IMF Executive Board Concludes 2019 Article IV Consultation with the Kingdom of Bahrain
May 7, 2019
On April 29, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Kingdom of Bahrain.Lower oil prices since 2014 had widened fiscal and external imbalances and intensified macroeconomic vulnerabilities. The authorities responded with the announcement of the Fiscal Balance Program (FBP) in late 2018, which provided a roadmap for addressing Bahrain’s fiscal challenges over the medium term. The announcement, and the accompanying US$10 billion in regional support, have led to a decline in borrowing costs. The authorities have begun implementing elements of the FBP, including the introduction of a value-added tax, the voluntary retirement scheme for public-sector employees, and various efficiency measures to reduce expenditure.
Growth decelerated to 1.8 percent in 2018, due to the decline in oil production and slowdowns in retail, hospitality, and financial services sectors. The overall deficit improved to 11.7 percent of GDP, though public debt continued to increase, to 93 percent of GDP by end 2018, with overall financing needs over 30 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. The banking system remains stable with large capital buffers and central bank’s continued efforts at supervisory and regulatory vigilance. Under baseline policies, fiscal and external deficits are projected to continue over the medium term, with public debt approaching 114 percent of GDP, and reserves are expected to remain low. Delays in fiscal adjustment, a sharp tightening of global financing conditions, and lower oil prices present downside risks to the baseline.
Executive Board Assessment [2]
Executive Directors commended the authorities for their recent efforts to address Bahrain’s fiscal and external vulnerabilities and acknowledged the medium-term budget support received from regional partners to assist in this adjustment. Nevertheless, macroeconomic challenges persist and risks, including from potential tightening in global financial conditions and delays in fiscal adjustment, remain tilted to the downside. Directors called for additional fiscal and structural reform efforts to strengthen the fiscal and external positions and to promote inclusive and sustainable growth, while preserving financial stability.
Directors welcomed the authorities’ Fiscal Balance Program that aims to reduce the fiscal deficit by increasing non-oil revenue and improving spending efficiency. They commended the introduction of the value-added tax (VAT) and welcomed the Voluntary Retirement Scheme as a tool to help contain the wage bill, but noted the need to monitor possible contingent liabilities. To further ensure fiscal and external sustainability, Directors saw merit in additional fiscal consolidation measures, including introducing direct taxes, reducing VAT exemptions, and phasing out untargeted subsidies, while protecting the vulnerable. They welcomed the ongoing efforts to strengthen debt management and institutionalize the fiscal framework and encouraged the authorities to promote greater data transparency to enhance the credibility of their fiscal reform plans.
Directors agreed that the exchange rate peg has served Bahrain well and has delivered low and stable inflation. They emphasized that gradually unwinding central bank lending to the government and continued fiscal adjustment will be instrumental in supporting the peg. Directors underscored the need to rebuild international reserves amid external sector pressure.
Directors welcomed continued progress in implementing the 2017 FSAP recommendations. They commended recent measures to enhance the supervision and regulation of banks, ongoing efforts to develop a macroprudential framework, and Bahrain’s leadership in promoting fintech. Directors encouraged the authorities to monitor banks’ profitability and exposure to the real estate sector and highlighted the need for a clearly-defined emergency liquidity assistance framework. They also emphasized the need to address the remaining gaps in the AML/CFT framework.
Directors encouraged further structural reforms to support diversification and private sector-led inclusive growth. They welcomed the announced plans to increase female labor participation, ease the cost of doing business, and enhance SMEs’ contribution to the economy. Directors also called for a more active privatization plan and overarching public-private partnership legislation to further encourage private investment. They emphasized that targeted education and labor market reforms will be important to promote opportunities and improve productivity.
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Bahrain: Selected Economic Indicators, 2015–20 |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
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