IMF Executive Board Concludes 2021 Article IV Consultation with The Kingdom of Bahrain
March 22, 2021
Washington, DC: On March 17, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the 2021 Article IV consultation [1] with The Kingdom of Bahrain.
Bahrain moved quickly to address the health, social, and economic effects of the COVID-19 pandemic, protecting lives and livelihoods. Swift and well-coordinated 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.
As in other countries, the prolonged COVID-19 pandemic and necessary containment measures continue to impact Bahrain. Growth in 2020 is estimated at -5.4 percent, driven by a sharp contraction in non-oil growth of -7 percent as activity in high contact and job-rich services sectors contracted markedly. With the plunge in oil prices and the contraction in nominal GDP, the overall fiscal deficit increased to 18.2 percent of GDP in 2020 and public debt reached 133 percent of GDP. The current account deficit widened to 9.6 percent of GDP and international reserves declined to about 1.4 months of prospective non-oil imports. Banks remained well capitalized and liquid, though vulnerabilities related to asset quality and low profitability may emerge from the crisis. In staff’s baseline scenario Bahrain’s twin deficit is set to persist over the medium-term, with public debt increasing to 155 percent of GDP by 2026. Risks to the baseline are tilted to the downside and stem from insufficient fiscal adjustment to contain the twin deficit, a tightening in global financial conditions or further declines in oil prices.
Despite considerable challenges, the authorities remain committed to achieving the key objectives of the Fiscal Balance Program, including gradually rebuilding policy buffers and reversing the rise in public debt, while maintaining essential social spending.
Executive Board Assessment [2]
Executive Directors commended the authorities’ swift and well-coordinated policy actions to address the health and economic effects of the COVID-19 pandemic. Acknowledging the impact of global and domestic containment measures and the plunge in oil prices, Directors noted a sharp increase in the fiscal and external deficits, high debt levels, and downside risks to the outlook. They called for urgent fiscal reforms to address the large imbalances, lower public debt, and restore macroeconomic sustainability, while ensuring targeted support to the most vulnerable.
Directors welcomed the authorities’ continued commitment to implementing the Fiscal Balance Program’s reforms and stressed that additional consolidation measures beyond the current budget are needed to put debt on a firm downward path and reduce the dependency of fiscal revenue on hydrocarbon prices. In particular, they called for an ambitious, credible and growth-friendly fiscal adjustment plan to be implemented over the medium-term, focusing on domestic revenue mobilization and expenditure rationalization, while protecting the most vulnerable. They noted that further steps to improve fiscal governance and transparency would reduce risks and enhance the credibility of the fiscal plan.
Executive Directors agreed that the exchange rate peg continues to serve Bahrain well. They emphasized that the recommended fiscal adjustment should lead to a gradual unwinding of central bank lending to the government to rebuild external buffers and support the peg.
Directors welcomed the substantial policy support to the banking system to help offset the negative effects of the crisis on households, firms, and banks. They urged the authorities to maintain forward-looking analysis of bank credit portfolios and provisioning levels and to carefully manage sovereign-bank interlinkages.
Directors welcomed the authorities’ structural reform agenda and called for continued efforts to minimize scarring and encourage economic diversification and private sector-led growth and employment.
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Table 1. Bahrain: Selected Economic Indicators, 2018–22 |
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|
Estimate |
Projections |
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|
2018 |
2019 |
2020 |
2021 |
2022 |
|
|
Real sector |
(Annual percentage change) |
||||
|
Real GDP |
1.7 |
2.0 |
-5.4 |
3.3 |
3.1 |
|
Hydrocarbon |
-1.3 |
2.2 |
2.0 |
0.7 |
0.7 |
|
Non-hydrocarbon |
2.4 |
2.0 |
-7.0 |
3.9 |
3.7 |
|
Consumer Price Index (period average) |
2.1 |
1.0 |
-2.3 |
1.5 |
2.1 |
|
Nominal GDP (BD millions) |
14,158 |
14,466 |
12,748 |
14,101 |
14,635 |
|
Fiscal sector |
(Percent of GDP) |
||||
|
Revenue |
21.9 |
23.8 |
17.8 |
22.5 |
21.0 |
|
o/w Hydrocarbon revenue |
16.3 |
14.6 |
9.8 |
13.1 |
11.9 |
|
Expense |
29.3 |
28.8 |
32.1 |
27.5 |
26.6 |
|
Expenditure 1 |
33.7 |
32.8 |
36.1 |
31.7 |
30.4 |
|
Net lending (+) / Net borrowing (-) |
-11.8 |
-9.0 |
-18.3 |
-9.1 |
-9.4 |
|
Government gross debt |
95 |
102 |
133 |
129 |
134 |
|
External sector |
(US$ billion) |
||||
|
Goods Exports |
18.0 |
18.1 |
14.1 |
18.6 |
18.7 |
|
of which : Hydrocarbon |
10.6 |
9.9 |
6.0 |
9.2 |
8.9 |
|
Goods Imports |
19.1 |
17.3 |
14.6 |
17.2 |
17.5 |
|
Current account balance |
-2.4 |
-0.8 |
-3.3 |
-1.5 |
-1.7 |
|
Current account (percent of GDP) |
-6.5 |
-2.1 |
-9.6 |
-4.0 |
-4.2 |
|
Official reserve assets 2 |
2.1 |
3.7 |
2.2 |
2.5 |
2.7 |
|
In months of prospective non-oil imports |
1.3 |
2.3 |
1.3 |
1.4 |
1.4 |
|
Monetary sector |
(Annual percentage change) |
||||
|
Broad money |
2.2 |
11.1 |
6.5 |
2.8 |
6.5 |
|
Exchange rates |
(Annual percentage change) |
||||
|
Real effective exchange rate |
-0.8 |
2.3 |
-3.4 |
... |
... |
|
Sources: Central Bank of Bahrain; Ministry of Finance and National Economy; and IMF staff estimates and projections. |
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1 Includes statistical discrepancy |
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2 Includes Special Drawing Rights and IMF Reserve Position. |
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[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing ups can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
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