May 30, 2018

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF's Executive Board for discussion and decision.

• A credibly large policy package—comprising both revenue and expenditure measures, while protecting the most vulnerable—is urgently needed.
• Bahraini financial sector remains stable, thanks to large capital buffers.
• Continued efforts to improve the business climate should help economic diversification and create jobs.

An International Monetary Fund (IMF) mission led by Mr. Bikas Joshi visited Manama from April 30–May 15, 2018 to conduct discussions for the 2018 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 July 2018.

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

“Output remained resilient in 2017, growing at around 3.8 percent. This was underpinned by the non-hydrocarbon sector, with robust implementation of GCC-funded projects as well as strong activity in the financial, hospitality, and education sectors. Inflation remains subdued. On the back of higher oil prices—increasing hydrocarbon revenues by 15 percent—and authorities’ fiscal consolidation measures, the overall fiscal deficit is estimated to have declined to 14 percent of GDP, from around 18 percent in 2016. Public debt increased to 89 percent of GDP, while the current account deficit remained unchanged at 4.5 percent. Reserves remain low, covering only 1.5 months of prospective non-oil imports at end 2017.

“Overall growth is projected at 3.2 percent in 2018, with a recovery in oil production, continuation of GCC-funded projects, and rising refinery and aluminum production capacity. Announced fiscal policy would reduce somewhat the overall fiscal deficit, to 11 percent of GDP in 2018. Over the medium term, the deficit is projected to remain sizable, with a rising interest bill as public debt continues to increase. Without further measures, non-oil revenue is expected to stagnate and growth to slow.

“The decline in oil prices since 2014 and absence of buffers have led to a rise in fiscal and external vulnerabilities. Notwithstanding notable measures implemented since 2015, a credibly large fiscal adjustment is a priority. Such a plan should comprise revenue and expenditure measures, while protecting the most vulnerable. The implementation of a value-added tax, as planned, would be important. Additional revenue measures—including consideration of a corporate income tax—would be welcome. Consideration should also be given to better targeting subsidies and addressing the large wage bill. Reforms to strengthen the fiscal framework, including by operationalizing the debt management office, would be crucial.

“The banking system remains well capitalized and liquid. Continued efforts to strengthen the regulation and supervision of the financial sector would further bolster the system. Fintech presents opportunities for Bahrain, where global experience can be brought to bear in addressing possible risks. Fiscal consolidation would support the peg to the U.S. dollar, which continues to provide a clear and credible policy anchor.

“Especially given fiscal constraints, sustained structural reforms remain key to supporting growth and diversification. Legal reforms to streamline regulations should reduce costs of doing business and catalyze private investment. Improving access to financing for small and medium enterprises and further reforming the labor market would help further diversify the economy and make the non-hydrocarbon sector more resilient.

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