Bahrain, which last year boosted state spending, urgently needs to reform its economy to stop its debt burden becoming unsustainable, the International Monetary Fund said.

Bahrain upped its original 2012 expenditure plan by nearly 19 percent in September 2011 after protesters took to the streets of the capital Manama to demand reforms.

As unrest continues to simmer among the country's Shi'ite population, the Fund said more belt-tightening was needed in addition to the almost 6 percent cut in spending planned for 2013.

"Overall fiscal deficits are projected to widen and public debt is estimated to continue on a rising path that could become unsustainable, reaching 61 percent of GDP as early as 2018," it said in a report published late on Wednesday following regular consultations with the kingdom.

"There is therefore an urgent need for a gradual fiscal consolidation over the next three two-year budget cycles, of about 7.7 percent of GDP.”

That should stabilise government debt at 40 percent of GDP over the medium term but needed to be accompanied by reforms to the subsidy-rich economy.

Authorities should also look to "contain public-sector wage increases, increase non-oil revenues, rationalize capital expenditures, and place the pension fund on a sustainable path," the IMF said.

The small non-Opec oil exporter registered a narrower-than-expected budget gap of 2.6 percent of gross domestic product in 2012, but the IMF said the fiscal situation still posed sustainability concerns.

"Halting the fiscal deterioration and putting government debt on a sustainable path will depend critically on the adoption of measures that have high fiscal saving potential," the Fund said.

Bahrain's fiscal break-even oil price reached critical levels of $115 per barrel in 2012, making the small island vulnerable to a sustained decline in oil prices, the IMF said, adding it supported the government's plan to establish a debt management office at the finance ministry.

The Fund expects Bahrain's fiscal shortfall to widen to as high as 8.6 percent of GDP in 2018 from 4.2 percent forecast this year. It sees public debt at 35.7 percent of GDP in 2013. – Reuters