Bahrain puts economic recovery ahead of boosting budget revenue

Bahrain could extend the duration of support measures to help businesses cope with the impact of the coronavirus after deploying the Gulf region’s biggest stimulus relative to economic output.

Before following some of its neighbours and exploring raising taxes to boost revenue, the focus is now on ensuring that a projected recovery gathers pace next year, Finance Minister Sheikh Salman bin Khalifa al Khalifa said in an interview.

The government will “do what is necessary to ensure a positive path” while “observing very closely” what countries including Saudi Arabia and Oman are doing to bolster income, he said.

“We’re also keeping one eye on the economy, and looking at the economic impact or potential for economic impact for any new revenue-boosting measures,” Sheikh Salman said. “We really want to see the recovery take hold before we take any additional steps in that regard, that’s our priority.”

Despite a $10bn bailout package pledged by its wealthier neighbours in 2018, Bahrain’s public finances have been under strain from the twin shock of the pandemic and lower oil prices. The kingdom has responded to the health emergency by rolling out a stimulus package estimated by S&P Global Ratings at about 32 per cent of gross domestic product, mostly consisting of liquidity for lending and debt deferment.

The smallest economy among the six Gulf Cooperation Council members, Bahrain is on track to run a budget deficit that will widen to double digits as a percentage of GDP this year.

Other countries that long relied on oil receipts have started to look for fresh sources of revenue, but Bahrain has yet to take new steps since implementing value-added tax in 2019. Saudi Arabia tripled VAT earlier this year, while Oman said it was exploring the introduction of income tax, which would make it the first state in the region to do so.

While Bahrain is committed to keeping its pledge to hold spending under control as part of the aid package that envisaged a balanced budget by 2022, the government is wary of new revenue-boosting measures that would dent growth, Sheikh Salman said.

Balancing act
“Even with the additional emergency expenditure that was taken, we also took measures to reduce spending elsewhere and were able to deliver numbers that were below budgeted expenditure” for the first six months of the year, he said.

A combination of recovering crude prices and optimism about the impact of vaccines have helped restore investor confidence, with the premium between Bahrain’s and Saudi government debt narrowing.

Bahrain’s early response to the pandemic and extensive testing have enabled the economy to reopen and movement restrictions to be lifted. More than 2 million coronavirus tests have been conducted in the country of 1.5 million people. It’s also approved a Covid-19 vaccination made by Pfizer for use, the second country to do so after the UK.

Yet the economic damage from the pandemic remains. Meeting the targets outlined in 2018’s Fiscal Balance Plan, which tied aid to progress tackling the deficit, has also been made harder.

Although the funds are still expected to be dispersed in recognition of the kingdom’s efforts to tackle spending, S&P projects gross debt – including GCC support – will rise toward 120 per cent of GDP by 2023. Bahrain’s economy is expected to shrink 4.9 per cent this year, with expansion of 2.3 per cent in 2021, according to the International Monetary Fund.

“We’ve got over the wide freeze in the economy, and now we continue to monitor certain sectors that are still affected,” Sheikh Salman said.