Saudi Arabia, along with Kuwait and the United Arab Emirates, came to the rescue of Bahrain last year when a prolonged period of lower oil prices pushed its public debt to nearly 93 per cent of annual economic output. — AFP photo
MANAMA: As the weekend kicks off in Bahrain, Saudi Arabian and Kuwaiti cars jam the capital’s roads and hotel lobbies fill with visitors looking for bars, restaurants and other night-time entertainment.
A new sales tax introduced this year means government coffers will gain with every glass of wine sold and shisha pipe smoked, but that’s still not enough to plug a large gap in the island kingdom’s finances and wean it off aid from richer neighbours.
Saudi Arabia, along with Kuwait and the United Arab Emirates, came to the rescue of Bahrain last year when a prolonged period of lower oil prices pushed its public debt to nearly 93 per cent of annual economic output.
Their $10 billion bailout pledge, along with Bahrain’s inclusion in JPMorgan’s emerging market indexes, have transformed its bonds from a busted bet to a boon for investors.
The price of Bahrain’s 2028 dollar bonds has risen by a third from a record low last June when the country looked in danger of default.
But that upward trajectory could go into reverse if Manama does not tackle its spending overruns.
With an overall deficit last year equivalent to 11.7 per cent of annual economic output, according to an estimate by the International Monetary Fund (IMF), Bahrain would need to introduce a raft of new taxes and spending cuts to eliminate its budget deficit by 2022, a target set as part of its bailout.
But the country’s Sunni Muslim royal rulers are wary of austerity measures roiling sectarian tensions among their Shi’ite majority populace and of taxes, fees and spending cuts dampening growth.
Instead, the government has set its sights on trying to grow the local economy to boost revenues and balance the books.
Investments in the fintech sector, a major oil and gas find and the development of Bahrain as a hub for foreign companies wanting to tap into the larger Saudi Arabian market are all initiatives touted by the government as future sources of revenue.
But they are not seen as sufficient to close the gap by 2022. The IMF said this month that it expects the economy to grow around 1.8 per cent this year, the same pace as last year, and said additional reform efforts were needed.
“We still think there will be deficits at the end of the period,” said Trevor Cullinan, sovereign credit analyst at Standard & Poor’s, which like the other main rating agencies has a junk rating on Bahrain’s debt.
Bahrain’s ministry of finance and national economy said the country’s fiscal programme was on track to deliver a balanced budget in 2022.
“This is a comprehensive and credible plan which, through a combination of spending reductions and revenue measures, is already delivering significant progress,” the ministry said in a statement
A recovering oil price, along with new excise taxes and cuts in subsidies for water and power consumption have helped shrink Bahrain’s deficit from a record 18.4 per cent of gross domestic product (GDP) in 2015.
As part of the bailout from its Gulf allies, Bahrain agreed to introduce a 5 per cent value added tax (VAT), as well as further subsidy cuts and a voluntary retirement plan for state workers.
But the government has ruled out taxing income or company profits, partly to continue attracting business to a region where such taxes are non-existent. — Reuters