Washington, DC: On July 5, 2023, the
Executive Board of the International Monetary Fund (IMF) concluded the
Article IV consultation
[1]
with The Kingdom of Bahrain.
Bahrain experienced strong growth in 2022, in line with other Gulf
Cooperation Council countries. Continued fiscal reform momentum and high
oil prices improved fiscal and external balances. The economy grew by 4.9
percent in 2022, driven by 6.2 percent growth in non-hydrocarbon GDP while
hydrocarbon GDP contracted by 1.4 percent. Non-hydrocarbon growth was
driven by public, financial, and hospitality services and manufacturing.
CPI inflation accelerated from -0.6 percent, on average, in 2021 to 3.6
percent in 2022. With the economic recovery well under way, ongoing fiscal
reforms, and higher oil prices, the state budget deficit declined
significantly, narrowing to 1.2 percent of GDP in 2022, from 6.4 percent in
2021, while the overall fiscal deficit declined from 11 to 6.1 percent of
GDP. Government debt declined to 117.6 percent of GDP in 2022 from 127.1
percent of GDP in 2021. The current account improved markedly and posted
its largest surplus in decades, estimated at 15.4 percent of GDP in 2022, up
from 6.6 percent of GDP surplus in 2021. The banking system remains
resilient with ample buffers and has so far withstood the phasing out of
COVID measures and tightening financial conditions.
Growth is projected to moderate to 2.7 percent in 2023, with non-oil GDP
growing by 3.3 percent reflecting fiscal consolidation, higher interest
rates, and a base effect from 2022 strong growth. Thereafter, growth is
projected to stabilize at around 2.7 percent over the medium term.
Nevertheless, significant uncertainty clouds the forecast, including from
oil price volatility, international financial turmoil and ongoing
tightening, and a slowdown in global growth.
The authorities remain strongly committed to their fiscal and structural
reform agenda as outlined in the Fiscal Balance Program and Economic
Recovery Plan with a focus on reducing the fiscal deficit and public debt,
while advancing diversification efforts, including by increasing labor
market flexibility, further lifting female labor force participation,
enhancing economic digital infrastructure, and addressing climate change
challenges.
Executive Board
Assessment[2]
Executive Directors agreed with the thrust of the staff appraisal. They
commended Bahrain’s strong post-COVID growth and fiscal performance,
supported by successful COVID responses, continued reform momentum, and
favorable commodity prices. Noting that growth is projected to moderate and
risks remain, Directors emphasized the importance of implementing a
medium-term fiscal adjustment plan, safeguarding financial stability, and
accelerating structural reforms.
Directors welcomed the authorities’ continued commitment to implementing
reforms under the Fiscal Balance Program (FBP), including the progress so
far to enhance non-hydrocarbon revenue mobilization and the continued
spending restraint. They underscored that implementing the current budget
in line with FBP targets and continuing with ambitious reforms in the
medium term are critical to ensure fiscal and external sustainability and
reduce reliance on oil revenues. Directors also highlighted the importance
of embedding fiscal reforms in a credible medium-term fiscal framework.
Improving debt and fiscal transparency including by gradually reducing
extrabudgetary spending would be important.
Directors agreed that the exchange rate peg continues to serve Bahrain well
as a monetary anchor. In this context, they stressed that fiscal
consolidation and structural reforms will support the external position,
while monetary policy should continue to follow the Fed. Directors
emphasized the importance of freezing the government overdraft account at
the central bank and developing a plan for its repayment, which will help
bolster reserves and thus support the external position and the peg.
Directors welcomed the successful withdrawal of COVID support measures,
noting that the banking system remains healthy with ample buffers. They
underscored that continued close monitoring of financial stability risks
and further strengthening of macroprudential frameworks are warranted,
given headwinds from tightening financial conditions. In this context,
Directors encouraged further strengthening of the regulatory, supervisory,
bank resolution and macroprudential frameworks. They also welcomed
Bahrain’s leading role in the fintech agenda and encouraged a careful
assessment of the benefits and risks in introducing a central bank digital
currency, with Fund CD support.
