31/01/2016 07:44 AST
Bahrain plans austerity steps to cut its budget deficit in line with International Monetary Fund (IMF) recommendations, Finance Minister Shaikh Ahmed bin Mohammed Al Khalifa said yesterday in comments that could help the kingdom sell its bonds when it returns to international markets later this year.
Bahrain is one of several Gulf states using the IMF’s assistance to plan economic reforms as low crude prices put heavy pressure on state finances. The IMF is also providing valuable political cover for the painful reforms.
The kingdom is expected to return to bond markets this year to help finance its budget deficit, which is estimated by the IMF at about 15 per cent of gross domestic product (GDP) this year.
The Finance Minister said the IMF’s recommendations “echo Bahrain’s current fiscal action plan.”
“Bahrain’s Government Action Plan, currently underway, includes wide-ranging measures that will ensure the sustainability of Bahrain’s financial resources and development, benefiting the entire country,” he said in a statement quoted by the official BNA news agency.
The IMF urged Bahrain to take “sizeable” steps to reduce its budget deficit, saying it could introduce a value-added tax being planned by Gulf states, cut spending on social transfers and freeze public sector wages.
Shaikh Ahmed said Bahrain aimed to balance its budget “within three budgetary cycles”. Bahrain drafts its budget plans in two-year periods, implying the kingdom would eliminate its deficit within six years.
Bahrain’s budget plan for 2015 and 2016 envisaged a deficit of about BD1.505 billion ($4bn). Austerity steps already taken include removing domestic price subsidies for meat and cutting them for petrol.
The kingdom’s plan is aimed at “continuing the longstanding diversification of Bahrain’s economy by increasing non-oil revenues, redirecting subsidies to Bahraini citizens, and reducing recurrent expenditure by restructuring government departments,” Shaikh Ahmed said.
Bahrain is trying to boost revenues from tourism, light manufacturing and services industries to reduce its heavy reliance on oil exports.
The IMF appeal follows its annual consultation with Bahrain. An IMF mission led by Padmaja Khandelwal had visited Bahrain from January 12 to 25 for discussions on the 2016 Article IV consultation.
Subject to management approval, the findings of the mission will be presented to the executive board for consideration in March.
In Bahrain, the IMF said it forecasts GDP growth to fall to 2.2pc in 2016 from 3.2pc in 2015 and 4.5pc in 2014.
“With the oil price decline expected to persist over the medium term, external and fiscal vulnerabilities have intensified, and consumer and investor sentiment has weakened,” the IMF said in its review.
“A sizeable fiscal adjustment is urgently needed to restore fiscal sustainability, reduce vulnerabilities, and boost investor and consumer confidence,” it added.
Rationalising the spending on social transfers, which is large, could provide substantial
savings, said the IMF report.
According to IMF, urgent measures are needed to raise non-oil revenue and help finance the provision of government services. Reforms to strengthen the fiscal framework would support the process of fiscal consolidation, it added.
According to IMF, fiscal consolidation will help support Bahrain’s dollar peg.
Bahraini banks’ strong capitalisation and liquidity will help them weather a slowdown in growth, it said in the report.
“The Central Bank of Bahrain continues to strengthen its regulations and supervision of the financial sector, which will support the continued development and stability of the financial system. The exchange rate peg to the US dollar continues to serve Bahrain well, and will be supported by fiscal consolidation,” it added.
Gulf Daily News
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