Bahrain needs to fix its budget deficit and reduce government debt by introducing reforms that retarget subsidies and raise state revenues, the International Monetary Fund said after an annual consultation with the country.
Bahrain, which has been in a state of political turmoil since tensions between its Sunni ruling class and its Shia majority erupted into civil unrest in 2011, nonetheless saw healthy economic growth last year, the IMF said in a statement. Gross domestic product expanded by 5.3%, the IMF estimated, driven by a pick-up in energy production.
But the IMF said Bahrain also needed to address a growing government budget deficit estimated at 4.3% of GDP last year.
The country’s most pressing policy challenges “are to correct the fiscal imbalances and stabilize government debt,” the IMF said; the long-term challenge was to reduce dependence on oil revenues.
Bahrain only extracts around 55,000 barrels of oil a day and is the world’s 35th-largest gas producer, but energy revenues account for a large chunk of the government’s funding.
The IMF’s executive board “stressed that fiscal consolidation is a priority and should focus on gradually retargeting subsidies to the lower income segments of the population, and on controlling the growth of current spending,” the fund said in its statement.
The board recommended Bahrain boost non-oil revenues by introducing a corporate income tax and consulting with other Gulf Arab countries on a region-wide value-added tax.
Even though Bahrain’s economy grew at its fastest pace since 2008 last year, Capital Economics economist Jason Tuvey said the acceleration in oil production that led to the boost was unlikely to last.
“On top of this, political tensions remain high and fiscal policy is likely to become less supportive of growth,” Mr. Tuvey said in a note Wednesday. He expects the pace of GDP growth to slow to 2.5% this year, making Bahrain “one of the Gulf’s economic laggards.”