IMF Executive Board Concludes 2018 Article IV Consultation with the Kingdom of Bahrain
IMF News, July 15, 2018
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Bibliographic details
- Published: July 15, 2018
Context and main finding
- Date: July 15, 2018.
- Main finding: The decline in oil prices since 2014 and absence of buffers have led to a rise in fiscal and external vulnerabilities.
- Public debt increased to 89 percent of GDP.
- Reserves at end‑2017 covered only 1.5 months of prospective non‑oil imports.
Growth performance and outlook
- Output grew by 3.8 percent in 2017, underpinned by a resilient non‑hydrocarbon sector.
- Drivers in 2017 included robust implementation of GCC‑funded projects and strong activity in the financial, hospitality, and education sectors.
- Growth is projected to decelerate over the medium term.
Fiscal position and projections
- Fiscal and external current deficits are large and persist.
- Despite planned fiscal consolidation measures, fiscal deficits are projected to continue over the medium term due to the large and growing interest bill.
- Delays in implementing a credible fiscal plan and changes in market sentiment as global financing conditions tighten present downside risks.
- Directors noted that public debt is expected to increase further over the medium term and reserves are projected to remain low.
- Directors welcomed authorities’ commitment to:
- continue subsidy reforms;
- cut non‑productive spending;
- raise non‑oil revenues by introducing a value‑added tax by 2019.
- Directors recommended:
- introduce direct taxation, including a corporate income tax;
- contain the public wage bill;
- target subsidies to the poorest;
- develop a contingent financing strategy via the newly established debt management office to mitigate financing risks and costs;
- strengthen the macro‑fiscal framework and increase fiscal transparency and accountability.
Exchange rate, reserves, and external sustainability
- Directors agreed the exchange rate peg remains appropriate and delivers a clear and credible policy anchor, keeping inflation low and stable.
- They underscored the importance of fiscal adjustment in supporting the peg and rebuilding international reserves, and ensuring external sustainability.
- Directors recommended gradually unwinding central bank lending to the government.
Financial sector resilience and supervision
- The banking system remains stable with large capital buffers.
- Directors welcomed the central bank’s continued efforts to implement the 2017 FSAP recommendations.
- Recommended actions for the financial sector:
- develop a well‑defined emergency liquidity assistance framework;
- deepen the interbank market;
- enhance supervision of Islamic banks and insurance companies;
- closely monitor the build‑up of household debt;
- continue efforts to strengthen the AML/CFT framework.
- Directors welcomed Bahrain’s initiatives to promote fintech while underscoring the importance of monitoring risks.
Structural reforms and employment
- Directors commended initiatives to streamline business regulations to promote private sector development, diversification, and job creation.
- Welcomed developments enhancing SMEs’ access to finance and recent labor market reforms to increase flexibility and promote private sector employment.
- Called for further structural reforms to boost productivity and competitiveness through:
- more privatization plans and public‑private partnerships;
- measures to strengthen the education system;
- measures to support greater female labor force participation.
Executive Board assessment and risks
- Executive Directors welcomed the resilience of growth while noting downside risks from:
- the rise in fiscal and external vulnerabilities;
- tighter global financing conditions;
- delays in fiscal adjustment;
- lower energy prices.
- A comprehensive package of reforms is needed to reduce fiscal deficits over the medium term, striking the right balance between revenue and expenditure measures while protecting the most vulnerable.
Selected macroeconomic indicators (2015–19) — key figures
- Real GDP: 2015: 2.9; 2016: 3.2; 2017: 3.8; 2018: 2.6; 2019: (Proj.) not shown.
- Real oil GDP1: 2015: -0.1; 2016: -0.7; 2017: 0.3; 2018: 0.2.
- Real non‑oil GDP: 2015: 3.6; 2016: 4.0; 2017: 4.8; 2018: 3.9; 2019: 3.1.
- Nominal GDP (billions of US$): 2015: 31.1; 2016: 32.2; 2017: 35.3; 2018: 39.1; 2019: 41.3.
- Consumer price index (period average): 2015: 1.8; 2016: 2.8; 2017: 1.4; 2018: 3.0; 2019: 5.1.
- State revenue (Percent of GDP): 2015: 18.2; 2016: 17.6; 2017: 18.3; 2018: 22.2; 2019: 21.9.
- Of which: oil revenue: 2015: 13.8; 2016: 12.0; 2017: 12.6; 2018: 15.6; 2019: 14.7.
- State expenditure (Percent of GDP): 2015: 31.0; 2016: 28.2; 2017: 27.1; 2018: 26.6; 2019: (not shown).
- State fiscal balance (Percent of GDP): 2015: -12.8; 2016: -13.4; 2017: -9.9; 2018: -5.0; 2019: -4.6.
- Overall fiscal balance2 (Percent of GDP): 2015: -18.4; 2016: -17.6; 2017: -14.3; 2018: -8.9; 2019: -8.4.
- Exports (Billions of US$): 2015: 16.5; 2016: 12.8; 2017: 15.4; 2018: 19.0; 2019: 19.5.
- Of which: Oil and refined products: 2015: 7.7; 2016: 6.1; 2017: 8.4; 2018: 11.2; 2019: 10.9.
- Imports (Billions of US$): 2015: -15.7; 2016: -13.6; 2017: -16.1; 2018: -18.9; 2019: (not shown).
- Current account balance (Billions of US$): 2015: -0.8; 2016: -1.5; 2017: -1.6; 2018: -0.9.
- Current account balance (Percent of GDP): 2015: -2.4; 2016: -4.5; 2017: -2.3; 2018: -2.1.
- Gross official reserves (end of period)3 (Percent of GDP): 2015: 3.4; 2016: 2.4; 2017: 2.3; 2018: 2.1.
- Months of imports4: 2015: 1.9; 2016: 1.2; 2017: 1.0; 2018: 0.9.
- Months of imports (excluding crude oil imports)4,5: 2015: 1.5; 2016: 1.1; 2017: (not shown).
- Real effective exchange rate (percent change): 2015: 10.8; 2016: 0.5; 2017: ...
Footnotes included in source:
- 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.
IMF Executive Board Concluding Statement — July 9, 2018.
