World Economy

IMF Asks Bahrain to Cut Deficits

IMF Asks Bahrain to Cut DeficitsIMF Asks Bahrain to Cut Deficits

The International Monetary Fund has urged Bahrain to take ‘sizable’ steps to reduce its growing budget deficit as slumping oil prices have sharply reduced exports and government revenues.

The warning following the IMF’s annual consultation with the kingdom comes as another struggling oil producer, Azerbaijan, is seeking as much as $3 billion in IMF financing aid and a $1 billion World Bank loan, according to a source familiar with the matter, TradeArabia reported.

An IMF mission led by Padmaja Khandelwal had visited Bahrain from January 12 to 25 for discussions on the 2016 Article IV consultation.

Subject to management approval, the findings of the mission will be presented to the executive board for consideration in March 2016.

In Bahrain, the IMF said it forecasts gross domestic product growth to fall to 2.2% in 2016 from 3.2% in 2015 and 4.5% in 2014. The country’s budget deficit will remain elevated at 15% of GDP, causing debt to increase substantially.

“With the oil price decline expected to persist over the medium term, external and fiscal vulnerabilities have intensified, and consumer and investor sentiment has weakened,” the IMF said in its review.

“A sizable fiscal adjustment is urgently needed to restore fiscal sustainability, reduce vulnerabilities, and boost investor and consumer confidence,” it added.

Near-term fiscal measures could include the implementation of a previously agreed value added tax, reducing spending on social transfers and freezing public-sector wages, it said.

Rationalizing the spending on social transfers, which is large, could provide substantial savings, stated the IMF report.

Significant progress in reducing the wage bill, which is higher in Bahrain (as a share of spending) than in all other (P)GCC countries (Kuwait, Oman, Qatar, Saudi Arabia, UAE), can be made in the near term by freezing wages, it added.

According to IMF, urgent measures are needed to raise non-oil revenue and help finance the provision of government services. Reforms to strengthen the fiscal framework would support the process of fiscal consolidation, it added.

According to IMF, fiscal consolidation will help support Bahrain’s dollar peg. Bahraini banks’ strong capitalization and liquidity will help them weather a slowdown in growth, it stated in the report.

“The Central Bank of Bahrain continues to strengthen its regulations and supervision of the financial sector, which will support the continued development and stability of the financial system. The exchange rate peg to the US dollar continues to serve Bahrain well, and will be supported by fiscal consolidation,” it added.

Welcoming the IMF’s positive outlook on Bahrain’s banking sector, finance minister, Shaikh Ahmed bin Mohamed Al Khalifa, said its latest country recommendations “echo Bahrain’s current fiscal action plan.”

The minister also welcomed the IMF’s positive outlook on Bahrain’s banking sector whose ‘strong capitalization and liquidity’ the report said would help ‘weather’ any potential slowdown in growth.