Bahrain plans to increase value-added tax to 10% in a bid to curb budget deficits and boost state revenues, Arab News reported following press releases from Bahraini media outlets last Sunday.
According to IMF estimates, Bahrain’s budget deficit will contract by 50% this year after lower oil prices and the coronavirus pandemic boosted the shortfall to a record 18% of economic output in 2020.
Reasons behind VAT increase
It’s not clear when the measure will be implemented but Bahrain’s 10% VAT, when announced, would become GCC’s highest rate after Saudi.
Saudi tripled its VAT rate to 15% in 2020, in the midst of COVID-19, to boost government coffers when oil prices slumped. The UAE and Oman imposed a 5% VAT under a common 2018 framework by the GCC. Kuwait and Qatar have yet to implement the tax.
Bahrain is Gulf’s smallest economy and is seeking ways to cut spending and bring its budget back into balance by 2024, later than previously hoped so as not to undermine a fragile recovery, according to Bloomberg News.
Bahrain did receive a $10 billion bailout package pledged by its wealthier neighbors in 2018. That package came under the condition that Bahrain implements fiscal reforms to rein in its budget deficit. The aim was to balance the budget by the end of 2022.
Bahrain’s budget shortfall is projected to drop to 9.1% of GDP this year from 18.3% of GDP in 2020, according to the IMF.
Bahrain’s government introduced pandemic stimuli including doubling the liquidity support fund to $530 million, central bank-enabled loan deferrals, reduced reserve requirements for banks, and relief on utility bills.
The country may also look at selling stakes in some of its energy and infrastructure assets as a way to raise new sources of income, Oil Minister Mohammed bin Khalifa Al Khalifa said in an interview with Bloomberg in May.
A similar strategy has already been pursued by Saudi and the UAE, specifically by Aramco and ADNOC respectively, which have sold off stakes in assets including oil and gas pipelines.
Bahrain’s real GDP growth reached 5.7% year-on-year in the second quarter while real non-oil growth hit 7.8% during that same time. In July, the IMF urged Bahrain to do more to get its finances in shape.
Bahrain’s economy contracted by 5.4% last year, the IMF has said, as the pandemic hurt vital sectors such as energy and tourism.
Parliament must approve such a change in the VAT law.
Legislators discussed the options of reducing wages or social welfare given to nationals to bolster the economy but also reviewed how to maintain social support for eligible citizens while amending the VAT rate.