Higher oil prices can help Bahrain press ahead with economic reforms, IMF says

Fund commends the kingdom's post-pandemic policy response and says authorities are 'committed to reforms'

The Financial Harbour district in Manama. Bahrain is pushing to cut spending and achieve a balanced budget by 2024. AFP

Higher oil prices could help Bahrain press ahead with its ambitious reforms, diversify its economy and reduce debt, the International Monetary Fund has said.

Favourable macroeconomic and financing conditions can strengthen its finances, boost its foreign exchange reserves and support the dinar's peg to the US dollar, the fund said.

“A gradual post-Covid recovery is under way, while the renewed fiscal reform momentum and high oil prices are mitigating Bahrain’s fiscal and external vulnerabilities," said Asmaa El-Ganainy, deputy division chief at the fund said on Thursday, after a staff visit to the country.

Bahrain's economy, the smallest within the six-member GCC bloc, has sought ways to cut spending and achieve a balanced budget by 2024.

In 2018, the country received a $10 billion package from its Gulf neighbours to support its Fiscal Balance Programme.

The country aims to have a balanced fiscal budget sooner than expected due to higher crude prices, Sheikh Salman bin Khalifa, Bahrain's Minister of Finance and National Economy, told The National earlier this year.

“The authorities are strongly committed to their reform agenda outlined in the Economic Recovery Plan and the revised Fiscal Balance Programme, including ambitious reforms to reduce the fiscal deficit and public debt," the IMF staff said.

Bahrain also unveiled a major economic reform plan last year that seeks to invest about $30bn in strategic projects to drive post-coronavirus growth, boost employment for citizens and attract $2.5bn in foreign direct investment by 2023.

The government also adopted cost rationalisation measures, including increasing VAT to 10 per cent to help the kingdom to balance its budget by 2024.

The IMF commended the country for its steps to mitigate the impact of the pandemic, which helped it to reopen its economy.

Bahrain's economy grew by 2.2 per cent in 2021, driven by 2.8 per cent growth in non-hydrocarbon gross domestic product, the Washington-based fund said.

"The recovery was supported by a strong performance in non-hydrocarbon manufacturing, as well as by the retail trade and hospitality sectors."

The economy is forecast to expand 3.4 per cent in 2022, with non-oil GDP rising 4 per cent due to stronger manufacturing and the full reopening of the economy, the fund said.

Growth is expected to stabilise at 3 per cent over the medium term.

"Phasing out financial sector pandemic support measures would contain the build-up of vulnerabilities and reduce financial stability risks. Continued support of FinTech and digitalisation could provide a source of growth that needs to be balanced against possible risks," the fund's staff said.

The fund also called for labour policies that will support the recovery of the market and improve employment for Bahrainis.

"Continuing to address skills mismatches and boosting labour market mobility could improve productivity. Finally, incentivising access to finance for women entrepreneurs and promoting the use of digital solutions to boost work flexibility could further improve women’s labour force participation," the IMF said.