Bahrain must act to further reduce its fiscal deficit as a large decline in oil prices since mid-2014 has adversely affected the economy, the International Monetary Fund has said.
The executive board of the IMF said in a new report that growth in the Gulf kingdom has slowed and, notwithstanding the positive impact that could be expected from the recent uptick in oil prices, fiscal and external vulnerabilities have "increased significantly".
Directors said they welcomed the substantial fiscal measures the authorities have implemented, including on energy price reform, to safeguard macroeconomic stability.
But they added that additional efforts are needed to further reduce the fiscal deficit, while continued reforms to diversify the economy should strengthen the country’s growth prospects.
The report said the decline in oil prices adversely affected Bahrain’s fiscal and external balances. GDP growth slowed to an estimated 3.2 percent in 2015 from 4.5 percent in 2014.
It added that fiscal and external buffers are limited and vulnerabilities rose. Consumer and investor sentiment weakened. Bank deposit growth slowed and excess liquidity fell. However, it said the banking sector remains well-capitalised and liquid.
In recent months, gasoline prices have been raised by nearly 60 percent, while prices of diesel, kerosene, natural gas, and electricity and water tariffs are being adjusted gradually over the medium term. Tobacco and alcohol taxes have also been increased.
In 2016 and 2017, the IMF said growth is expected to slow further on account of the fiscal adjustment and weaker investor sentiment. Inflation is expected to rise modestly in 2016 with the increase in energy prices, and ease over the medium term with weak economic activity containing the pass-through to wages.
Despite the implementation of fiscal measures, lower oil prices imply that the fiscal deficit is projected to reach 19.5 percent of GDP in 2016 and remain high over the medium term. The current account deficit is projected to reach over 8 percent of GDP in 2016 and narrow gradually. Financial outflows are expected to continue.
Directors agreed that additional sizable and frontloaded fiscal adjustment is needed to put debt on a downward trajectory over the medium term and rebuild fiscal space over time.
They recommended measures to contain current expenditure, including the wage bill, while protecting capital spending; efforts to raise nonoil revenue, including adoption of a VAT; and further reductions in energy subsidies by replacing them with targeted transfers.
Directors acknowledged that some measures could be politically challenging to implement, and underscored the need for strong communication to strengthen public awareness and support.
They agreed that the exchange rate peg remains appropriate for Bahrain, noting that it has delivered monetary policy credibility and low inflation.
