Bahrain’s fiscal reform programme and the $10 billion (Dh36.7bn) in aid pledged by its Arabian Gulf neighbours last year have reduced borrowing costs for the smallest GCC economy, the International Monetary Fund said.
Bahrain is committed to its Fiscal Balance Programme (FBP) and has started implementing elements, including the introduction of a value-added tax, the voluntary retirement scheme for public-sector employees, and efficiency measures to reduce expenditures, the Washington-based lender said in a statement after concluding its annual consultation to its member nation.
The IMF's executive directors “commended authorities for their efforts to address fiscal and external vulnerabilities”, but said macroeconomic challenges persist and risks, such as potential tightening in global financial conditions and delays in fiscal adjustment, remain.
“[The] directors encouraged further structural reforms to support diversification and private sector-led inclusive growth,” the IMF said.
They also called for additional fiscal and structural reform efforts to strengthen the kingdom’s economy, while preserving financial stability.
The lender saw “merit in additional fiscal consolidation measures, including introducing direct taxes, reducing VAT exemptions, and phasing out un-targeted subsidies, while protecting the vulnerable.
The IMF executive board welcomed the ongoing efforts to strengthen debt management and institutionalise the fiscal framework and encouraged authorities to promote greater data transparency to enhance the credibility of their fiscal reform plans.
Bahrain last year launched efforts to eliminate its fiscal deficit by 2022 through FBP, which aims to achieve annual savings of 800 million Bahraini dinars (Dh7.8bn) in spending. The programme is based on six pillars, which include controlling public expenditure, a voluntary retirement scheme for public sector employees, streamlining distribution of cash subsidies to citizens and increasing non-oil revenues.
The $10bn financial package from the UAE, Kuwait and Saudi Arabia is comprised of long-term low interest rate loans that will not financially burden the kingdom's economy, Bahrain Central Bank governor, Rsheed Al Maraj, said earlier this year.
The island kingdom plans to tap the global capital markets to help fund its fiscal reform plan in addition to the Gulf aid, the country’s Finance Minister, Sheikh Salman bin Khalifa Al Khalifa, said in February.
Bahrain’s fiscal deficit fell to 11.7 per cent of gross domestic product in 2018, according to the IMF. Its public debt stands at 93 per cent of GDP, the highest among the GCC.
However, government plans to increase female workforce participation, lower the cost of doing business and enhance small and medium-sized enterprises’ contribution to the economy are steps in the right direction to stimulate the economy and achieve fiscal balance. A more active privatisation plan and overarching public-private partnership legislation will also be vital for the kingdom to further encourage private investment and boost economic output, the IMF said.
“Targeted education and labour market reforms will be important to promote opportunities and improve productivity.”
