Bahrain needs a comprehensive package of reforms to reduce its fiscal deficit in the medium term, starting with levying taxes, the International Monetary Fund said.
The Arabian Gulf's smallest economy must introduce direct taxes, including corporate income tax, contain its public wage bill and extend subsidies to the poorest segment of the population, the IMF said in a statement on Sunday. It warned that Bahrain's public debt is expected to increase in the medium term while foreign exchange reserves are projected to remain low.
"Additional steps are needed to put public finances on a sustainable trajectory, striking the right balance between revenue and expenditure measures while protecting the most vulnerable," the IMF said.
Bahrain is the smallest crude oil producer in the GCC, which accounts for about a third of the world's proven oil reserves, and its state finances are among the weakest in the region. Its public debt has ballooned to 89 per cent of the gross domestic product and reserves cover just 1.5 months of non-oil imports. Its GCC peers - Saudi Arabia, the UAE and Kuwait - last month said they will soon announce a programme to help bolster Bahrain's fiscal stability and economic reform plans.
Bahrain has hired Lazard to advice on how to fix its stretched public finances, Bloomberg reported earlier this month, citing people familiar with the matter.
The country's economy is forecast to grow 3.2 per cent this year, shrinking from 3.8 per cent in 2018, according to the IMF.
The fund, while praising Bahraini authorities continued efforts for fiscal reforms, warned against risks from tighter global financing conditions and delays in fiscal adjustments. It urged the government to increase fiscal transparency that will help boost the market confidence.
Last month, Bahrain's central bank said it was committed to keeping its dinar pegged to the dollar, after Bahraini dinar fell to a 17-year low amid investor concerns about the country's rising public debt.
The IMF agreed that the "exchange rate peg remains appropriate for the economy, and delivers a clear and credible policy anchor, keeping inflation low and stable," it said.
The fund emphasised the importance of fiscal adjustment in supporting the peg and rebuilding international reserves. It recommended gradual unwinding of central bank lending to the government.
Structural reforms are also needed in Bahrain's business environment, according to IMF, which recommended boosting productivity and competitiveness through more privatisations and adopting public-private partnerships to fund the projects that are in the pipeline.
Greater female participation in the country's workforce is another step in improving the country's businesses environment, the IMF noted.