Bahrain's economy to grow 3.3% in 2021 driven by quick pandemic response, IMF says

The Washington-based fund expects the kingdom's non-oil economy to grow 3.9% this year

Cityscape of the hotels, skyscrapers and development along the 'Al Corniche' and the 'Diplomatic Area' of Manama in Bahrain illuminated at night.

The International Monetary Fund projects Bahrain’s economy will expand 3.3 per cent this year, driven by its quick policy response to minimise the impact of the pandemic on its economy and its people.

The country’s non-oil economy will grow 3.9 per cent in 2021 as widespread vaccine distribution revives economic activity toward pre-crisis levels, the fund said at the end of its Article IV consultations with the Gulf country on Sunday.

“Bahrain moved quickly to address the health and economic effects of the Covid-19 pandemic, protecting lives and livelihoods,” the Washington-based lender said. “Swift and well-co-ordinated policy responses have helped limit the spread of the virus, deliver rapid and widespread access to vaccinations, and target income and liquidity support to those most in need."

The kingdom will maintain about 3 per cent economic expansion rate in the medium term and the post-pandemic recovery will be “gradual”.

However, there is considerable uncertainty around the economic outlook including the pandemic-related global and domestic containment measures, it said.

Bahrain, the smallest economy in the six-member economic bloc of GCC, has faced stiff economic headwinds amid the Covid-19 pandemic. Its economy is estimated to have shrunk 5.4 per cent, driven by a sharp contraction in non-oil output, which according to IMF projections contracted 7 per cent.

Activity in high contact and job-rich services sectors contracted markedly, but manufacturing activity remained relatively unaffected. The kingdom’s hydrocarbon gross domestic product is estimated to have grown 2 per cent, while its consumer price index inflation averaged -2.3 per cent in 2020, according to the fund's estimate.

The IMF said the state budget deficit last year increased to 12.8 per cent of GDP from 4.7 per cent recorded in 2019 due to the plunge in oil prices and the contraction in nominal GDP. The country’s overall fiscal deficit increased to 18.2 per cent of GDP, from 9 per cent in 2019.

Public debt increased to 133 per cent of GDP in 2020 from 102 per cent a year earlier. Its current account deficit has widened to 9.6 per cent of GDP, while the country’s international reserves declined to levels sufficient for about a month and half of non-oil imports.

“Despite considerable challenges, the authorities remain committed to achieving the key objectives of the Fiscal Balance Programme, including gradually rebuilding policy buffers and reversing the rise in public debt,” the IMF said.

“The near-term priority remains to ensure public health, essential services, and targeted fiscal support to the most vulnerable.”

Once the economic recovery takes hold, “ambitious and growth-friendly fiscal adjustment, set within a credible medium-term framework” is needed to address the country’s large fiscal imbalances.

Bahrain also needs to address growing government debt, putting it on a firm downward path, and restore macroeconomic sustainability.

These measures, the IMF said, will help the country rebuild external buffers, solidify its exchange rate peg and support access to sustainable external financing.

The IMF mission staff welcomed the Central Bank of Bahrain’s support to lenders in the country and said maintaining a healthy banking system and innovation in FinTech will support its economic recovery.

“Targeted policies and structural reform efforts should aim at minimising economic scarring risks and creating post-crisis private sector opportunities,” the IMF said.