Bahrain needs to retarget is subsidies to lower income families while controlling other spending commitments in a bid to stabilise debt levels, according to a new report by the International Monetary Fund (IMF).
Following an IMF mission to the Gulf kingdom, officials have said that despite a GDP growth of 4.9 percent last year, authorities need to make fiscal adjustment a priority.
The mission noted that Bahrain's state budget deficit is expected to continue to rise in the medium term.
"Without additional fiscal measures, government debt is projected to increase and become an important source of vulnerability to the economy in the medium term. A gradual retargeting of subsidies to the lower-income segments of the population, and controlling the growth of other current spending (the public sector wage bill and goods and services) would help stabilise debt in the medium term," the IMF said in a statement.
The statement described Bahrain's economic performance in 2013 as "moderate".
GDP is estimated to have grown by 4.9 percent, supported by a rebound in the hydrocarbons sector, but non-oil activity is estimated to have slowed to 2.8 percent, largely reflecting weak investment sentiment and the delay in the 2013–14 budget approval.
The IMF added that non-oil GDP growth is projected to pick up to about 5 percent in 2014 driven by capital spending, with oil GDP expected to be flat.
Overall growth is projected to revert to moderate levels in the medium term, around 3 percent, reflecting continued weak investment sentiment in the non-oil sector and limited growth in the oil sector.
“Diversifying the sources of fiscal revenue is essential in the longer term to lower vulnerability to oil price shocks. Placing the pension fund on a more sustainable path is imperative," the statement said.
It added that the banking sector was in "good health" with nonperforming loans (NPLs) to gross loans continuing on a downward trajectory in conventional retail and wholesale banking, to ranges between 5–7 percent.
In December it was announced that the cost of state-provided subsidies in Bahrain soared by 73 percent in the past five years, to BD1.126bn ($2.99bn) per year.
Deputy Prime Minister Shaikh Khalid bin Abdullah Al Khalifa said the mammoth expenditure would continue to plague the state budget unless measures were taken to remove or reduce them, indicating they would soon no longer apply to expatriates.
The subsidy system, which provides significant discounts for items such as petrol and some food stuffs, has been in place since the 1980s, when the population was half of its present 1.3m, of which more than half are expatriates.
Writer :Andy Sambidge