- Economic recovery was very strong, supported by robust non-oil growth.
- Fiscal reforms and high oil prices improved fiscal and external positions and provided an opportunity to continue with ambitious fiscal reforms to put debt on a firm downward path. Full implementation of the 2023/24 state budget will go a long way towards achieving this goal.
- The banking sector is resilient and weathered the phasing out of COVID measures well. With tightening financing conditions, banking system risks should continue to be closely monitored.
Washington, DC: An International Monetary Fund (IMF) mission led by Ms. Asmaa El-Ganainy visited Manama from May 9-18, 2023 to conduct discussions for the 2023 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 July.
At the conclusion of the visit, Ms. El-Ganainy issued the following statement:
"Bahrain experienced strong growth in 2022, in line with other GCC 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 to 3.6 percent on average in 2022. With the economic recovery well under way, ongoing fiscal reforms, and higher oil prices, the state budget deficit declined significantly, narrowing to 1.7 percent of GDP in 2022, from 6.8 percent in 2021, while the overall fiscal deficit declined from 11.6 to 6.1 percent of GDP. Government debt declined to 117 percent of GDP in 2022 from 126 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.
"Growth is projected to moderate to 2.7 percent in 2023, with non-oil GDP growing by 3.2 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 from oil price volatility, international financial turmoil and ongoing tightening, and a slowdown in global growth.
"The authorities remain strongly committed to their reform agenda outlined in the Economic Recovery Plan. The 2023/24 budget is guided by the Fiscal Balance Program targets, which focus on reducing the fiscal deficit and public debt. Measures include spending restraint and efficiency improvements and increasing the non-oil revenue base. Fiscal consolidation should continue beyond 2024 with ambitious and growth-friendly reforms to reduce reliance on oil revenue and put debt on a firm downward path. A stronger fiscal position would also enhance FX reserve accumulation, thereby supporting the exchange rate peg which remains an appropriate monetary anchor.
"The banking system remains resilient with ample buffers and has so far withstood the phasing out of COVID measures and tightening financial conditions. Bank soundness remained strong through 2023 Q1. Nevertheless, vigilance to financial stability risks is warranted given headwinds, including from tightening financial conditions and lingering effects from the withdrawal of COVID measures. Formalizing the macroprudential and resolution frameworks would help cement financial stability further. Advancing CBDC preparatory work, including through a careful design that enhances adoption and limits potential financial stability risks, would facilitate a smooth roll out should one be deemed beneficial and preserve Bahrain's competitive advantage in digitalization and fintech.
"Enhancing labor market mobility, containing public sector wages, and continuing to address skill mismatches in the labor market with well-integrated and coordinated training programs would provide employment opportunities for Bahrainis in the private sector. Commendable progress has been achieved to enhance female labor force participation and employment. Institutionalizing flexible work arrangements, enhancing mobility, and introducing gender balance acts that promote gender equality in senior positions would further lift female participation and boost potential growth. Further developing economic digital infrastructure, including cybersecurity investment, is key to promoting potential growth while minimizing and managing potential risks from digital innovation. Finally, gradually phasing out energy subsidies to increase fiscal space for renewable energy investment, would help move toward Bahrain's emission reduction goals and support its energy transition without creating additional fiscal needs.
"The IMF mission team wishes to express its appreciation to the Bahraini authorities for their cooperation, hospitality, and engaging discussions."
