Bahrain’s economic activity is expected to experience a moderate rebound in 2022 and the fiscal and external positions will improve significantly in the short term and in the medium term, growth is expected to stabilize at 3%, according to a study by the International Monetary Fund (IMF) .

A gradual post-Covid recovery is underway, while new fiscal reform momentum – with the recent doubling of the VAT rate to 10% and high oil prices – eases Bahrain’s fiscal and external vulnerabilities, the Council said. Executive Directors of the IMF in its conclusion. of the Article IV consultation with Bahrain.

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with its members, usually annually. A team of staff visits the country, collects economic and financial information and discusses with officials the country’s economic developments and policies.

Back at headquarters, staff draft a report that serves as the basis for Board discussions.

In this report, the IMF said that Bahrain’s economy grew by 2.2% in 2021, driven by a 2.8% growth in non-hydrocarbon GDP.

The recovery was supported by a strong performance in non-hydrocarbon manufacturing as well as the retail and hospitality sectors.

With the economic recovery and rising oil prices, the state budget deficit narrowed to 6.8% of GDP in 2021, while the overall budget deficit narrowed to 11.1% of GDP and debt fell slightly to 129% of GDP, he said.

According to the IMF, the kingdom’s current account has improved markedly and posted a surplus of 6.7% of GDP in 2021 and international reserves have increased to around 2.4 months of prospective non-oil imports. Bank soundness indicators remain resilient, but the financial sector support program may have masked some vulnerabilities.

Bahrain implemented a strong vaccination campaign that covered all residents, was one of the fastest in the world and enabled a wide reopening of the economy in the summer of 2021. The support program relieved the private and banking sectors, helping to contain job losses and corporate strains. .

All these measures have contributed to the rapid recovery of the kingdom and the IMF now forecasts steady medium-term growth, which should stabilize at 3%.

Hailing Bahrain’s efforts, the IMF said its authorities were firmly committed to their reform agenda outlined in the economic recovery plan and the revised balanced budget program, including ambitious reforms to reduce the budget deficit and debt. public.

In concluding the 2022 Article IV consultation with the Kingdom of Bahrain, Directors approved the staff assessment as follows:

* Bahrain has implemented a commendable policy response to the pandemic and is continuing its fiscal and structural reforms. The authorities’ crisis policy actions succeeded in mitigating the health and socio-economic impact of the Covid-19 pandemic, preventing job losses and contributing to economic recovery as soon as the containment measures were lifted. .

*Renewed fiscal reform momentum and favorable oil prices have reduced fiscal and external vulnerabilities. The recovery is expected to continue at a moderate pace, with headwinds from fiscal adjustment and tighter global financial conditions. Risks to the outlook remain tilted to the downside.

The IMF called on Bahrain to pursue tax reforms to put debt on a firm downward path. He welcomed the new fiscal reform momentum and recommended that the authorities take advantage of the current favorable macroeconomic and financial conditions to legislate a set of fiscal measures in the next budget law 2023/24 in line with their PBF.

The pace and composition of medium-term adjustment could be balanced to support both growth and fiscal sustainability while reducing dependence on oil revenues and increasing spending efficiency. Any windfall oil revenues should be used to replenish buffers, he said.

The kingdom should also improve fiscal transparency by phasing out extrabudgetary spending and reducing reform implementation risks, the IMF said in the review.

“Monetary policy should continue to be tightened in line with the Fed. The exchange rate peg remains an appropriate monetary anchor and the CBB should continue to follow the Fed tightening cycle to stem capital outflow pressures,” he added.

The IMF said the phasing out of the foreign exchange overdraft at the CBB, together with fiscal consolidation, would support the external position and hence the peg.

In the longer term, monitoring foreign exchange balance sheet risks and deepening domestic financial markets would help prepare for more independent monetary policy in the post-oil economy, he said.

The IMF report praised the CBB for successfully preserving financial stability during the crisis and called on the kingdom’s central bank to roll back pandemic support measures.

General loan moratoriums should be phased out and, if necessary, could be replaced by targeted, time-bound measures aimed at viable borrowers, while non-viable exposures should be resolved, he said.

According to the IMF, macroprudential instruments should be recalibrated to their neutral position given the banking system’s comfortable liquidity and capital buffers.

The authorities should strengthen the macroprudential policy framework, notably by adding real estate indicators to their analysis of financial stability. Efforts to strengthen the resolution framework should be continued, he said.

Bahrain’s labor market and other structural reforms will help promote private sector job creation and economic diversification, he added.

Welcoming the economic stimulus package, the IMF said containing public wages, addressing skills mismatches and facilitating labor mobility would help Bahrain’s recovery and boost job creation.

“Efforts to support greater participation of women in the labor force should be continued. Improving the business environment, promoting digitalization and improving access to finance, especially for SMEs and women, and continued reforms to support the transition to a low-carbon economy would drive a strong inclusive and green recovery,” he added.

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