- Growth remained resilient in 2023, despite tight financial conditions, heightened geopolitical uncertainty, and tensions in the broader region.
- Government debt is high and additional fiscal measures and structural reforms will be needed to put it onto a durable downward path.
- Financial stability has been well-maintained and efforts to deepen financial markets should continue.
Washington, DC: An International Monetary Fund (IMF) mission led by Mr. John Bluedorn visited Manama during September 29–October 10, 2024 to conduct discussions for the 2024 Article IV consultation. The mission will submit a report to IMF management and Executive Board, which is scheduled to discuss the Article IV consultation in November.
At the conclusion of the visit, Mr. Bluedorn issued the following statement:
"Despite further tightening of financial conditions and heightened geopolitical uncertainty, Bahrain's real GDP grew at 3 percent in 2023, while CPI inflation fell to 0.1 percent. However, the fiscal position declined in 2023, with the overall fiscal balance to GDP falling by 3.3 percentage points to –8.5 percent and gross government debt to GDP increasing by 12 percentage points to 123 percent. This marked a change from the notable improvements in 2021 and 2022 under the revised Fiscal Balance Program (FBP), when Bahrain recorded rises in the overall primary balance of about 6 percentage points of GDP on average per year. The ratio of nonhydrocarbon revenues to primary recurrent expenditures (excluding extrabudgetary spending) remained at its FBP target of about 40 percent in 2023. The current account stayed in surplus at 5.9 percent of GDP in 2023, but down from its peak in the previous year.
"Growth is anticipated to remain at 3 percent in 2024 and rise to 3.5 percent in 2025, with the completion of refinery upgrades in the manufacturing sector and a pick-up in private sector credit growth supporting greater private investment. Over the medium-term, real GDP is expected to grow at around 3 percent, driven by nonhydrocarbon GDP, which is expected to grow to account for about 90 percent of the economy by 2029. CPI inflation is projected to rise to 1.2 percent in 2024, before steadily converging to 2 percent over the medium term.
"To put government debt to GDP onto a durable downward path, a multi-year and pre-committed fiscal consolidation and reform package is the policy priority. In this regard, the recently introduced domestic minimum top-up tax under the OECD/G20 Inclusive Framework is welcome. However, additional steady fiscal efforts over multiple years, appropriately staggered to smooth the adjustment, remain necessary. These efforts would include raising nonhydrocarbon revenue, rationalizing current spending, and reducing subsidies while increasing social transfers to protect the vulnerable and supporting investment. This package would balance growth and equity considerations and fiscal sustainability.
"The Central Bank of Bahrain should continue to closely follow the U.S. Federal Reserve in changes to its policy stance. Looking forward, the anticipated easing of monetary conditions will mitigate the growth impact from fiscal adjustment, which in turn further supports the build-up of external buffers. Formalizing and implementing a bank resolution framework would build on a tradition of sound financial sector supervision and regulation and help safeguard financial stability. Further developing the local currency bond market and the non-bank financial sector, while closely monitoring interconnectedness between banks and non-banks, would promote greater financial market deepening and the diversification of financing sources for the broader economy.
"Economic diversification has progressed well, but additional reforms would foster higher, greener, and more inclusive medium-term growth. Building upon existing efforts, policies to further boost inclusion and productivity include expanding well-designed programs to enhance human capital and close identified skill gaps, improving small and medium-sized enterprises' access to finance, and harnessing the digital transformation. By raising growth, the measures would also hasten the decline in the debt-to-GDP ratio and ease the fiscal adjustment. Gradually reducing energy subsidies while increasing renewable energy investments would also bolster Bahrain's moves toward its emission reduction goals and ensure a smooth energy transition.
"The recent implementation of the National Summary Data Page (NSDP), one of the key recommendations of the IMF's enhanced General Data Dissemination Standards (e-GDDS), is a welcome change and a testament to Bahrain's commitment to improving data quality and transparency, with the aim to subscribe to the Special Data Dissemination Standard (SDDS) in the near future. Such enhancements are an important public good and will help national decision-makers and domestic and international stakeholders to improve their monitoring of macroeconomic and financial developments in Bahrain.
"The IMF mission team wishes to express its appreciation to the Bahraini authorities for their cooperation, hospitality, and engaging and helpful discussions."
