IMF Executive Board Concluded 2023 Article IV Consultation with The Kingdom of Bahrain

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Washington, DC: On July 5, 2023, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with The Kingdom of Bahrain.

Bahrain experienced strong growth in 2022, in line with other Gulf Cooperation Council countries. Continued fiscal reform momentum and high oil prices improved fiscal and external balances. The economy grew by 4.9 percent in 2022, driven by 6.2 percent growth in non-hydrocarbon GDP while hydrocarbon GDP contracted by 1.4 percent. Non-hydrocarbon growth was driven by public, financial, and hospitality services and manufacturing. CPI inflation accelerated from -0.6 percent, on average, in 2021 to 3.6 percent in 2022. With the economic recovery well underway, ongoing fiscal reforms, and higher oil prices, the state budget deficit declined significantly, narrowing to 1.2 percent of GDP in 2022, from 6.4 percent in 2021, while the overall fiscal deficit declined from 11 to 6.1 percent of GDP. Government debt declined to 117.6 percent of GDP in 2022 from 127.1 percent of GDP in 2021. The current account improved markedly and posted its largest surplus in decades, estimated at 15.4 percent of GDP in 2022, up from 6.6 percent of GDP surplus in 2021. The banking system remains resilient with ample buffers and has so far withstood the phasing out of COVID measures and tightening financial conditions.

Growth is projected to moderate to 2.7 percent in 2023, with non-oil GDP growing by 3.3 percent reflecting fiscal consolidation, higher interest rates, and a base effect from 2022 strong growth. Thereafter, growth is projected to stabilize at around 2.7 percent over the medium term. Nevertheless, significant uncertainty clouds the forecast, including oil price volatility, international financial turmoil and ongoing tightening, and a slowdown in global growth.

The authorities remain strongly committed to their fiscal and structural reform agenda as outlined in the Fiscal Balance Program and Economic Recovery Plan with a focus on reducing the fiscal deficit and public debt, while advancing diversification efforts, including by increasing labor market flexibility, further lifting female labor force participation, enhancing economic digital infrastructure, and addressing climate change challenges.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They commended Bahrain’s strong post-COVID growth and fiscal performance, supported by successful COVID responses, continued reform momentum, and favorable commodity prices. Noting that growth is projected to moderate and risks remain, Directors emphasized the importance of implementing a medium-term fiscal adjustment plan, safeguarding financial stability, and accelerating structural reforms.

Directors welcomed the authorities’ continued commitment to implementing reforms under the Fiscal Balance Program (FBP), including the progress so far to enhance non-hydrocarbon revenue mobilization and the continued spending restraint. They underscored that implementing the current budget in line with FBP targets and continuing with ambitious reforms in the medium term are critical to ensure fiscal and external sustainability and reduce reliance on oil revenues. Directors also highlighted the importance of embedding fiscal reforms in a credible medium-term fiscal framework. Improving debt and fiscal transparency including by gradually reducing extrabudgetary spending would be important.

Directors agreed that the exchange rate peg continues to serve Bahrain well as a monetary anchor. In this context, they stressed that fiscal consolidation and structural reforms will support the external position, while monetary policy should continue to follow the Fed. Directors emphasized the importance of freezing the government overdraft account at the central bank and developing a plan for its repayment, which will help bolster reserves and thus support the external position and the peg.

Directors welcomed the successful withdrawal of COVID support measures, noting that the banking system remains healthy with ample buffers. They underscored that continued close monitoring of financial stability risks and further strengthening of macroprudential frameworks are warranted, given headwinds from tightening financial conditions. In this context, Directors encouraged further strengthening of the regulatory, supervisory, bank resolution, and macroprudential frameworks. They also welcomed Bahrain’s leading role in the fintech agenda and encouraged a careful assessment of the benefits and risks in introducing a central bank digital currency, with Fund CD support.

Directors welcomed Bahrain’s ambitious structural reform agenda. They encouraged the authorities to continue improving labor market flexibility and empowering women, and leveraging opportunities from regional integration. Pressing ahead with climate mitigation, through a gradual phasing out of energy subsidies and further investments in renewable energy, would facilitate Bahrain’s climate transition without creating additional fiscal needs or weighing on growth.

It is expected that the next Article IV Consultation with The Kingdom of Bahrain will be held on the standard 12-month cycle.

Table 1. Bahrain: Selected Economic Indicators, 2019–24

    EstimatesProjections
 201920202021202220232024
Real sector(Annual Percentage Change)
Real GDP2.2-4.62.74.92.73.6
Hydrocarbon2.2-0.1-0.3-1.40.10.1
Non-hydrocarbon2.2-5.63.36.23.34.3
Consumer Price Index (period average)1.0-2.3-0.63.62.22.2
Nominal GDP (BD millions)14,53413,01814,77816,69116,98017,778
Fiscal sector(Percent of GDP)
Revenue23.717.920.823.123.223.0
o/w Hydrocarbon revenue14.59.512.214.614.014.1
Expense28.630.927.526.025.124.4
Expenditure 132.735.831.829.228.527.1
Net lending (+) / Net borrowing (-)-9.0-17.9-11.0-6.1-5.4-4.1
Government gross debt101.6130.1127.1117.6121.1119.9
External sector(US$ billion)
Goods Exports18.114.122.430.225.927.3
of which: Hydrocarbon9.95.99.915.111.712.5
Goods Imports17.314.217.521.920.622.1
Current account balance-0.8-3.22.66.83.43.1
Current account (percent of GDP)-2.1-9.46.615.47.66.6
Official reserve assets 23.72.24.74.56.28.0
In months of prospective non-oil imports2.21.22.32.33.03.7
Monetary sector(Annual Percentage Change)
Broad money11.16.54.93.96.14.1
Exchange rates 
Real effective exchange rate (percentage change)2.2-3.2-4.64.3
Sources: Central Bank of Bahrain; Ministry of Finance and National Economy; and IMF staff estimates and projections.
1 Includes statistical discrepancy
2 Includes Special Drawing Rights and IMF Reserve Position.

[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 the Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.

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