Press Release No. 16/30

Press Release: IMF Staff Completes 2016 Article IV Mission to Bahrain

January 29, 2016

An International Monetary Fund (IMF) mission led by Ms. Padamja Khandelwal visited Manama from January 12–25, 2016 for discussions on the 2016 Article IV consultation. Subject to management approval, the findings of the mission will be presented to the Executive Board for consideration in March 2016.

At the conclusion of the visit, Ms. Khandelwal issued the following statement:

“The large decline in oil prices has substantially lowered export and fiscal revenues. With the oil price decline expected to persist over the medium term, external and fiscal vulnerabilities have intensified, and consumer and investor sentiment has weakened.

“Economic growth slowed during 2015 and is estimated to have reached 3.2 percent, which is lower than the 4.5 percent achieved in 2014. The overall fiscal deficit and government debt in 2015 are projected to be 15 percent and 63 percent of GDP, respectively. The external current account deficit is estimated at 3.8 percent of GDP.

“In early 2016, authorities announced significant fiscal measures to strengthen revenues, including increases in retail prices of fuel products, electricity, and water. As a result of weakening confidence, and reflecting the dampening effect of the necessary fiscal measures on aggregate demand, real GDP growth is projected to slow further in 2016, to 2.25 percent, and inflation is expected to rise to around 3 percent.

“Despite the implementation of measures, lower projected oil prices in 2016 imply that the overall fiscal deficit will remain high at over 15 percent of GDP, and narrow only gradually over the medium term. A substantial increase in debt is projected. A sizable fiscal adjustment is urgently needed to restore fiscal sustainability, reduce vulnerabilities, and boost investor and consumer confidence.

“In this context, fiscal measures in the near term could include the implementation of a Value-added Tax, which has been agreed at the Gulf Cooperation Council (GCC) level. Rationalizing the spending on social transfers, which is large, could provide substantial savings. Significant progress in reducing the wage bill, which is higher in Bahrain (as a share of spending) than in all other GCC countries, can be made in the near term by freezing wages. Over the medium term, sizable further consolidation can be achieved in the context of a civil service review and will help support the goal of boosting private sector employment of Bahrain nationals. Other measures are also needed to raise non-oil revenue and help finance the provision of government services. Reforms to strengthen the fiscal framework would support the process of fiscal consolidation.

“Bahraini banks’ strong capitalization and liquidity will help them weather a slowing in the pace of economic growth. The Central Bank of Bahrain continues to strengthen its regulations and supervision of the financial sector, which will support the continued development and stability of the financial system. The exchange rate peg to the U.S. dollar continues to serve Bahrain well, and will be supported by fiscal consolidation.”