Bahrain misses key fiscal adjustment goals with 2019-2020 budget

Bahrain does not expect to meet some of the key goals it set out last year as part of a fiscal adjustment programme linked to a $10bn bailout received from its Gulf allies, a final draft of its state budget for the next two years shows.

Saudi Arabia, Kuwait and the United Arab Emirates last year pledged $10bn in financial aid for the small Gulf oil producer as it headed for a credit crunch after piling up debt to offset the impact on revenues of lower oil prices.

The aid, however, was linked to a series of reforms aimed at eliminating Bahrain’s budget deficit by 2022.

Bahrain earlier this month revised upwards its budget deficit forecasts for the next two years, already signalling that it might take longer than expected to balance the budget.

The final budget draft, published on Monday, shows that other items such as non-oil revenues and government expenditures – key points of Bahrain’s fiscal reform plan – are also expected to miss earlier estimates.

The discrepancies “might not seem very much but they are across various items”, said Monica Malik, chief economist at Abu Dhabi Commercial Bank.

“They’re trying to make progress on the reforms but this is unlikely to reach the pace that was in the initial targets.”

The Finance Ministry did not respond to a request for comment on the budget figures.

TALL ORDER

Based on gross domestic product (GDP) forecasts by the IMF, Bahrain’s non-oil revenues – a measure of its success in diversifying the economy away from oil – will correspond to 5.4 per cent and 5.7 per cent of GDP in 2019 and 2020, respectively, according to the budget.

That is below expectations of 6.2 per cent and 6.6 per cent set out in Bahrain’s fiscal adjustment programme last year.

Another important item of the programme was a reduction of government expenditure. But according to the budget, public expenditure is expected to account for 24 per cent of GDP in 2019 and 23.1 per cent of GDP in 2020 – falling short of targets of 22.6 per cent and 21.6 per cent for 2019 and 2020.

Carla Slim, economist for the MENA region at Standard Chartered, said the budget reflected progress on the reform agenda, despite missing last year’s targets.

“Front-loading such a sizeable adjustment is a tall order, therefore we are not surprised that some of the non-oil revenue and spending targets do not exactly meet the Fiscal Balance Programme targets – the change in direction is quite visible, however.”

The planned reforms included the introduction of a 5 per cent value-added tax, subsidy cuts and a voluntary retirement plan for state workers.

But officials told Reuters this month that the government ditched the subsidy reform because its Sunni Muslim rulers were worried that austerity measures would bolster the majority Shi’ite-led opposition and stir more of the unrest that has rattled the kingdom since the Arab Spring uprisings of 2011.

The budget showed that government subsidies will remain practically unchanged over 2019 and 2020.