Bahrain seen needing urgent spending cuts

riyadh — Bahrain needs to make significant spending cuts to restore stability to its budget and improve investor confidence as the smallest economy among Gulf Arab monarchies tries to manage the impact of lower oil prices, the International Monetary Fund said.

The Washington-based lender said the drop in crude prices has largely offset “significant fiscal measures that were implemented,” causing the budget deficit and public debt in 2016 to stand at 18 per cent and 82 per cent of gross domestic product, respectively.

“A sizable fiscal adjustment is urgently needed to restore fiscal sustainability, reduce vulnerabilities, and boost investor and consumer confidence,” the IMF said in a statement after concluding regular consultations with Bahraini authorities.

Bahrain has been more vulnerable to slumping oil prices than richer Gulf Cooperation Council states after authorities increased spending in response to the global recession in 2009 and civil unrest two years later. The country’s 2016 budget deficit of BD1.5 billion ($4 billion), which is larger than its foreign exchange assets, spurred the government to tap both domestic and international markets to fund spending last year.

The central bank’s foreign exchange assets fell 11 per cent in January to BD725.9 million from December. Overall, they’re down 68 per cent from a peak of BD2.24 billion in November 2014, according to data compiled by Bloomberg.

More declines?

“We expect reserves to drop to about $1 billion by year-end on the financing of the currency account deficit,” said Carla Slim, Dubai-based economist at Standard Chartered. “This is well below reserve adequacy levels in the context of a fixed-exchange rate regime.” — Bloomberg

A sizable fiscal adjustment is urgently needed to restore fiscal sustainability IMF statement