# IMF Executive Board Concludes 2017 Article IV Consultation with the Kingdom of Bahrain Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2017-08-24 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: Bahrain IMF Article IV Consultation: Fiscal Challenges Ahead Meta Description: Learn more about Bahrain's economic outlook, fiscal adjustments, and recommendations from the International Monetary Fund's recent assessment. Tags: featured Tag URLs: featured (https://financedigest.com/tag/featured) URL: https://financedigest.com/imf-executive-board-concludes-2017-article-iv-consultation-with-the-kingdom-of-bahrainhtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/fd240817-12-1-1736843579407-compressed.jpg) On June 5, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Kingdom of Bahrain.\[1\] **Background** Bahrain’s fiscal and external vulnerabilities have increased in the wake of the oil price decline. Overall GDP grew 3 percent in 2016, supported by strong [growth of 3.7 percent in the non-oil sector aided](https://www.financedigest.com/infant-positioning-aids-market-application-trends-growth-opportunities-and-worldwide-forecast-to-2027.html "Infant Positioning Aids Market Application, Trends, Growth, Opportunities and Worldwide Forecast to 2027") by the implementation of GCC-funded projects. Average inflation remained moderate at 2.8 percent. Bank deposit and private sector credit [growth slowed](https://www.financedigest.com/china-nov-export-growth-slows-but-imports-accelerate.html "China Nov export growth slows but imports accelerate"). The banking sector remains well capitalized and liquid. Despite the implementation of significant fiscal adjustment, lower [oil prices meant that the overall fiscal deficit reached nearly](https://www.financedigest.com/oil-prices-ease-to-trade-near-2-month-lows-on-china-demand-fears-dollar-strength.html "Oil prices ease to trade near 2-month lows on China demand fears, dollar strength") 18 percent of GDP and government debt rose to 82 percent of GDP. The current account deficit widened to 4.7 percent. International reserves have declined. Real [GDP growth](https://www.financedigest.com/spain-q2-quarterly-gdp-growth-revised-to-1-5-from-1-1.html "Spain Q2 quarterly GDP growth revised to 1.5% from 1.1%") is expected to slow to 2.3 and 1.6 percent in 2017 and 2018, reflecting the ongoingfiscal consolidation and weaker investor sentiment. The fiscal deficit is projected to improve to 12.2 percent of GDP in 2017 owing to [higher oil prices](https://www.financedigest.com/wall-street-set-to-open-higher-oil-prices-extend-losses.html "Wall Street set to open higher, oil prices extend losses") and continued reduction in spending. Over the medium term, the [fiscal deficit is projected to narrow only slightly because of rising interest payments that offset some of the revenues from the planned](https://www.financedigest.com/sterling-plunges-to-all-time-low-in-scathing-appraisal-of-fiscal-plan.html "Sterling plunges to all-time low in scathing appraisal of fiscal plan") implementation of the VAT.  The current account deficit is [estimated to reach](https://www.financedigest.com/cellulose-derivative-excipient-market-is-estimated-to-reach-a-global-value-of-around-us-500-mn-by-the-end-of-2029.html "Cellulose Derivative Excipient Market Is Estimated To Reach A Global Value Of Around US$ 500 Mn By The End Of 2029  ") over 3½ percent of GDP in 2017, and is projected to narrow gradually over the medium-term. **Executive Board Assessment\[2\]** Executive Directors considered that, although economic activity and financial [market conditions have remained positive](https://www.financedigest.com/automotive-glass-market-to-witness-sales-slump-in-near-term-due-to-covid-19-long-term-outlook-remains-positive.html "Automotive Glass Market to Witness Sales Slump in Near Term Due to COVID-19; Long-term Outlook Remains Positive"), fiscal and external vulnerabilities have increased in the wake of the oil price decline. While welcoming the significant fiscal measures underway, they stressed that an additional sizable and frontloaded fiscal adjustment is [urgently](https://www.financedigest.com/why-the-us-urgently-needs-media-compliance-auditing.html "Why the US urgently needs media compliance auditing") needed to restore fiscal sustainability and reduce the large fiscal and external financing needs. Sustained fiscal efforts will be needed over the medium term to put [debt on a downward path and rebuild policy](https://www.financedigest.com/dollar-gains-against-yen-as-fed-policy-debt-ceiling-in-focus.html "Dollar gains against yen as Fed policy, debt ceiling in focus") space. 