Directors welcomed Bahrain’s ambitious structural reform agenda. They
encouraged the authorities to continue improving labor market flexibility
and empowering women, and leveraging opportunities from regional
integration. Pressing ahead with climate mitigation, through a gradual
phasing out of energy subsidies and further investments in renewable
energy, would facilitate Bahrain’s climate transition without creating
additional fiscal needs or weighing on growth.
It is expected that the next Article IV Consultation with The Kingdom of
Bahrain will be held on the standard 12-month cycle.
Table 1. Bahrain: Selected Economic Indicators, 2019–24
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|
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Estimates
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Projections
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|
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2019
|
2020
|
2021
|
2022
|
2023
|
2024
|
|
Real sector
|
(Annual Percentage Change)
|
|
Real GDP
|
2.2
|
-4.6
|
2.7
|
4.9
|
2.7
|
3.6
|
|
Hydrocarbon
|
2.2
|
-0.1
|
-0.3
|
-1.4
|
0.1
|
0.1
|
|
Non-hydrocarbon
|
2.2
|
-5.6
|
3.3
|
6.2
|
3.3
|
4.3
|
|
Consumer Price Index (period average)
|
1.0
|
-2.3
|
-0.6
|
3.6
|
2.2
|
2.2
|
|
Nominal GDP (BD millions)
|
14,534
|
13,018
|
14,778
|
16,691
|
16,980
|
17,778
|
|
Fiscal sector
|
(Percent of GDP)
|
|
Revenue
|
23.7
|
17.9
|
20.8
|
23.1
|
23.2
|
23.0
|
|
o/w Hydrocarbon revenue
|
14.5
|
9.5
|
12.2
|
14.6
|
14.0
|
14.1
|
|
Expense
|
28.6
|
30.9
|
27.5
|
26.0
|
25.1
|
24.4
|
|
Expenditure 1
|
32.7
|
35.8
|
31.8
|
29.2
|
28.5
|
27.1
|
|
Net lending (+) / Net borrowing (-)
|
-9.0
|
-17.9
|
-11.0
|
-6.1
|
-5.4
|
-4.1
|
|
Government gross debt
|
101.6
|
130.1
|
127.1
|
117.6
|
121.1
|
119.9
|
|
External sector
|
(US$ billion)
|
|
Goods Exports
|
18.1
|
14.1
|
22.4
|
30.2
|
25.9
|
27.3
|
|
of which: Hydrocarbon
|
9.9
|
5.9
|
9.9
|
15.1
|
11.7
|
12.5
|
|
Goods Imports
|
17.3
|
14.2
|
17.5
|
21.9
|
20.6
|
22.1
|
|
Current account balance
|
-0.8
|
-3.2
|
2.6
|
6.8
|
3.4
|
3.1
|
|
Current account (percent of GDP)
|
-2.1
|
-9.4
|
6.6
|
15.4
|
7.6
|
6.6
|
|
Official reserve assets 2
|
3.7
|
2.2
|
4.7
|
4.5
|
6.2
|
8.0
|
|
In months of prospective non-oil imports
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2.2
|
1.2
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2.3
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2.3
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3.0
|
3.7
|
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Monetary sector
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(Annual Percentage Change)
|
|
Broad money
|
11.1
|
6.5
|
4.9
|
3.9
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6.1
|
4.1
|
|
Exchange rates
|
|
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Real effective exchange rate (percentage change)
|
2.2
|
-3.2
|
-4.6
|
4.3
|
...
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...
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Sources: Central Bank of Bahrain; Ministry of Finance and
National Economy; and IMF staff estimates and projections.
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1 Includes statistical discrepancy
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2 Includes Special Drawing Rights and IMF Reserve Position.
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[1]
Under Article IV of the IMF's Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country's economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
Executive Board.
[2]
At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country's authorities. An
explanation of any qualifiers used in summings up can be found
here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.