and the UAE, linked to fiscal reforms, has BAHRAIN alleviated gross financing concerns, and Recent developments bond spreads have since declined. Evidence on welfare impacts remain lim- Growth in 2018 is estimated at 2 percent, ited due to limited access to household with relatively strong downstream energy survey. As for other GCC, unemployment Table 1 2018 investments and activity (oil refining and among female youth (percent of female P o pulatio n, millio n 1.6 aluminum) offsetting the capacity- labor force ages 15-24) is high and stands GDP , current US$ billio n 38.4 constrained crude oil sector. The first three at 14 percent, compared to only 3 percent GDP per capita, current US$ 24483 quarters of 2018 showed a year-on-year 5 among male youth. The generous state a percent contraction in the oil sector, with subsidies (for energy and food) form an Scho o l enro llment, primary (% gro ss) 101.1 Life expectancy at birth, years a 76.9 slowdown in financial services, hospitality, important part of the social protection and trade sectors. Non-oil growth is esti- system. In January 2018, and in an attempt Source: WDI, M acro Poverty Outlook, and official data. Notes: mated to have decelerated to 2.5 percent, to limit social unrest, government officials driven by slowdowns in retail, hospitality, announced that no new taxes or subsidy (a) M ost recent WDI value (2016) and financial services sectors. Average cuts would be implemented in the king- inflation has increased from 1.4 percent in dom before compensatory measures for 2017 to an estimated 2.1 percent in 2018, lower-income citizens are adopted. In late due to higher food and transport prices. 2018, the government announced a series While improved, fiscal and external defi- of reforms within the fiscal balance pro- cits remain high. Higher oil prices and gram that would affect households and Consumer spending and increased invest- some tax and subsidy measures are esti- their earning potential. Key among them, ment in the ALBA aluminum plant ex- mated to have lowered the fiscal deficit to providing incentives for government pansion supported an overall estimated 11.7 percent of GDP in 2018, from 14.2 workers to voluntarily retire or move to growth of 2 percent in 2018. The govern- percent of GDP in 2017. Despite higher oil the private sector. However, given the ment Fiscal Balance program (FBP) an- prices, the current account deficit is esti- voluntary nature of the reform, it is un- mated to have increased to 5.8 percent of clear what share of the large number of nounced in 2018 accompanied by US$10 GDP in 2018, from of 4.5 percent of GDP government workers in the country will billion in GCC financial support will alle- in 2017, mainly due to an increase in accept the incentive. viate financing constraints in the after- workers’ remittances outflows. Reserves math of 2014 oil price shock. Key challeng- are estimated to continue falling, to reach es facing Bahrain include the need to fully only US$2 billion in 2018 (or one month of non-oil imports), compared to US$2.6 bil- Outlook implement the FBP reforms. Bahrain will lion in 2017 (or 1.5 months of imports). need to pursue energy subsidy reform and Recurring fiscal and external deficits have Overall growth is projected to remain at an control large off-budget expenditures, led to a further increase in public debt-to- average of 2.1 percent over 2019-2020, and while pursuing its diversification strategy. GDP ratio, estimated at 93 percent in 2018, non-oil growth to slow to 2.4 percent, due from 88 percent in 2017. to front-loaded FBP fiscal measures and The recent announcement of US$10 billion tapering megaproject investments. Growth in support from Saudi Arabia, Kuwait, will resume in outer years as efficiency FIGURE 1 Bahrain / Real annual GDP growth FIGURE 2 Bahrain / General government operations Percentage change Percentage change Percent of GDP Percent of GDP 6.0 4.5 0.0 40.0 Hydrocarbon GDP Non-hydrocarbon GDP 4 -2.0 35.0 5.0 Real GDP (RHS) -4.0 3.5 30.0 4.0 -6.0 3 3.0 -8.0 25.0 2.5 2.0 -10.0 20.0 2 -12.0 15.0 1.0 1.5 -14.0 0.0 10.0 1 -16.0 Overall fiscal balance -1.0 0.5 -18.0 Total revenus (RHS) 5.0 Total expenditure (RHS) -2.0 0 -20.0 0.0 2015 2016 2017 2018 2015 2016 2017 2018 Sources: Bahrain authorities, World Bank; and IMF staff projections. Sources: Bahrain authorities, World Bank; and IMF staff projections. MPO 148 Apr 19 gains from reforms materialize. Inflation is are expected to stay low at less than one to the outlook are on the downside. De- expected to increase to 3 percent in 2019- month of prospective non-oil imports in spite the flexibility provided by the GCC3 2020, given the imposition of the VAT in the forecast period. package, the FBP will face implementation 2019 and additional proposed energy tar- Given this outlook, people’s welfare is constraints. A key constraint is the limited iff hikes. Fiscal consolidation under the likely to be negatively impacted unless room for budgetary expenditure cuts to FBP would lower the fiscal deficit to an more diversified sources of government achieve big gains, since they will largely average of 8 percent of GDP in 2019-2020. revenue are found. Bahrain faces tough need to come from reducing social spend- Public debt will remain high, approaching public policy choices as it implements the ing. The second constraint relates to off - 100 percent over the forecast period. The FBP, especially since cuts to social spend- budget expenditures, which contribute introduction of VAT and excise taxes ing will likely affect delivery of public around 5 percentage points to the overall would boost non-oil revenue by an aver- services and social safety net programs. deficit and may be difficult to cut. Third, age of 6.3 percent of non-oil GDP in the The country also needs to create a vibrant the plan will need to be more ambitious period 2019-2020, compared to less than 5 environment for a diversified job-creating on non-oil revenue generation. A sharp percent of non-oil GDP in 2018 – contrib- non-oil private sector. tightening of global financing conditions uting to an improvement in the non-oil and lower oil prices could impede liquidi- primary balance. The current account defi- ty flows in the retail and wholesale finan- cit is likely to persist in 2019-2020, albeit at moderate levels, as rising remittances and Risks and challenges cial sector, which remains Bahrain’s main driver of diversification. While financing interest payment on the government’s constraints have eased, a reduction in the external debt offset the increase in net While regional financial support has level of debt is still unlikely in the near exports of goods and services. Reserves greatly reduced near-term pressures, risks term given the size of fiscal deficit. TABLE 2 Bahrain / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2016 2017 2018 e 2019 f 2020 f 2021 f Real GDP growth, at constant market prices 3.5 3.8 2.0 2.0 2.2 2.8 Private Consumption 0.5 -1.4 1.6 2.0 2.2 2.2 Government Consumption -0.6 3.1 0.8 -1.6 0.4 0.4 Gross Fixed Capital Investment 10.8 11.0 3.3 5.7 5.1 5.1 Exports, Goods and Services -1.8 2.8 4.5 3.5 2.2 2.2 Imports, Goods and Services -3.4 7.8 4.1 3.5 2.0 2.0 Real GDP growth, at constant factor prices 3.5 3.8 2.0 2.0 2.2 2.8 Agriculture 6.9 -0.9 -0.9 -0.9 -0.9 -0.9 Industry 2.8 0.6 0.6 0.6 0.6 0.6 Services 4.0 6.3 3.0 3.0 3.3 4.3 Inflation (Consumer Price Index) 2.8 1.4 2.1 3.3 3.2 2.3 Current Account Balance (% of GDP) -4.6 -4.5 -5.8 -3.9 -3.6 -3.4 Net Foreign Direct Investment (% of GDP) 3.5 0.8 1.0 0.8 0.8 0.8 Fiscal Balance (% of GDP) -17.6 -14.2 -11.7 -8.4 -7.7 -7.4 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. MPO 149 Apr 19