Economic activity in Bahrain was subdued in 2018 and is expected to remain at about 1.8 percent this year, according to the International Monetary Fund (IMF).
The IMF described the introduction of value added tax (VAT) in January as “a particularly significant step”, as are plans for cost recovery in utilities and further means-tested subsidy reforms.
It added that 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.
“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,” said Bikas Joshi who led an IMF mission which visited Manama recently.
“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,” he added.
The IMF noted that oil output in Bahrain 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, 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, the IMF added.
Joshi said the banking system remains stable, with Bahrain being a leader in fintech.
He added that targeted education and labour market reforms would help promote opportunities and improve productivity while improving access to financing for small and medium enterprises would invigorate further the private sector’s contribution to the overall economy.