Press Release No. 17/126

IMF Staff Completes 2017 Article IV Mission to Bahrain

April 10, 2017

• Measures to reduce the costs of doing business are key to boosting growth prospects and achieving economic diversification in Bahrain
• A sizable fiscal adjustment is urgently needed to restore fiscal sustainability, reduce vulnerabilities, and boost investor and consumer confidence. The adjustment should be designed to minimize the adverse impact on vulnerable groups
• Bahraini banks’ strong capitalization and liquidity will help them weather a slowing in the pace of economic growth

An International Monetary Fund (IMF) mission led by Ms. Padamja Khandelwal visited Manama from March 12–23, 2017 for discussions on the 2017 Article IV consultation. Subject to management approval, the findings of the mission will be presented to the Executive Board for consideration in June 2017.

At the conclusion of the visit, Ms. Khandelwal issued the following statement:

“During 2016, economic activity was solid and inflation remained subdued. Overall GDP growth is estimated at 3.0 percent, with strong non-oil growth of 3.7 percent aided by the implementation of GCC-funded projects. Despite significant fiscal measures that were implemented, lower oil prices led to the overall fiscal deficit and public debt in 2016 near 18 percent and 82 percent of GDP, respectively. The external current account deficit is estimated at 4.7 percent of GDP.

“Overall growth is projected at 2.3 percent in 2017, continuing to be driven by strong infrastructure spending from GCC funds. Inflation is expected to stay moderate. Owing to the higher expected oil prices and continued implementation of measures to reduce spending and raise non-oil revenues, the fiscal deficit is expected to fall to 12.6 percent of GDP in 2017 and remain close to that level over the medium term. A substantial increase in debt is projected.

“A sizable fiscal adjustment is urgently needed to restore fiscal sustainability, reduce vulnerabilities, and boost investor and consumer confidence. In this context, fiscal measures in the near term could include the VAT, which is already agreed at the GCC level, and further rationalizing spending on subsidies, which disproportionately benefit the wealthy, and social transfers. The wage bill, which is nearly 12 percent of GDP and among the highest in the GCC, can be reduced in the near term by streamlining allowances and freezing nominal wages. Over the medium term, sizable further consolidation can be achieved in the context of a civil service review and will help support the goal of boosting private sector employment of Bahrain nationals. Other measures are also needed to raise non-oil revenue to help finance the provision of government services. Reforms to strengthen the fiscal framework would support the process of fiscal consolidation. The adjustment should be designed to minimize the adverse impact on vulnerable groups.

“Bahraini banks’ strong capitalization and liquidity will help them weather a slowing in the pace of economic growth. The Central Bank of Bahrain continues to strengthen its regulation and supervision of the financial sector, which will support the continued development and stability of the financial system. The exchange rate peg to the U.S. dollar continues to serve Bahrain well, and will be supported by fiscal consolidation.

“Measures to reduce the costs of doing business are key to boosting growth prospects and achieving economic diversification in Bahrain. They can help raise productivity and catalyze private investment, thereby contributing to create better paying private sector jobs for nationals and diversify the economy.”