Press Release No. 10/486

Press Release No. 10/486
December 13, 2010

An International Monetary Fund (IMF) mission led by Mr. David O. Robinson visited Manama during December 1-13 to conduct the 2010 Article IV Consultations. At the end of the visit, Mr. David O. Robinson issued the following statement:

“The economy of Bahrain has managed the global crisis well. The global crisis produced a sharp fall in oil prices, a tightening of global capital markets, and declines in regional and local real estate markets. High initial levels of bank capital and sound prudential norms established by the Central Bank of Bahrain (CBB) ensured the resilience of the financial system, without recourse to the extensive direct interventions seen in many countries. The wholesale banking system started a deleveraging process at the beginning of 2009 with balance sheets continuing to be scaled back, reflective of a move to more conservative portfolios.

“The near-term outlook is favorable. Buoyed by the rebound in oil prices, the continuing recovery in the global economy, and fiscal stimulus, growth is expected to accelerate from the 3 percent recorded in 2009 to 4 percent in 2010 and further to 5 percent in 2011. Inflation is anticipated to remain contained at around 2.5 percent next year.

“Managing the recovery and the exit from fiscal stimulus creates a number of policy challenges but also provides an opportunity to address underlying imbalances. Increased government borrowing in the last couple of years has increased debt levels and highlighted the need to rebalance the fiscal accounts in order to ensure the existence of sufficient fiscal space to respond to external shocks in the future. Reorienting spending away from untargeted subsidies—accompanied by compensatory transfers to needy households—would provide room for an increase in public investment as well as providing fiscal savings. Non-oil revenues are currently low, and broadening the revenue base would not only raise revenues but also provide insurance against fluctuations in oil prices.

“Given the exchange rate peg and the monetary easing in the US, interest rates are expected to remain low. The CBB’s existing macroprudential tools have worked well in preventing excesses from building up in the domestic financial system and will continue to play a key role in insulating the economy from fluctuations in global capital markets. With private sector credit growth gradually recovering, this will provide additional support for growth. The current high level of excess liquidity within the banking system provides an opportunity to foster the growth of the domestic debt market and push out the yield curve. A further strengthening of debt management capacity would be beneficial. While Islamic products have been an important growth area, there remain areas of uncertainty in the legal and regulatory framework that should be remedied.

“The large number of new entrants to the labor market anticipated over the next decade places a premium on ensuring the creation of new employment opportunities, especially with growth anticipated to be below historical averages. Regional GCC markets are likely to play an important role in fostering growth. Accelerating integration initiatives could provide important impetus to investment.”