Via IMF (Den Internationale Valutafond)

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.

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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.

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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.


Bahrain: Selected Economic Indicators, 2015–20

Est.

Proj.

Proj.

2015

2016

2017

2018

2019

2020

(Percent change, unless otherwise
indicated)

Production and prices

Real GDP

2.9

3.5

3.8

1.8

1.8

2.1

Real oil GDP1

-0.1

-0.1

-0.7

-1.2

0.2

0.2

Real non-oil GDP

3.6

4.3

4.9

2.5

2.2

2.5

Nominal GDP (billions of US$)

31.1

32.3

35.4

38.3

39.0

40.7

Consumer price index (period average)

1.8

2.8

1.4

2.1

3.3

3.2

(Percent of GDP, unless otherwise
indicated)

Fiscal variables

State revenue

18.2

17.5

18.2

21.7

21.3

21.3

Of which:
oil revenue

13.8

12.0

12.6

16.0

13.9

13.5

State expenditure

31.0

30.9

28.0

27.6

25.7

25.3

State fiscal balance

-12.8

-13.4

-9.9

-6.0

-4.4

-3.9

Overall fiscal balance 2

-18.4

-17.6

-14.2

-11.7

-8.4

-7.7

Change in broad money (percent)

2.9

1.2

4.2

2.2

2.1

2.5

(Billions of US$, unless otherwise
indicated)

External sector

Exports

16.5

12.8

15.4

18.3

17.1

17.9

Of which:
Oil and refined products

7.7

6.1

8.4

10.8

9.3

9.3

Imports

-15.7

-13.6

-16.1

-19.1

-18.0

-18.4

Current account balance

-0.8

-1.5

-1.6

-2.2

-1.4

-1.4

Percent of GDP

-2.4

-4.6

-4.5

-5.8

-3.6

-3.4

Gross official reserves (end of period) 3

3.4

2.4

2.6

2.0

2.0

1.9

Months of imports 4

1.9

1.2

1.2

0.9

0.9

0.8

Months of imports (excluding crude oil
imports) 4,5

2.3

1.5

1.5

1.1

1.1

1.0

Real effective exchange rate (percent
change)

10.8

2.9

0.6

-1.6

Sources: Bahraini authorities; and IMF
staff estimates.

1
Includes crude oil and gas.

2
Includes State fiscal balance and
Extra-budgetary expenditures.

3
Includes Special Drawing Rights and IMF
Reserve Position.

4
Imports of goods and non-factor
services for the following year.

5
All imported crude oil is exported
after refining.

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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

.


IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Randa Elnagar; Wafa Amr

Phone: +1 202 623-7100Email: MEDIA@IMF.org