Bahrain is considering introducing new fees to help to avert the risk of a future fiscal crunch, according to the chief economist of a semi-government agency.
The country was also planning to more closely link subsidies to those in most need of assistance, said Jarmo Kotilaine of the Bahrain Economic Development Board, the semi-autonomous body responsible for economic strategy.
Against a backdrop of depleting oil reserves, the government is striving to arrest a slide in its fiscal health as it faces a fifth annual budget deficit in a row.
“Looking at the longer term picture, there are a number of steps the government is pursuing as part of a three-pronged approach,” said Mr Kotilaine, in response to questions about Bahrain’s fiscal outlook.
“Firstly, this will involve reducing the cost of spending by targeting subsidies at those with the highest need. Secondly, it will look at areas where fees can be introduced to boost government revenues, and thirdly, it will involve continuing the growth and diversification of the government’s sources.”
In May, the IMF warned Bahrain there was an “urgent need for a gradual fiscal consolidation over the next three two-year budget cycles” to stabilise government debt at 40 per cent of GDP over the medium term. Without action, public debt could spiral to 61 per cent of GDP as early as 2018, the IMF warned.
Mr Kotilaine did not specify what new fees could be introduced. But fees on the labour market are believed to be one area the government is considering. In September, it lifted a 28-month freeze on the levy paid by companies employing expatriate workers.
The IMF has long urged the GCC to trim subsidies on food, fuel and other goods, warning of the unsustainability of high public spending. Bahrain was among several governments that raised social spending in response to unrest in 2011.
King Hamad bin Isa Al Khalifa ordered 1,000 dinars (Dh9,740) be handed out to each family in February that year, a month before the kingdom declared a state of emergency as protesters led by members of the Shiite majority sought more powers.
Standard & Poor’s, the ratings agency, said on Friday it was affirming its rating for Bahrain at BBB/A-2. It cited steady economic growth and inflows of GCC funds as reasons for a stable outlook.
But it said the ratings were constrained by stagnating real GDP per capita growth, estimated at only 1 per cent between 2014 and 2017.
“Given that headline GDP growth will average about 4 per cent per year, wealth creation is accruing only modestly for the average Bahraini,” analysts wrote in the report. “In this regard, socioeconomic frustrations are an element of the island’s political tensions.”
S&P forecast budget deficits of 3 to 3.5 per cent between 2014 and 2017, assuming oil prices averaged US$97 per barrel. It said it expected net general government debt to rise to 12 per cent of GDP by 2017.
“It is important to bear in mind that Bahrain’s current fiscal position is very stable – debt to GDP is below 40 per cent as a result of a long history of prudent management,” said Mr Kotilaine. “A counter-cyclical policy increased debt but the situation is stabilising and fiscal sustainability is a recognised government priority.”
tarnold@thenational.ae