1. Directors recommended measures to contain current expenditure, including the wage bill and further [reducing energy](https://www.financedigest.com/britains-ofgem-to-urge-public-to-reduce-energy-usage-ft.html "Britain’s Ofgem to urge public to reduce energy usage – FT") subsidies, while raising non‑oil revenue, including through the VAT and exploring other revenue measures. They stressed the importance of minimizing the adverse [impact of these measures on vulnerable groups](https://www.financedigest.com/bicycle-chain-market-size-and-forecast-2020-2030-with-post-impact-of-covid-19-by-top-leading-players-sram-llc-renold-plc-taya-chain-co-ltd-kmc-group-shimano-inc-tien.html "Bicycle Chain Market Size And Forecast (2020-2030) | With Post Impact Of Covid-19 By Top Leading Players- SRAM LLC., Renold PLC., Taya Chain Co., Ltd., KMC Group, Shimano Inc., Tien"). Directors advised strengthening revenue administration and establishing a medium‑term fiscal framework to support fiscal consolidation. They underscored the need for a strong communication campaign to explain the authorities’ adjustment plans to help strengthen public awareness and support and [maintain market](https://www.financedigest.com/innovation-based-sanity-to-maintain-the-momentum-of-dermatophytic-onychomycosis-therapeutics-market.html "Innovation-Based Sanity To Maintain The Momentum Of Dermatophytic Onychomycosis Therapeutics Market") confidence. Directors encouraged the authorities to put in place a comprehensive fiscal financing and debt management strategy to mitigate risks, and welcomed recent steps to establish a [public debt management office](https://www.financedigest.com/france-to-turn-off-hot-water-in-public-offices-to-save-energy.html "France to turn off hot water in public offices to save energy"). 2. Directors agreed that the exchange rate peg remains appropriate for Bahrain, noting that it has delivered [monetary policy](https://www.financedigest.com/asian-economic-powers-warn-of-risks-from-war-monetary-policy-normalisation.html "Asian economic powers warn of risks from war, monetary policy normalisation") credibility and low inflation. Strong fiscal adjustment, sizable external financing, and structural reforms are needed to support the peg and strengthen the international reserve position. Gradually raising interest rate differentials vis‑à‑vis the United States through the stepped‑up issuance of government securities could also help discourage capital outflows and rebuild reserves. Directors also stressed the importance of discontinuing [central bank lending](https://www.financedigest.com/irish-central-bank-eases-strict-mortgage-lending-limits.html "Irish central bank eases strict mortgage-lending limits") to the government. 3. Directors welcomed the FSAP [stress test](https://www.financedigest.com/stress-test-backs-extending-lifespan-of-two-german-nuclear-plants-sources.html "Stress test backs extending lifespan of two German nuclear plants: sources") results that the banking sector appears well positioned to face moderate credit and liquidity shocks, although recapitalization needs could be significant under a severe shock scenario. Liquidity [stress tests](https://www.financedigest.com/demystifying-us-feds-approach-on-systemic-climate-risk-stress-testing.html "Demystifying US Fed’s approach on Systemic Climate Risk Stress Testing") suggest that most banks’ liquidity positions are relatively robust, but some wholesale banks and foreign branches hold few liquid assets. Directors welcomed the [central bank’s](https://www.financedigest.com/major-central-banks-renew-rate-hike-push-in-may.html "Major central banks renew rate hike push in May") efforts to implement FSAP recommendations to strengthen the regulation and supervision of the financial sector, including steps to introduce quantitative liquidity requirements for banks and to develop a macroprudential framework. A clear legal mandate for financial stability, stronger risk‑based supervision, and enhanced crisis management and [resolution framework will also help support](https://www.financedigest.com/holcim-supports-resolution-with-u-s-regarding-legacy-operations-in-syria.html "Holcim supports resolution with U.S. regarding legacy operations in Syria") the financial sector. 