IMF Executive Board Concludes 2014 Article IV Consultation with Bahrain

Press Release No. 14/289
June 18, 2014

On May 21, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Bahrain.

GDP grew 5.3 percent in 2013, supported by a rebound in the hydrocarbons sector, while non-oil activity slowed to 3 percent, largely reflecting weak investment sentiment and the delay in the 2013–14 budget approval. Within non-oil activity, transport and tourism continued to expand, reflecting buoyant activity in the service sector, particularly hotels and restaurants and social and personal services. Unemployment remains low, at 4.2 percent at end-February 2014. Inflation picked up in late 2013 (4 percent year on year at end 2013) reflecting price increases in housing, but has fallen in March to 2.3 percent year on year. Private sector credit growth remained moderate at about 6.6 percent at end-2013 (6.2 percent in 2012), while deposits grew by 9 percent for the same period (4.6 percent in 2012).

The fiscal deficit has continued on a rising trend in 2013, although by less than budgeted. The better fiscal turnout is largely related to the under-spending of the capital budget. The overall deficit (including extra-budgetary operations) is estimated at 4.3 percent of GDP, up from 3.2 percent of GDP in 2012—the fiscal breakeven oil price increased to $125 per barrel in 2013 from $119 per barrel in 2012. Government debt increased by eight percentage points of GDP in 2013, to 44 percent of GDP. While the government has increased its reliance on external financing, government external debt as a share of GDP remains low, at 20 percent of GDP. Bond yields and Credit Default Swap spreads are now back to their pre-2011 levels, but are higher than levels experienced in late 2012–early 2013. The current account remains strong with an estimated surplus of 7.8 percent of GDP in 2013. Official reserves coverage fell marginally from about 10 months of imports in 2012 to nine in 2013.

The banking sector is in good health, and the performance of the challenged Islamic retail banks has improved marginally. The capitalization of the banking system is high on average and nonperforming loans (NPLs) to gross loans have continued on a downward trajectory. The Islamic retail banking segment has been tackling high NPLs due to concentrated exposures to local and regional real estate; while capital buffers for this sector declined slightly in 2013, the capital adequacy ratio remained high. After several years of posting losses, the sector’s profitability has moved into positive territory, with the Islamic banking segment undergoing some consolidation in 2013. Bahrain has not been affected by the recent bouts in market volatility. Its stock market index increased 17 percent in 2013 and about 7 percent since the start of 2014 (as of end-March 2014).

The economic outlook is characterized by moderate growth and higher public debt, with average annual inflation projected to be subdued in 2014 and over the medium term. The most immediate policy challenges are to correct the fiscal imbalances and stabilize government debt, while balancing growth and debt sustainability considerations. Over the longer term, the challenge is to reduce fiscal dependence on oil revenues and resume robust economic growth.

Executive Board Assessment2

Executive Directors welcomed the recent strengthening of growth and the low unemployment, but noted the vulnerabilities created by rising fiscal deficits and debt levels, the heavy dependence of the budget on oil revenues, and the difficult political context. They agreed that achieving fiscal sustainability and enhancing medium-term growth are Bahrain’s main policy challenges.

Directors stressed that fiscal consolidation is a priority and should focus on gradually retargeting subsidies to the lower-income segments of the population, and on controlling the growth of current spending. Directors noted that significant fiscal adjustment is needed over the medium term to put debt back on a sustainable path. They encouraged the authorities to adopt a strong communication campaign to ensure political support of fiscal reforms. Directors welcomed plans to set up a special unit at the Ministry of Finance to enhance debt management.

Directors underscored the importance of diversifying the sources of fiscal revenue. They encouraged the authorities to prepare for the introduction of a corporate income tax and to continue working with other Gulf Cooperation Council (GCC) countries to expedite the introduction of a value-added tax. Directors stressed the need to ensure the sustainability of the pension fund and to develop plans to address fiscal contingencies.

Directors noted that the banking sector is generally sound. They commended the Central Bank of Bahrain (CBB) for its efforts to bolster the regulatory and supervisory frameworks, including by putting domestically systemically important banks under a more stringent supervisory regime. Nonetheless, Directors agreed that continued vigilance is needed. They encouraged the CBB to ensure that Islamic retail banks build deeper capital cushions and that their business model is sufficiently robust. They also stressed the importance of developing plans for emergency liquidity assistance for wholesale banks, and reviewing crisis preparedness plans in view of possible spillovers from global financial markets. In addition, Directors welcomed progress made by the authorities in strengthening their Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework and encouraged them to continue their efforts to bring it in line with the 2012 revised FATF standards.

Directors supported the authorities’ objective of achieving sustainable and inclusive growth, which is the focus of Bahrain Economic Vision 2030. They recommended preserving public capital spending, enhancing the business climate to promote private sector investment, and removing bottlenecks in the economy. The implementation of GCC-funded projects should also be accelerated.

Bahrain: Selected Macroeconomic Indicators, 2009–13






2009 2010 2011 2012 2013


(Percent change, unless otherwise indicated)

Production and prices







Real GDP

  2.5 4.3 2.1 3.4 5.3

Real oil GDP1

  -0.4 0.1 3.6 -8.5 15.3

Real non-oil GDP

  3.4 5.5 1.7 6.6 3.0

Nominal GDP (billions of US$)

  22.9 25.7 29.0 30.7 32.8

Consumer price index (period average)

  2.8 2.0 -0.4 2.8 3.3


(Percent of GDP, unless otherwise indicated)

Financial variables


State revenue

  20.1 22.7 26.0 26.5 24.3

Of which: oil revenue

  16.7 19.4 22.9 23.1 21.2

State expenditure

  24.1 27.3 26.1 28.3 26.2

State fiscal balance

  -4.1 -4.5 -0.1 -1.8 -1.9

Overall fiscal balance2

  -5.6 -5.8 -1.5 -3.2 -4.3

Change in broad money (percent)

  5.8 10.5 3.4 4.1 8.2


(Billions of US$, unless otherwise indicated)

External sector



  11.9 13.6 19.6 19.8 20.9

Of which: Oil and refined products

  8.9 10.2 15.5 15.2 15.3


  -9.6 -11.2 -12.1 -13.2 -13.7

Current account balance

  0.6 0.8 3.2 2.2 2.6

Percent of GDP

  2.4 3.0 11.2 7.2 7.8

Gross official reserves (end of period)

  3.5 4.8 4.2 4.9 5.0

Months of imports3

  3.2 4.1 3.5 3.9 3.9

Months of imports (excluding crude oil imports)3,4

  6.1 7.5 7.9 10.1 9.0

Real effective exchange rate


4.6 -2.4 -6.9 1.6 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 Imports of goods and non-factor services for the following year.

4 All imported crude oil is exported after refining.


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:


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