IMF Staff Completes 2021 Article IV Mission to The Kingdom of Bahrain

An International Monetary Fund (IMF) mission led by Mr. Ali Al-Eyd held virtual discussions from January 25–February 11, 2021 to conduct the 2021 Article IV consultation. The mission will submit a report to IMF management and Executive Board, which is scheduled to discuss the Article IV Consultation on March 17, 2021.

At the conclusion of the virtual consultation, Mr. Al-Eyd issued the following statement:

“Bahrain moved quickly to address the health and economic effects of the COVID-19 pandemic, protecting lives and livelihoods. 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.

“Nevertheless, as in other countries, the prolonged COVID-19 pandemic and necessary containment measures continue to impact Bahrain. Growth in 2020 is estimated at -5.4 percent, driven by a sharp contraction in non-oil growth of -7 percent. Activity in high contact and job-rich services sectors contracted markedly, but manufacturing has been relatively unaffected. Hydrocarbon GDP growth is estimated at 2 percent, while CPI inflation averaged -2.3 percent in 2020. With the plunge in oil prices and the contraction in nominal GDP, the state budget deficit in 2020 increased to 12.8 percent of GDP from 4.7 percent of GDP in 2019, while the overall fiscal deficit increased to 18.2 percent of GDP in 2020, from 9 percent of GDP in 2019. Public debt increased to 133 percent of GDP from 102 percent of GDP in 2019. The current account deficit widened to 9.6 percent of GDP and international reserves declined to about 1.4 months of prospective 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 near-term priority remains to ensure public health, essential services, and targeted fiscal support to the most vulnerable. Once the recovery firms, ambitious and growth-friendly fiscal adjustment set within a credible medium-term framework is needed to address Bahrain’s large imbalances, put government debt on a firm downward path, and restore macroeconomic sustainability. The adjustment would also help rebuild external buffers, solidify the exchange rate peg, which continues to serve Bahrain well as a monetary policy anchor, and support access to sustainable external financing.

“The post-pandemic recovery will be gradual. Economic growth is projected at 3.3 percent in 2021 and is expected to remain flat at around 3 percent over the medium term. This outlook reflects a recovery in non-oil growth to 3.9 percent in 2021 as widespread vaccine distribution boosts activity toward pre-crisis levels. However, there is considerable uncertainty around the outlook, including from the path of the pandemic and related global and domestic containment measures.

“Staff welcomed the Central Bank of Bahrain’s substantial support to banks but cautioned about emerging credit risks. Maintaining a healthy banking system and fostering innovation in Fintech and digital banking solutions will support the recovery and strengthen financial inclusion for underserved segments.

“Targeted policies and structural reform efforts should aim at minimizing economic scarring risks and creating post-crisis private sector opportunities. More flexible remote working policies could improve labor force participation, particularly among women and youth. Reducing the role of government as an employer could also help create a more dynamic and attractive private sector and alleviate fiscal pressures.

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