IMF expects Bahrain’s economy to grow 3.2%

Bahrain’s economy is poised to grow 3.2 per cent this year and the Arabian Gulf’s smallest crude producer is forecast to cut its fiscal deficit to 11 per cent of gross domestic product in 2018, a senior International Monetary Fund official said.

Recovery in oil output, continuation of GCC-funded projects and rising refinery and aluminium production capacity will support the economic growth, said Bikas Joshi, who led the IMF’s delegation for Article IV consultation with Manama, in a statement.

Bahrain is expected to narrow the fiscal deficit further from last year’s 14 per cent of GDP.

The shortfall was as high as 18 per cent in 2016.

“Over the medium term, the deficit is projected to remain sizeable, with a rising interest bill as public debt continues to increase,” Mr Joshi said. “Without further measures, non-oil revenue is expected to stagnate and growth to slow.”

The non-oil sector was the key to Bahrain’s resilient output in 2017, growing at around 3.8 per cent, while inflation remained subdued and oil revenues rose by 15 per cent on the back of higher crude prices, according to the IMF. The Bahrain Economic Development Board earlier this month said real GDP grew by 3.9 per cent last year from 3.2 per cent in 2016. The non-oil economy expanded by 5 per cent, with the tourism and financial sectors leading gains in the kingdom, it said.

Bahrain continues to diversify its income away from hydrocarbons, but oil remains a key component of the country’s economy. The sector recently got a boost after Bahrain announced the discovery of 80 billion barrels of unconventional oil and up to 20 trillion cubic feet of tight gas off its west coast.

The discovery dwarfs Bahrain’s current proven reserves, which according to the CIA World Factbook stand at 124.6 million barrels of oil and around three trillion cubic feet of gas. Production from the new discoveries is expected to begin within five years, and Bahrain is looking at all financing options to make that happen, Bahraini officials have said.

While the monetary benefits of the discovery are still a few years away, Bahrain in the meantime has to address the fiscal imbalances, according to the IMF.

“The decline in oil prices since 2014 and the absence of buffers have led to a rise in fiscal and external vulnerabilities ... a credibly large fiscal adjustment is a priority,” Mr Joshi said.

“Such a plan should comprise revenue and expenditure measures, while protecting the most vulnerable.”

The implementation of VAT, as planned, would help government finances. But additional revenue measures, including consideration of a corporate income tax, measures to reform subsidies and cutting the large wage bill should also be considered, the IMF said.