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Bahrain economy: To miss reform targets but still on strong financial footing

Bahrain has not necessarily renegged on its promises but rather took a more careful approach to managing its finances

Bahrain does not expect to meet some of the key goals it set out last year as part of a fiscal adjustment program linked to a $10 billion bailout and reform plan State speending is expected to account for 24% of GDP in 2019 and 23.1% of GDP in 2020, below agreed targets of 22.6% and 21.6% Universities do not produce enough entrepreneurs or training that might help graduates land well-paid technical jobs

The IMF said in a statement after concluding its annual consultation to its member nation. Bahrain is committed to its Fiscal Balance Programme (FBP) and has started implementing elements, including the introduction of a value-added tax, the voluntary retirement scheme for public-sector employees, and efficiency measures to reduce expenditures.

But a mixed bag of news emerged out of Bahrain recently, all pointing to reforms, surpluses, better fiscal policies, and balanced spending, but nonetheless falling short of targets.

Bahraini fiscal progress

Bahrain’s fiscal deficit fell to 11.7% of gross domestic product in 2018, according to the IMF. Its public debt stands at 93% of GDP, the highest among the GCC.

 “The budget for 2019 and 2020 that was approved by parliament forecasts a primary budget surplus in 2020,” the spokesman added.

Monica Malik, chief economist at Abu Dhabi Commercial Bank said: "They’re trying to make progress on the reforms but this is unlikely to reach the pace that was in the initial targets".

Read more: Is Bahrain’s economy showing signs of recovery?

Falling short on reforms

In a Reuters report, published by Zawya, and quoting a final draft of Bahrain’s state budget, the country does not expect to meet some of the key goals it set out last year as part of a fiscal adjustment program linked to a $10 billion bailout and reform plan received from its Gulf allies last year.

It received $2.3bn in 2018 and expects further payments of $2.3bn this year, $1.8bn in 2020, $1.8bn in 2021, $1.4bn in 2022 and $650m in 2023.

Non-oil revenues

The IMF expects Bahrain's non-oil revenues to grow 5.4% and 5.7% of GDP in 2019 and 2020, respectively, according to the budget, below expectations of 6.2% and 6.6% set out in the fiscal adjustment program.

Expenditures

State spending is expected to account for 24% of GDP in 2019 and 23.1% of GDP in 2020, below agreed targets of 22.6% and 21.6%, but still better than before past with GCC lenders when expenditures would have reached 25.5% and 25.2% of GDP in 2019 and 2020.

According to the IMF, Bahrain last year launched efforts to eliminate its fiscal deficit by 2022 through FBP, which aims to achieve annual savings of 800 million Bahraini dinars ($2.12bn) in spending

Subsidies

No change through 2020.

Business climate Bahrain

An Economist article said GCC members have lofty plans to wean their economies off oil, and Bahrain is a forerunner of this effort, after building a financial sector back in the 1980s, and having recently passed a bankruptcy law, allowed 100% foreign ownership of firms and introduced flexible visas that allow some migrants to freelance.

Employment 

“The job market in Bahrain shows 2/3rd of citizens work in the private sector, compared with 55% in Saudi and 10% in Kuwait, and unemployment is only 4%,” said the Economist.

“Bahrain ploughs 80% of the take from work-permit fees back into the domestic economy through Tamkeen, which offers subsidised loans and grants to help businesses buy equipment and training.”

State jobs still pay 70% more than those in the private sector.

Sameer Abdulla Nass, the head of Bahrain’s chamber of commerce, complains that 100% foreign ownership has brought only “retail and restaurants”, not industry.

The Economist says fintech is a growth industry for Bahrain but reports investors saying universities do not produce enough entrepreneurs or training that might help graduates land well-paid technical jobs.

However, businessmen looking for permits praise the country’s simple, red-tape free bureaucracy.

Oil revenues

Oil provides about 70% of government revenue and more than half of exports.

Gulf Daily reports that The national budget for 2019 and 2020 forecasts a deficit of BD696m ($1.84bn) this year and BD600.7m ($1.6bn) next year, but that is based on a projected oil price of $60 per barrel.

However, since late January the price has rallied from around $60 to $70 per barrel, so the deficit could be much lower than expected.

“If oil remained at $70p/b for the full two-year period it would inflate Bahrain’s revenues by around BD275m ($730 million) per year,” said the daily.

Borrowing 

According to AlBawaba, Parliament has expressed concerns about Bahrain’s borrowing, with public debt standing at BD11.457bn ($30.4bn) – the equivalent of 80.7% of GDP – in the first quarter of 2019.

“Bahrain already faces interest payments of BD640m ($1.7bn) this year and BD697m($1.85bn) next year on outstanding debt, but the government has already been authorised by the National Assembly to borrow further,” said the site.