4. Directors commended the authorities’ [recent initiatives to streamline business regulation and improve](https://www.financedigest.com/polypropylene-fibre-market-witness-a-spike-in-growth-pace-recent-improvements-in-pricing-models-fmi.html "Polypropylene Fibre Market Witness a Spike in Growth Pace Recent Improvements in Pricing Models: FMI") the legal framework. They called for additional structural reforms to promote competition and catalyze private investment, including by privatizing state‑owned enterprises and promoting greater diversification. Directors welcomed efforts to remove bottlenecks in the economy to support growth. 5. Directors welcomed [recent improvements](https://www.financedigest.com/leno-bags-market-witness-a-spike-in-growth-pace-recent-improvements-in-pricing-models-fmi.html "Leno Bags Market Witness a Spike in Growth Pace Recent Improvements in Pricing Models: FMI") in financial sector data, and underscored the need to further strengthen economic statistics to support the decision‑making process. 5 All imported [crude oil](https://www.financedigest.com/factbox-who-is-buying-russian-crude-oil-and-who-has-stopped.html "Factbox-Who is buying Russian crude oil and who has stopped") is exported after refining. **Selected Macroeconomic Indicators, 2012–17**Proj.201220132014201520162017   (Percent change, unless otherwise indicated)[**Production and prices**](https://www.financedigest.com/french-retailer-carrefour-to-freeze-prices-on-100-products-to-tackle-inflation.html "French retailer Carrefour to freeze prices on 100 products to tackle inflation")Real GDP3.75.44.42.93.02.3Real oil GDP1-8.515.33.0-0.1-0.1-0.6Real non-oil GDP7.13.14.73.63.72.9Nominal GDP (billions of US$)30.732.533.431.131.934.2[Consumer price](https://www.financedigest.com/german-eu-harmonised-consumer-prices-up-8-8-y-y-in-august.html "German EU-harmonised consumer prices up 8.8% y/y in August") index (period average)2.83.32.71.82.81.3     (Percent of GDP, unless otherwise indicated)**Fiscal variables**State revenue26.424.625.018.217.722.6_Of which:_ oil revenue23.021.421.413.812.114.7State expenditure28.227.628.431.030.930.6State fiscal balance-1.8-3.0-3.4-12.8-13.2-8.0Overall fiscal balance 2-5.5-9.7-1.6-18.4-17.8-12.2Change in broad money (percent)4.18.26.52.91.21.5     (Billions of US$, unless otherwise indicated)**External sector**Exports23.125.623.516.512.815.3_Of which:_ [Oil and refined products](https://www.financedigest.com/new-product-launches-to-put-the-cod-liver-oil-market-in-a-good-stead.html "New Product Launches To Put The Cod Liver Oil Market In A Good Stead")7.910.39.08.86.77.0Imports-19.7-21.3-19.8-15.7-13.6-14.9[Current account](https://www.financedigest.com/coffee-current-accounts-and-the-commoditisation-conundrum.html "Coffee, current accounts and the commoditisation conundrum") balance2.62.41.5-0.8-1.5-1.2  Percent of GDP8.47.44.6-2.4-4.7-3.6Gross official reserves ( [end of period](https://www.financedigest.com/global-tool-holders-market-is-anticipated-to-reach-over-us-1604-5-mn-by-the-end-of-the-projected-period-growing-at-a-cagr-of-5-1-fmi.html "Global Tool Holders Market is anticipated to reach over US$ 1,604.5 Mn by the end of the projected period, growing at a CAGR of 5.1%: FMI")) 35.25.46.13.42.42.4  Months of imports 42.22.43.31.91.21.1  Months of imports (excluding crude [oil imports](https://www.financedigest.com/indias-reliance-makes-rare-buy-of-russian-naphtha-ups-fuel-oil-imports.html "India’s Reliance makes rare buy of Russian naphtha, ups fuel oil imports")) 4,53.23.44.02.31.51.4Real effective exchange rate (percent change)2.82.72.410.72.7…Sources: Bahraini authorities; and IMF staff estimates.Note: Projections are based on a March [oil price](https://www.financedigest.com/oil-prices-take-a-breather-opec-sticks-to-output-plans.html "Oil prices take a breather, OPEC+ sticks to output plans") assumption of $55.2 per barrel in 2017.1 Includes crude [oil and gas](https://www.financedigest.com/bhp-in-talks-to-sell-global-oil-gas-business-to-australias-woodside.html "BHP in talks to sell global oil, gas business to Australia’s Woodside").2 Includes State fiscal balance and Extra-budgetary expenditures.3 Includes Special Drawing Rights and IMF Reserve Position.4 Imports of goods and non-factor services for the following year. --- This blog is powered by Superblog. 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