Bahrain’s Economic Outlook- July 2016

How is Bahrain Reacting to Low Oil Prices?

Bahrain is one of the vulnerable countries in this group due to its limited savings, low reserves and high debt levels. Despite plans to curb spending, Bahrain is expected to continue to run significant fiscal deficits over the next few years, currently estimated at 16.8% of GDP in 2016.

Consequently, government debt is forecast to increase from 44% of GDP in 2014 to 83.7% in 2016, placing Bahrain in breach of the 60% debt-to-GDP stability criterion, required by the future GCC currency union. The fiscal break-even price for Bahrain is estimated at $107.2 p/b in 2015, the highest among GCC countries.

Given the existing sectarian tensions and the government’s plans to cut subsidies, the country remains vulnerable to civil unrest as well as regional tensions. Tourism and financial services activity could dampen as a result of the slowdown in the region. The current account will record a deficit of 8.2% of GDP in 2016. Reserves are expected to decline to 4.3 months of imports in 2016 from 5.8 in 2014.

In response to lower oil revenues and the subsequent growth slowdown, Bahrain began taking significant fiscal consolidation measures in 2015 and is now seeking a higher cap on the public debt ceiling. Revenue-enhancing measures include increasing tobacco and alcohol taxes and increasing fees on some government services (primary health care).

A cost-cutting program entailed the removal of the meat subsidy in 2015 and raising petrol prices by 60% in January 2016 (which is likely to create savings worth $148.4 million); the gradual phasing-in of price increases for electricity, water, diesel and kerosene by 2019; and an increase and unification of natural gas prices for industrial users at $2.5 per million BTUs beginning April 2015.

As a result, the 2015 non-oil primary balance improved by 2.5% of non-oil GDP relative to 2014. However, this was insufficient to mitigate the negative impact of lower oil revenues.

Rationalization of government expenditures is also planned in the near-term. Lower oil prices are forcing the government to cut back on the capital budget as restraining current spending may exacerbate the already tense political scene. Members of parliament have also proposed a law to fully privatize several state-owned businesses to help curb the deficit.