline regulations should further improve efficiency and catalyze private investment. Improving access to financing for small and medium enterprises would invigorate further the private sector’s contribution to the overall economy.

“The IMF team greatly appreciated the candid discussions with the Bahrain authorities and their hospitality and cooperation.”