Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with Bahrain
IMF News, September 9, 2009
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- Published: September 9, 2009
Background
- The Executive Board concluded the Article IV consultation with Bahrain on May 22, 2009.
- The ongoing financial crisis affected Bahrain’s economy in 2008:
- Real GDP growth declined to 6 percent, from 8 percent in 2007, owing to a deceleration in non-oil activity associated with a drop in financial services.
- Inflation remained contained relative to other Gulf Cooperation Council countries, reflecting government subsidies and infrastructure development projects that helped to limit housing bottlenecks.
- External position and reserves:
- Appreciation of the U.S. dollar generated a reversal of speculative capital inflows.
- Some locally-incorporated banks incurred losses on international securities portfolios and experienced a sharp decline in deposits; parent banks or shareholders provided capital, increased deposits, or credit lines.
- Resulted in a balance of payments deficit, with gross international reserves declining from 7½ months of imports in 2007 to 5½ months in 2008.
- Fiscal developments:
- Buoyant hydrocarbon revenues financed a strong increase in public spending in 2008.
- Non-oil primary deficit increased to 33 percent of non-oil GDP, from 27½ percent in 2007.
- Rise in spending reflected higher current outlays; capital spending declined.
- The 2009 budget foresees an increase in the non-oil primary budget deficit of 1½ percentage points of non-oil GDP, as higher current spending is expected to more than offset a further decline in capital expenditure.
- Monetary and credit developments:
- Net foreign assets increased in the first half of 2008 due to high oil prices and speculative inflows; a decline after July 2008 contributed to a slowdown in broad money growth to 18½ percent by year’s end.
- Despite policy measures (higher capital charges on real estate investments in 2007 and increase in reserve requirements from 5 to 7 percent in January 2008), banks continued strong domestic lending.
- 12-month growth of credit to the economy remained high at 37 percent in December 2008.
- Financial sector resilience:
- The financial sector has so far withstood global turbulence, reflecting in part the strength of sovereign shareholders.
- The CBB did not have to take drastic action to shore up retail banks because parent banks and/or shareholders provided support.
- Liquidity maintained and core retail banks preserved their balance sheets.
- Outlook (staff projection):
- Worldwide deleveraging, lower oil prices, and the global recession expected to further slow growth in 2009.
- Real GDP growth projected to slow to 2½ percent, mostly due to contraction in the wholesale banking sector and stagnation in oil output.
- Drop in oil prices expected to reduce the external current account surplus and result in a fiscal deficit.
Executive Board Assessment — Findings and Recommendations
- Commendations and concerns:
- Directors commended Bahraini authorities’ prudent macroeconomic policies and strong financial oversight for contributing to macroeconomic performance and financial sector resilience.
- Directors noted downside risks from the sharp decline in oil prices, the credit crunch, and asset price deflation.
- Key challenges: safeguard financial stability and mitigate the impact of the global downturn on the domestic economy.
- Financial sector and supervision:
- Commended the Central Bank of Bahrain’s response: monitoring interbank exposures and roll-over risk, provision of liquidity, and crisis preparedness framework.
- Encouraged continued vigilance given Bahrain’s open capital account, large weight of the financial sector, and close global linkages.
- Supported measures addressing vulnerabilities from rapid bank asset growth and concentration in real estate; welcomed additional provisions to limit bank exposure to real estate.
- Encouraged acceleration of the remaining recommendations of the 2005 Financial Sector Assessment Program (FSAP).
- Monetary and exchange rate policy:
- Supported easing of monetary policy to protect growth and the exchange rate peg.
- Agreed fixed exchange rate has helped keep inflation low; staff found the Bahraini dinar broadly in line with economic fundamentals.
- Endorsed authorities’ decision to keep the peg to the U.S. dollar.
- Fiscal policy and sustainability:
- Commended commitment to fiscal prudence and medium-term fiscal sustainability.
- Noted lower extra-budgetary spending for 2009–10 may result in a procyclical fiscal stance.
- Most Directors emphasized the need to ensure at least a neutral fiscal stance; some favored a counter-cyclical stance given Bahrain’s low level of indebtedness.
- Supported authorities’ contingency plan to reactivate delayed investment spending if oil prices rebound above the budget price.
- Encouraged development of a medium-term fiscal framework to balance fiscal sustainability and growth.
- To ensure medium-term fiscal sustainability, Directors stressed revenue diversification and supported planned introduction of a value added tax, corporate income tax, and excises to reduce dependence on oil revenue.
- Emphasized containing current spending, including linking salaries and benefits to performance and merit and gradually phasing out subsidies, in particular those on electricity and fuel.
