IMF Executive Board Concludes 2017 Article IV Consultation with the Kingdom of Bahrain
IMF News, August 21, 2017
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- Published: August 21, 2017
Overview
- On June 5, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Kingdom of Bahrain.
- Press Release No. 17/331; published August 21, 2017.
- Bahrain’s fiscal and external vulnerabilities have increased in the wake of the oil price decline.
- Overall GDP grew 3 percent in 2016, supported by strong growth of 3.7 percent in the non-oil sector aided by the implementation of GCC-funded projects.
- Average inflation remained moderate at 2.8 percent.
- Bank deposit and private sector credit growth slowed; the banking sector remains well capitalized and liquid.
- Despite significant fiscal adjustment, lower oil prices meant:
- overall fiscal deficit reached nearly 18 percent of GDP,
- government debt rose to 82 percent of GDP,
- the current account deficit widened to 4.7 percent,
- international reserves have declined.
Macroeconomic outlook and projections
- Real GDP growth projections:
- 2017: 2.3 percent
- 2018: 1.6 percent
- Drivers: ongoing fiscal consolidation and weaker investor sentiment.
- Fiscal deficit projections:
- 2017 overall fiscal deficit projected to improve to 12.2 percent of GDP owing to higher oil prices and continued reduction in spending.
- Over the medium term, the fiscal deficit is projected to narrow only slightly because rising interest payments will offset some revenues from planned implementation of the VAT.
- Current account:
- Estimated to reach over 3½ percent of GDP in 2017 and projected to narrow gradually over the medium-term.
- Note: Projections are based on a March oil price assumption of $55.2 per barrel in 2017.
Executive Board assessment — vulnerabilities and priorities
- Directors’ overall view:
- Economic activity and financial market conditions have remained positive, but fiscal and external vulnerabilities increased after the oil price decline.
- An additional sizable and frontloaded fiscal adjustment is urgently needed to restore fiscal sustainability and reduce large fiscal and external financing needs.
- Sustained fiscal efforts are needed over the medium term to put debt on a downward path and rebuild policy space.
- Fiscal policy priorities recommended:
- Contain current expenditure, including the wage bill.
- Further reduce energy subsidies.
- Raise non-oil revenue, including through the VAT and by exploring other revenue measures.
- Minimize adverse impacts on vulnerable groups when implementing adjustment measures.
- Strengthen revenue administration.
- Establish a medium-term fiscal framework to support fiscal consolidation.
- Implement a strong communication campaign to explain adjustment plans, strengthen public awareness and support, and maintain market confidence.
- Put in place a comprehensive fiscal financing and debt management strategy to mitigate risks.
- Recent steps to establish a public debt management office were welcomed.
Exchange rate, reserves, and monetary/financial measures
- Exchange rate:
- Directors agreed that the exchange rate peg remains appropriate for Bahrain, noting that it has delivered monetary policy credibility and low inflation.
- To support the peg and strengthen international reserves, Directors said strong fiscal adjustment, sizable external financing, and structural reforms are needed.
- Gradually raising interest rate differentials vis-à-vis the United States through stepped-up issuance of government securities could help discourage capital outflows and rebuild reserves.
- Directors stressed the importance of discontinuing central bank lending to the government.
- Reserves:
- International reserves have declined (see Selected Macroeconomic Indicators for levels and months of imports).
Financial sector assessment
- FSAP results:
- Banking sector appears well positioned to face moderate credit and liquidity shocks.
- Recapitalization needs could be significant under a severe shock scenario.
- Liquidity stress tests indicate most banks’ liquidity positions are relatively robust, but some wholesale banks and foreign branches hold few liquid assets.
- Regulatory and supervisory priorities:
- Directors welcomed central bank efforts to implement FSAP recommendations, including steps to introduce quantitative liquidity requirements for banks and to develop a macroprudential framework.
- Additional needs: a clear legal mandate for financial stability, stronger risk-based supervision, and an enhanced crisis management and resolution framework.
- These reforms will help support the financial sector.
Structural reforms and data
- Directors commended authorities’ initiatives to streamline business regulation and improve the legal framework.
- Recommended additional structural reforms to:
- promote competition,
- catalyze private investment, including by privatizing state-owned enterprises,
- promote greater diversification.
- Directors welcomed efforts to remove bottlenecks to support growth.
- Data and statistics:
- Recent improvements in financial sector data were welcomed.
- Directors underscored the need to further strengthen economic statistics to support decision-making.
Selected macroeconomic indicators (2012–2017, as presented)
- Production and prices (Percent change, unless otherwise indicated)
- Real GDP: 2012: 3.7; 2013: 5.4; 2014: 4.4; 2015: 2.9; 2016: 3.0; 2017 (Proj.): 2.3
- Real oil GDP1: 2012: -8.5; 2013: 15.3; 2014: -0.1; 2015: -0.6
- Real non-oil GDP: 2012: 7.1; 2013: 3.1; 2014: 4.7; 2015: 3.6; 2016: 3.7
- Nominal GDP (billions of US$): 2012: 30.7; 2013: 32.5; 2014: 33.4; 2015: 31.1; 2016: 31.9; 2017 (Proj.): 34.2
- Consumer price index (period average): 2012: 2.8; 2013: 3.3; 2014: 2.7; 2015: 1.8; 2016: 1.3
- Fiscal variables (Percent of GDP, unless otherwise indicated)
- State revenue: 2012: 26.4; 2013: 24.6; 2014: 25.0; 2015: 18.2; 2016: 17.7; 2017 (Proj.): 22.6
- Of which: oil revenue: 2012: 23.0; 2013: 21.4; 2014: 13.8; 2015: 12.1; 2016: 14.7
- State expenditure: 2012: 28.2; 2013: 27.6; 2014: 28.4; 2015: 31.0; 2016: 30.9; 2017 (Proj.): 30.6
- State fiscal balance: 2012: -1.8; 2013: -3.0; 2014: -3.4; 2015: -12.8; 2016: -13.2; 2017 (Proj.): -8.0
- Overall fiscal balance2: 2012: -5.5; 2013: -9.7; 2014: -1.6; 2015: -18.4; 2016: -17.8; 2017 (Proj.): -12.2
- Change in broad money (percent): 2012: 4.1; 2013: 8.2; 2014: 6.5; 2015: 1.2; 2016: 1.5
- External sector (Billions of US$, unless otherwise indicated)
- Exports: 2012: 23.1; 2013: 25.6; 2014: 23.5; 2015: 16.5; 2016: 12.8; 2017 (Proj.): 12.8
- Of which: Oil and refined products: 2012: 7.9; 2013: 10.3; 2014: 9.0; 2015: 8.8; 2016: 6.7; 2017 (Proj.): 7.0
- Imports: 2012: -19.7; 2013: -21.3; 2014: -19.8; 2015: -15.7; 2016: -13.6; 2017 (Proj.): -14.9
- Current account balance (Percent of GDP): 2012: 8.4; 2013: 7.4; 2014: 4.6; 2015: -2.4; 2016: -4.7; 2017 (Proj.): -3.6
- Gross official reserves (end of period)3: 2012: 5.2; 2013: 6.1; 2014: 3.4
- Months of imports4: 2012: 2.2; 2013: 1.9; 2014: 1.1
- Months of imports (excluding crude oil imports)4,5: 2012: 3.2; 2013: 4.0; 2014: 1.4
- Real effective exchange rate (percent change): 2012: 10.7; 2013: ...
- Sources: Bahraini authorities; and IMF staff estimates.
- Notes provided in the original content:
- 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, June 5, 2017.