IMF: Bahrain's Economy to Grow This Year

The International Monetary Fund projects Bahrain’s economy will expand 3.3% this year, driven by its quick policy response to minimize the impact of the pandemic on its economy and its people. The country’s non-oil economy will grow 3.9% in 2021 as widespread vaccine distribution revives economic activity toward pre-crisis levels, the fund said at the end of its Article IV consultations with the GCC country. “Bahrain moved quickly to address the health and economic effects of the Covid-19 pandemic, protecting lives and livelihoods,” the Washington-based lender said. “Swift and well-coordinated policy responses have helped limit the spread of the virus, deliver rapid and widespread access to vaccinations, and target income and liquidity support to those most in need.” The kingdom will maintain about 3% economic expansion rate in the medium term and the post-pandemic recovery will be “gradual”. However, there is considerable uncertainty around the economic outlook including the pandemic-related global and domestic containment measures, it said.

Bahrain, the smallest economy in the six-member economic bloc of GCC, has faced stiff economic headwinds amid the Covid-19 pandemic. Its economy is estimated to have shrunk 5.4%, driven by a sharp contraction in non-oil output, which according to IMF projections contracted 7%. Activity in high contact and job-rich services sectors contracted markedly, but manufacturing activity remained relatively unaffected. The kingdom’s hydrocarbon gross domestic product is estimated to have grown 2%, while its consumer price index inflation averaged -2.3% in 2020, according to the fund's estimate.

The IMF said the state budget deficit last year increased to 12.8% of GDP from 4.7% recorded in 2019 due to the plunge in oil prices and the contraction in nominal GDP. The country’s overall fiscal deficit increased to 18.2% of GDP, from 9% in 2019. Public debt increased to 133% of GDP in 2020 from 102% a year earlier. Its current account deficit has widened to 9.6% of GDP, while the country’s international reserves declined to levels sufficient for about a month and half of non-oil imports. “Despite considerable challenges, the authorities remain committed to achieving the key objectives of the Fiscal Balance Program, including gradually rebuilding policy buffers and reversing the rise in public debt,” the IMF said. “The near-term priority remains to ensure public health, essential services, and targeted fiscal support to the most vulnerable.”

Once the economic recovery takes hold, “ambitious and growth-friendly fiscal adjustment, set within a credible medium-term framework” is needed to address the country’s large fiscal imbalances. Bahrain also needs to address growing government debt, putting it on a firm downward path, and restore macroeconomic sustainability. These measures, the IMF said, will help the country rebuild external buffers, solidify its exchange rate peg and support access to sustainable external financing. The IMF mission staff welcomed the Central Bank of Bahrain’s support to lenders in the country and said maintaining a healthy banking system and innovation in FinTech will support its economic recovery. “Targeted policies and structural reform efforts should aim at minimizing economic scarring risks and creating post-crisis private sector opportunities,” the IMF said.