Bahrain's fiscal deficit is projected to improve to 12.2 per cent of GDP in 2017, from 18 per cent last year, owing to higher oil prices and continued reduction in spending, an IMF statement said.

However, the real GDP growth is expected to slow to 2.3 per cent in 2017 and 1.6 percent in 2018, reflecting the ongoing fiscal consolidation and weaker investor sentiment, the statement issued following IMF Executive Board's consultations with Bahrain authorities said.

Over the medium term, the fiscal deficit is projected to narrow only slightly because of rising interest payments that offset some of the revenues from the planned implementation of the VAT.  The current account deficit is estimated to reach over 3½ percent of GDP in 2017, and is projected to narrow gradually over the medium-term.

Overall GDP grew 3 per cent in 2016, supported by strong growth of 3.7 percent in the non-oil sector aided by the implementation of GCC-funded projects. Average inflation remained moderate at 2.8 percent.

IMF executive directors considered that, although economic activity and financial market conditions have remained positive, fiscal and external vulnerabilities have increased in the wake of the oil price decline. While welcoming the significant fiscal measures under way, they stressed that an additional sizable and frontloaded fiscal adjustment is urgently needed to restore fiscal sustainability and reduce the large fiscal and external financing needs. Sustained fiscal efforts will be needed over the medium term to put debt on a downward path and rebuild policy space, it said.
 
Directors recommended measures to contain current expenditure, including the wage bill and further reducing energy subsidies, while raising non-oil revenue, including through the VAT and exploring other revenue measures. They stressed the importance of minimising the adverse impact of these measures on vulnerable groups, said the statement.

Directors advised strengthening revenue administration and establishing a medium term fiscal framework to support fiscal consolidation. They underscored the need for a strong communication campaign to explain the authorities’ adjustment plans to help strengthen public awareness and support and maintain market confidence. Directors encouraged the authorities to put in place a comprehensive fiscal financing and debt management strategy to mitigate risks, and welcomed recent steps to establish a public debt management office, it said.

The IMF directors agreed that the exchange rate peg remains appropriate for Bahrain, noting that it has delivered monetary policy credibility and low inflation. Strong fiscal adjustment, sizable external financing, and structural reforms are needed to support the peg and strengthen the international reserve position. Gradually raising interest rate differentials vis à vis the US through the stepped up issuance of government securities could also help discourage capital outflows and rebuild reserves, they felt.
 
They welcomed the FSAP stress test results that the banking sector appears well positioned to face moderate credit and liquidity shocks, although recapitalisation needs could be significant under a severe shock scenario. Liquidity stress tests suggest that most banks’ liquidity positions are relatively robust, but some wholesale banks and foreign branches hold few liquid assets. Directors welcomed the central bank’s efforts to implement FSAP recommendations to strengthen the regulation and supervision of the financial sector, including steps to introduce quantitative liquidity requirements for banks and to develop a macroprudential framework. -TradeArabia News Service