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On June 5, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Kingdom of Bahrain.[1]


Bahrain’s fiscal and external vulnerabilities have increased in the wake of the oil price decline. Overall GDP grew 3 percent in 2016, supported by strong growth of 3.7 percent in the non-oil sector aided by the implementation of GCC-funded projects. Average inflation remained moderate at 2.8 percent. Bank deposit and private sector credit growth slowed. The banking sector remains well capitalized and liquid. Despite the implementation of significant fiscal adjustment, lower oil prices meant that the overall fiscal deficit reached nearly 18 percent of GDP and government debt rose to 82 percent of GDP. The current account deficit widened to 4.7 percent. International reserves have declined.

Real GDP growth is expected to slow to 2.3 and 1.6 percent in 2017 and 2018, reflecting the ongoingfiscal consolidation and weaker investor sentiment. The fiscal deficit is projected to improve to 12.2 percent of GDP in 2017 owing to higher oil prices and continued reduction in spending. Over the medium term, the fiscal deficit is projected to narrow only slightly because of rising interest payments that offset some of the revenues from the planned implementation of the VAT.  The current account deficit is estimated to reach over 3½ percent of GDP in 2017, and is projected to narrow gradually over the medium-term.

Executive Board Assessment[2]

Executive Directors considered that, although economic activity and financial market conditions have remained positive, fiscal and external vulnerabilities have increased in the wake of the oil price decline. While welcoming the significant fiscal measures underway, they stressed that an additional sizable and frontloaded fiscal adjustment is urgently needed to restore fiscal sustainability and reduce the large fiscal and external financing needs. Sustained fiscal efforts will be needed over the medium term to put debt on a downward path and rebuild policy space.

  1. Directors recommended measures to contain current expenditure, including the wage bill and further reducing energy subsidies, while raising non‑oil revenue, including through the VAT and exploring other revenue measures. They stressed the importance of minimizing the adverse impact of these measures on vulnerable groups. Directors advised strengthening revenue administration and establishing a medium‑term fiscal framework to support fiscal consolidation. They underscored the need for a strong communication campaign to explain the authorities’ adjustment plans to help strengthen public awareness and support and maintain market confidence. Directors encouraged the authorities to put in place a comprehensive fiscal financing and debt management strategy to mitigate risks, and welcomed recent steps to establish a public debt management office.
  2. Directors agreed that the exchange rate peg remains appropriate for Bahrain, noting that it has delivered monetary policy credibility and low inflation. Strong fiscal adjustment, sizable external financing, and structural reforms are needed to support the peg and strengthen the international reserve position. Gradually raising interest rate differentials vis‑à‑vis the United States through the stepped‑up issuance of government securities could also help discourage capital outflows and rebuild reserves. Directors also stressed the importance of discontinuing central bank lending to the government.
  3. Directors welcomed the FSAP stress test results that the banking sector appears well positioned to face moderate credit and liquidity shocks, although recapitalization needs could be significant under a severe shock scenario. Liquidity stress tests suggest that most banks’ liquidity positions are relatively robust, but some wholesale banks and foreign branches hold few liquid assets. Directors welcomed the central bank’s efforts to implement FSAP recommendations to strengthen the regulation and supervision of the financial sector, including steps to introduce quantitative liquidity requirements for banks and to develop a macroprudential framework. A clear legal mandate for financial stability, stronger risk‑based supervision, and enhanced crisis management and resolution framework will also help support the financial sector.
  4. Directors commended the authorities’ recent initiatives to streamline business regulation and improve the legal framework. They called for additional structural reforms to promote competition and catalyze private investment, including by privatizing state‑owned enterprises and promoting greater diversification. Directors welcomed efforts to remove bottlenecks in the economy to support growth.
  5. Directors welcomed recent improvements in financial sector data, and underscored the need to further strengthen economic statistics to support the decision‑making process.
Selected Macroeconomic Indicators, 2012–17
  2012 2013 2014 2015 2016 2017
     (Percent change, unless otherwise indicated)
Production and prices      
Real GDP 3.7 5.4 4.4 2.9 3.0 2.3
Real oil GDP1 -8.5 15.3 3.0 -0.1 -0.1 -0.6
Real non-oil GDP 7.1 3.1 4.7 3.6 3.7 2.9
Nominal GDP (billions of US$) 30.7 32.5 33.4 31.1 31.9 34.2
Consumer price index (period average) 2.8 3.3 2.7 1.8 2.8 1.3
       (Percent of GDP, unless otherwise indicated)
Fiscal variables
State revenue 26.4 24.6 25.0 18.2 17.7 22.6
  Of which: oil revenue 23.0 21.4 21.4 13.8 12.1 14.7
State expenditure 28.2 27.6 28.4 31.0 30.9 30.6
State fiscal balance -1.8 -3.0 -3.4 -12.8 -13.2 -8.0
Overall fiscal balance 2 -5.5 -9.7 -1.6 -18.4 -17.8 -12.2
Change in broad money (percent) 4.1 8.2 6.5 2.9 1.2 1.5
       (Billions of US$, unless otherwise indicated)
External sector
Exports 23.1 25.6 23.5 16.5 12.8 15.3
  Of which: Oil and refined products 7.9 10.3 9.0 8.8 6.7 7.0
Imports -19.7 -21.3 -19.8 -15.7 -13.6 -14.9
Current account balance 2.6 2.4 1.5 -0.8 -1.5 -1.2
  Percent of GDP 8.4 7.4 4.6 -2.4 -4.7 -3.6
Gross official reserves (end of period) 3 5.2 5.4 6.1 3.4 2.4 2.4
  Months of imports 4 2.2 2.4 3.3 1.9 1.2 1.1
  Months of imports (excluding crude oil imports) 4,5 3.2 3.4 4.0 2.3 1.5 1.4
Real effective exchange rate (percent change) 2.8 2.7 2.4 10.7 2.7
Sources: Bahraini authorities; and IMF staff estimates.  
Note: Projections are based on a March oil price assumption of $55.2 per barrel in 2017.
1 Includes crude oil and gas.      
2 Includes State fiscal balance and Extra-budgetary expenditures.
3 Includes Special Drawing Rights and IMF Reserve Position. 
4 Imports of goods and non-factor services for the following year.
5 All imported crude oil is exported after refining.
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