Consumer spending and increased investment in the ALBA aluminum plant expansion supported an overall estimated growth of 2% in 2018. The government Fiscal Balance program (FBP), announced in 2018, accompanied by US$10 billion in GCC financial support will alleviate financing constraints in the aftermath of 2014 oil price shock. Key challenges facing Bahrain include the need to fully implement the FBP reforms. Bahrain will need to pursue energy subsidy reform and control large off-budget expenditures, while pursuing its diversification strategy.
Overall growth is projected to remain at an average of 2.1% over 2019-2020, and non-oil growth will slow to 2.4%, due to front-loaded FBP fiscal measures and tapering megaproject investments. Growth will resume in outer years as efficiency gains from reforms materialize. Inflation is expected to increase to 3% in 2019-2020, given the imposition of the VAT in 2019 and additional proposed energy tariff hikes. Fiscal consolidation under the FBP would lower the fiscal deficit to an average of 8% of GDP in 2019-2020. Public debt will remain high, approaching 100% over the forecast period. The introduction of VAT and excise taxes would boost non-oil revenue by an average of 6.3% of non-oil GDP in the period 2019-2020, compared to less than 5% of non-oil GDP in 2018 — contributing to an improvement in the non-oil primary balance. The current account deficit is likely to persist in 2019-2020, albeit at moderate levels, as rising remittances and interest payment on the government’s external debt offset the increase in net exports of goods and services. Reserves are expected to stay low at less than one month of prospective non-oil imports in the forecast period.
While regional financial support has greatly reduced near-term pressures, risks to the outlook are on the downside. Despite the flexibility provided by the GCC3 package, the FBP will face implementation constraints. A key constraint is the limited room for budgetary expenditure cuts to achieve big gains, since they will largely need to come from reducing social spending. The second constraint relates to off-budget expenditures, which contribute around 5 percentage points to the overall deficit and may be difficult to cut. Third, the plan will need to be more ambitious on non-oil revenue generation.