- Public investment and PPPs:
- Welcomed commitment to address infrastructure needs.
- Encouraged strengthening public expenditure management to ensure appropriate prioritization of investment.
- Recommended a cautious and gradual approach to public-private partnerships until capacity to assess risk is built.
- Labor market and human capital:
- Encouraged pursuit of labor market reform strategy aimed at stimulating technological change, enhancing education and on-the-job training, and investing in skill-building programs to boost productivity.
- Stressed reforms should be appropriately calibrated and phased to dampen adverse impacts on competitiveness.
- Statistics and data dissemination:
- Welcomed commitment to strengthen statistical framework; noted Bahrain’s participation in the Fund’s General Data Dissemination System.
- Encouraged increased resources for statistical work.
Selected Economic and Financial Indicators (2003–09) — Key Statistics
- Production and prices (Percent change, unless otherwise indicated):
- Real GDP: 2003: 7.2; 2004: 5.6; 2005: 7.9; 2006: 6.7; 2007: 8.1; 2008: 6.1; 2009 (Proj.): 2.6
- Real oil GDP 1/: 2003: 1.2; 2004: -11.9; 2005: -8.8; 2006: -1.0; 2007: 1.1; 2008: 0.1
- Real non-oil GDP: 2003: 9.1; 2004: 10.7; 2005: 11.6; 2006: 9.2; 2007: 6.9; 2008: 3.0
- Nominal GDP (in billions of U.S. dollars): 2003: 9.7; 2004: 11.2; 2005: 13.5; 2006: 15.8; 2007: 18.4; 2008: 21.2; 2009 (Proj.): 18.1
- Consumer Price Index (period average): 2003: 1.7; 2004: 2.2; 2005: 2.0; 2006: 3.3; 2007: 3.5
- Financial variables (In percent of GDP, unless otherwise indicated):
- Total revenue: 2003: 31.3; 2004: 30.8; 2005: 33.0; 2006: 30.9; 2007: 29.4; 2008: 33.7; 2009 (Proj.): 24.0
- Of which: Oil revenue: 2003: 22.8; 2004: 22.3; 2005: 25.0; 2006: 23.8; 2007: 23.5; 2008: 28.8; 2009 (Proj.): 19.2
- Budgetary spending: 2003: 29.5; 2004: 26.2; 2005: 25.5; 2006: 26.1; 2007: 25.7; 2008: 31.6; 2009 (Proj.): …
- Extra-budgetary operations (net): 2003: -3.8; 2004: -4.3; 2005: -4.1; 2006: -2.0; 2007: -1.3; 2008: -3.1; 2009 (Proj.): -1.1
- Overall fiscal balance: 2003: 0.3; 2004: 2.7; 2005: 1.9; 2006: 4.9; 2007: -8.7; 2008: …
- Change in broad money (in percent): 2003: 6.4; 2004: 4.1; 2005: 22.0; 2006: 14.9; 2007: 40.8; 2008: 9.6; 2009 (Proj.): …
- Interest rate (in percent): 2003: 1.3; 2004: 2.1; 2005: 5.2; 2006: 3.1; 2007: …
- External sector (In billions of U.S. dollars, unless otherwise indicated):
- Exports: 2003: 6.6; 2004: 7.6; 2005: 10.2; 2006: 12.2; 2007: 13.6; 2008: 17.3; 2009 (Proj.): 10.3
- Of which: Oil and refined products: 2003: 4.7; 2004: 5.5; 2005: 7.8; 2006: 10.8; 2007: 13.8; 2008: 7.5
- Imports: 2003: -5.3; 2004: -6.9; 2005: -8.9; 2006: -10.0; 2007: -10.9; 2008: -14.2; 2009 (Proj.): -9.5
- Current account balance: 2003: 0.2; 2004: 0.5; 2005: 1.5; 2006: 2.9; 2007: 2.3; 2008: …
- In percent of GDP: 2003: 4.2; 2004: 11.0; 2005: 10.6; 2006: 1.6; 2007: …
- Gross official reserves (end period): 2003: 1.4; 2004: 3.8; 2005: …
- In months of imports (including crude oil imports) 2/: 2003: 3.6; 2004: …
- In months of imports (excluding crude oil imports) 2/: 2003: 5.1; 2004: 5.4; 2005: 6.2
- Real effective exchange rate (percent change): 2003: -7.7; 2004: -6.7; 2005: -2.9
Notes:
- Sources: Bahraini authorities; and IMF staff estimates and projections.
- 1/ Includes crude oil and gas.
- 2/ Imports of goods and non-factor services for the following year.
Public Information Notice (PIN) No. 09/112 — September 9, 2009.