Bahrain to have VAT preparations in place by year-end

Bahrain will go ahead with imposing a value-added tax to strengthen state finances, Minister of Finance Sheikh Ahmed bin Mohammed al-Khalifa said on Wednesday, after domestic political opposition slowed the plan.

“We’ll be working with parliament on VAT and aim to have everything set up by the end of 2018,” Sheikh Ahmed told an investment conference in Manama, without giving a firm date for when the tax would be launched.

Bahrain, its sovereign debt rated “junk” by major credit rating agencies because of low oil prices, needs to diversify state revenues beyond oil. It originally planned to introduce VAT at a 5 per cent rate last month, at the same time as neighbouring Saudi Arabia and the United Arab Emirates.

But the plan ran into resistance from some members of parliament, and last month officials said the government would not proceed with new austerity steps until parliament agreed on a new system to compensate citizens for a higher cost of living.

“We have a system of consensus building, such as parliament. It’s vital for Bahrain to go through that process as we diversify,” Sheikh Ahmed said, adding that the government was diversifying revenues “not in a panicked way, in a controlled way”. He also said the government had no new plans to cut the subsidies it pays to keep down consumer prices of fuel, food and services.

Bahrain is covering its budget deficit partly through international borrowing, and the central bank governor said on Tuesday that the government would return to the international debt markets soon to raise money.

Read: Bahrain central bank warns of budget deficit, says VAT coming

“We communicate well with world markets. We make sure they understand how we are dealing with our challenges,” Sheikh Ahmed said.

He also outlined the government’s spending priorities, saying it was committed to building 25,000 homes over four years and that part of a $32bn infrastructure plan would go towards developing strategic enterprises such as Aluminium Bahrain and Bahrain Petroleum Co.

Kuwait, Oman and Qatar also planned originally to introduce VAT last month but have not done so; in the cases of Kuwait and Oman, domestic political concerns are one reason. Regional economists now think those three countries may impose the tax in 2019.

Read: IMF says Bahrain, Kuwait, Oman, Qatar will need more than a year to introduce VAT