POST Online Media Lite Edition


IMF welcomes Bahrain reforms, urges deficit cuts

Staff Writer |
International Monetary Fund (IMF) directors have welcomed Bahrain authorities’ commitment to continue subsidy reforms, cut non-productive spending, and raise non-oil revenues by introducing a value-added tax by 2019.

Article continues below

Following their consultations with Bahrain officials, IMF executive directors welcomed the resilience of growth in Bahrain, while noting downside risks to the outlook stemming from the rise in fiscal and external vulnerabilities, tighter global financing conditions, delays in fiscal adjustment, and lower energy prices.

They agreed that a comprehensive package of reforms is needed to reduce fiscal deficits over the medium term, said a statement.

The directors agreed that the exchange rate peg remains appropriate for the economy, 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. In this context, Directors recommended gradually unwinding central bank lending to the government.

"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, with large fiscal and external current deficits persisting. Reserves remain low, covering only 1.5 months of prospective non-oil imports at end 2017," they said in their report.

Output grew by 3.8 percent in 2017, underpinned by a resilient non-hydrocarbon sector, with robust implementation of GCC-funded projects as well as strong activity in the financial, hospitality, and education sectors.

The banking system remains stable with large capital buffers. Growth is projected to decelerate over the medium term.

Despite planned fiscal consolidation measures, fiscal and external 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 to the baseline, they said.

The directors called for additional sustained efforts to improve Bahrain’s fiscal and external positions, preserve financial sector resilience, and support diversified, inclusive growth.

They welcomed the authorities’ continued fiscal reform efforts, but observed that public debt is expected to increase further over the medium term and reserves are projected to remain low.

They considered that additional steps are needed to put public finances on a sustainable trajectory, striking the right balance between revenue and expenditure measures while protecting the most vulnerable. In this context, the directors emphasised the need to introduce direct taxation, including a corporate income tax, while containing the public wage bill and targeting subsidies to the poorest.

They looked forward to the newly established debt management office developing a contingent financing strategy to mitigate financing risks and costs. Directors also encouraged the authorities to strengthen their macro-fiscal framework and increase fiscal transparency and accountability, securing public support and awareness, and enhancing market confidence.

The directors welcomed the central bank’s continued efforts to implement the 2017 FSAP recommendations to further strengthen the regulation and supervision of the financial sector.

They emphasised the need to develop a well-defined emergency liquidity assistance framework, deepen the interbank market, and enhance the supervision of Islamic banks and insurance companies.

They also encouraged close monitoring of the build-up of household debt. They welcomed Bahrain’s initiatives to promote fintech, while underscoring the importance of monitoring risks. Continued efforts to strengthen the AML/CFT framework were also encouraged.

Directors commended the authorities’ initiatives to streamline business regulations to promote private sector development, diversification, and job creation.

They welcomed recent developments in enhancing SMEs’ access to finance, as well as recent labour market reforms to increase flexibility and promote employment in the private sector.

They called for further structural reforms to boost productivity and competitiveness through more privatization plans and public-private partnerships, and measures to strengthen the education system and support greater female labour force participation, said the IMG statement.

What to read next

Eurozone government deficit narrows in 2017
British trade deficit narrows more than estimated
U.K. visible trade gap widens in September