IMF Staff Completes 2018 Article IV Mission to Bahrain

IMF News, May 30, 2018

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Mission led by Mr. Bikas Joshi visited Manama from April 30–May 15, 2018 to conduct discussions for the 2018 Article IV consultation.
The mission will submit a report to IMF management and Executive Board, which is tentatively scheduled to discuss the Article IV Consultation in July 2018.
Statement issued at conclusion of the visit by Mr. Joshi.

Output in 2017:
- Grew at around 3.8 percent.
- Growth underpinned by the non-hydrocarbon sector, with robust implementation of GCC-funded projects and strong activity in the financial, hospitality, and education sectors.
- Inflation remains subdued.
Hydrocarbon revenues:
- Increased by 15 percent on the back of higher oil prices.
2018 projection:
- Overall growth is projected at 3.2 percent in 2018, with a recovery in oil production, continuation of GCC-funded projects, and rising refinery and aluminum production capacity.
Risks without further measures:
- Non-oil revenue is expected to stagnate and growth to slow.

Fiscal outcomes and public debt (as presented):
- Overall fiscal deficit estimated to have declined to 14 percent of GDP in 2017, from around 18 percent in 2016.
- Public debt increased to 89 percent of GDP.
- Announced fiscal policy would reduce somewhat the overall fiscal deficit, to 11 percent of GDP in 2018.
- Over the medium term, the deficit is projected to remain sizable, with a rising interest bill as public debt continues to increase.
Urgent policy message:
- A credibly large policy package—comprising both revenue and expenditure measures, while protecting the most vulnerable—is urgently needed.
- A credibly large fiscal adjustment is a priority.
Specific recommended measures:
- Implement the planned value-added tax.
- Consider additional revenue measures—including consideration of a corporate income tax.
- Better target subsidies and address the large wage bill.
- Reforms to strengthen the fiscal framework, including by operationalizing the debt management office, would be crucial.

Current account and reserves:
- Current account deficit remained unchanged at 4.5 percent.
- Reserves remain low, covering only 1.5 months of prospective non-oil imports at end 2017.
Macro anchor:
- Fiscal consolidation would support the peg to the U.S. dollar, which continues to provide a clear and credible policy anchor.

Banking sector stability:
- Bahraini financial sector remains stable, thanks to large capital buffers.
- The banking system remains well capitalized and liquid.
Supervision and fintech:
- Continued efforts to strengthen the regulation and supervision of the financial sector would further bolster the system.
- Fintech presents opportunities for Bahrain, where global experience can be brought to bear in addressing possible risks.

Importance of reforms:
- Especially given fiscal constraints, sustained structural reforms remain key to supporting growth and diversification.
Recommended reforms:
- Legal reforms to streamline regulations should reduce costs of doing business and catalyze private investment.
- Improving access to financing for small and medium enterprises.
- Further reforming the labor market to help diversify the economy and make the non-hydrocarbon sector more resilient.
Expected benefits:
- Continued efforts to improve the business climate should help economic diversification and create jobs.

The IMF team greatly appreciated the candid discussions with the Bahrain authorities and their hospitality and excellent cooperation.

IMF Staff Completes 2018 Article IV Mission to Bahrain, May 30, 2018.