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Bahrain economy set for 3pc growth on key reforms, high oil

MANAMA, July 2, 2022

Bahrain’s economic activity is set for a moderate rebound in 2022 and the fiscal and external positions will improve considerably in the near-term and over the medium-term, growth is set to stabilize at 3%, according to a review by International Monetary Fund (IMF). 
 
A gradual post-Covid recovery is underway, while the renewed fiscal reform momentum - with the recent doubling of the VAT rate to 10% and high oil prices - are mitigating Bahrain’s fiscal and external vulnerabilities, stated the Executive Board of the IMF in its conclusion of the Article IV consultation with Bahrain.
 
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.
 
In this report, IMF stated that the Bahraini economy grew by 2.2% in 2021, driven by 2.8% 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% of GDP in 2021, while the overall fiscal deficit narrowed to 11.1% of GDP and debt declined slightly to 129% of GDP, it stated. 
 
According to IMF, the kingdom's current account improved markedly and posted a surplus of 6.7% 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.
 
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.
 
All these measures helped in the kingdom's speedy recovery and IMF is now projecting steady growth over the medium-term which is set to stabilize at 3%.
 
Lauding Bahrain's efforts, the IMF said its authorities were 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.
 
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.
 
The IMF called upon Bahrain to continue the fiscal reforms to put debt on a firm downward path. It 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, it stated. 
 
The kingdom should also improve fiscal transparency by phasing out extrabudgetary spending and reduce reform implementation risks, stated IMF in the review.
 
"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, it added. 
 
IMF said 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, it stated.
 
The IMF report commended CBB for successfully preserving financial stability during the crisis and called upon the kingdom's central bank to 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, it stated. 
 
According to IMF, 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, it stated.
 
Bahrain's labour market and other structural reforms will help promote private sector job creation and economic diversification, it added. 
 
Welcoming the economic recovery plan, IMF said containing public wages, addressing skills mismatches and facilitating labor mobility would help Bahrain's recovery and boost 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," it added.-TradeArabia News Service



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