IMF Concludes 2022 Article IV Consultation with Kingdom of Bahrain

Washington, DC : On June 24, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with The Kingdom of Bahrain, and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis[2].

Bahrain implemented a strong vaccination campaign that covered all residents, was one of the fastest globally, and allowed the broad reopening of the economy in summer 2021. The support package provided relief to the private and banking sectors, helping to contain job losses and corporate strains.

A gradual post-COVID recovery is underway, while the renewed fiscal reform momentum, with the recent doubling of the VAT rate to 10 percent, and high oil prices are mitigating Bahrain’s fiscal and external vulnerabilities. The Bahraini economy grew by 2.2 percent in 2021, driven by 2.8 percent growth in non-hydrocarbon GDP. The recovery was supported by a strong performance in non-hydrocarbon manufacturing as well as by the retail trade and hospitality sectors. With the economic recovery and higher oil prices, the state budget deficit narrowed to 6.8 percent of GDP in 2021, while the overall fiscal deficit narrowed to 11.1 percent of GDP and debt declined slightly to 129 percent of GDP. The current account improved markedly and posted a surplus of 6.7 percent of GDP in 2021 and international reserves increased to about 2.4 months of prospective nonoil imports. Banks’ soundness indicators remain resilient, but the financial sector support package might have masked some vulnerabilities.

Economic activity is projected to continue a moderate rebound and the fiscal and external positions will improve considerably in the near-term. Over the medium-term, growth is set to stabilize at 3 percent. However, declining oil prices will put pressure on the medium-term fiscal deficit and public debt is projected at 127 percent of GDP by 2027. Significant uncertainty clouds the forecast, including from the uncertain evolution of the pandemic, and the war in Ukraine, as well as the global inflation outlook.

The authorities are strongly committed to their reform agenda outlined in the Economic Recovery Plan and the revised Fiscal Balance Program, including ambitious reforms to reduce the fiscal deficit and public debt.

Executive Board Assessment

In concluding the 2022 Article IV consultation with The Kingdom of Bahrain, Executive Directors endorsed the staff’s appraisal as follows:

Bahrain implemented a commendable pandemic policy response and is moving ahead with fiscal and structural reforms. The authorities’ crisis policy actions successfully mitigated the health and socioeconomic impact of the COVID-19 pandemic, prevented job losses, and helped the economic recovery as soon as containment measures were lifted. Renewed fiscal reform momentum and favorable oil prices eased fiscal and external vulnerabilities. The recovery is projected to continue at a moderate pace, with headwinds stemming from fiscal adjustment and the tightening of global financial conditions. Risks to the outlook remain tilted to the downside.

Fiscal reform should proceed to put debt on a firm downward path. Staff welcomed the renewed fiscal reform momentum and recommended that the authorities take advantage of the current favorable macroeconomic and financing conditions to legislate a set of fiscal measures in the upcoming 2023/24 Budget Law in line with their FBP. The pace and composition of the medium-term adjustment could be balanced to support both growth and fiscal sustainability while reducing reliance on oil revenue and increasing spending efficiency. Any oil revenue windfalls should be used to rebuild buffers. Improving fiscal transparency, including by phasing out extrabudgetary spending, can reduce reform implementation risks.

Monetary policy should continue to be tightened in line with the Fed. The exchange rate peg remains an appropriate monetary anchor and the CBB should continue to follow the Fed tightening cycle to stem capital outflow pressures. Phasing out the FX overdraft at the CBB, together with fiscal consolidation, would support the external position and thus the peg. In the longer run, monitoring FX balance sheet risks and further deepening domestic financial markets would help prepare for a more independent monetary policy in the post-oil economy.

The CBB successfully preserved financial stability during the crisis and should now unwind the pandemic support measures. The blanket loan moratoria should be phased out and, if needed, could be replaced with targeted and time-bound measures aimed at viable borrowers, while nonviable exposures should be resolved. Macroprudential instruments should be recalibrated to their neutral stance given comfortable banking system liquidity and capital buffers. The authorities should enhance the macroprudential policy framework, including by adding real estate indicators to their financial stability analysis. Efforts to strengthen the resolution framework should be continued.

Labor market and other structural reforms should promote private sector job creation and economic diversification. Staff welcomed the authorities’ economic recovery plan. Containing public wages, addressing skills mismatches, and facilitating labor mobility would help the recovery and job creation. Efforts to support higher women’s participation in the labor force should be continued. Improving business environment, advancing digitalization and enhancing access to finance, especially for SMEs and women, and pursuing reforms to support the transition toward a low-carbon economy would spur a strong, inclusive, and green recovery.

Staff proposes that the next Article IV consultation with The Kingdom of Bahrain follow the standard 12-month cycle.


[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]The Executive Board takes decisions under its lapse-of-time procedure when it is agreed by the Board that a proposal can be considered without convening formal discussions.

Table 1. Bahrain: Selected Economic Indicators, 2019-23

Estimate

Projections

2019

2020

2021

2022

2023

Real sector

(Annual percentage change)

Real GDP

2.2

-4.9

2.2

3.4

3.0

Hydrocarbon

2.2

-0.1

-0.3

0.5

0.1

Non-hydrocarbon

2.2

-6.0

2.8

4.0

3.6

Consumer Price Index (period average)

1.0

-2.3

-0.6

3.5

2.8

Nominal GDP (BD millions)

14,534

13,056

14,615

16,622

17,090

Fiscal sector

(Percent of GDP)

Revenue

23.7

17.8

21.1

25.3

22.5

of which : Hydrocarbon revenue

14.5

9.5

12.3

16.7

14.2

Expense

28.6

30.9

27.8

24.7

24.1

Expenditure 1

32.7

35.7

32.2

28.7

27.2

Net lending (+) / Net borrowing (-)

-9.0

-17.9

-11.1

-3.3

-4.7

Government gross debt

102

130

129

116

118

External sector

(US$ billion)

Goods Exports

18.1

14.1

22.4

30.0

28.3

of which : Hydrocarbon

9.9

5.9

9.9

16.8

13.8

Goods Imports

17.3

14.2

17.5

22.0

21.7

Current account balance

-0.8

-3.2

2.6

4.9

3.4

Current account (percent of GDP)

-2.1

-9.3

6.7

11.1

7.5

Official reserve assets 2

3.7

2.2

4.7

10.3

14.5

In months of prospective non-oil imports

2.2

1.2

2.4

5.0

6.8

Monetary sector

(Annual percentage change)

Broad money

11.1

6.5

4.9

12.7

8.3

Exchange rates

(Annual percentage change)

Real effective exchange rate

2.5

-2.9

-5.1

Sources: Central Bank of Bahrain; Ministry of Finance and National Economy; and IMF staff estimates and projections.

1Includes statistical discrepancy

2Includes Special Drawing Rights and IMF Reserve Position.

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