Bahrain's VAT move will improve finances: Fitch

A reboot of Bahrains Fiscal Balance Programme (FBP), including a rise in the VAT rate, could improve the trajectory of the countrys public finances, says Fitch Ratings.

"We believe that progress with other fiscal measures would be necessary, in addition to the VAT increase, to bring the budget deficit to balance, based on our current oil price assumptions," it said.

Bahrain's move to increase the value added tax (VAT) from the current 5% to 10% could raise an additional 1.5%-2% of GDP in revenue for the kingdom, a Fitch Ratings report said.

Bahrains government plans to raise the VAT rate from January 2022, alongside other measures, reports have said. A draft amended law on VAT is to be referred to parliament for scrutiny. If cleard by the legistlature, the amended tax will come into effect on Jan 1, said a GDN report.

Fitchs latest forecasts, which do not assume any VAT hike, see the budget deficit falling to 7.9% of GDP in 2021, from 16.8% in 2020. (Fitich's 2021 figure is equivalent to around 6% under the Ministry of Finances measure, which excludes some extra-budgetary spending, it said.)

Bahrain launched its FBP at end-2018, targeting a balanced budget in 2022 a target Fitch now expects to be reached further out. The initial FBP projected government debt/GDP without the FBP would rise to 106% of GDP, but would decline to 82% in 2022 with the reforms. It assumed an average oil price of $60/barrel (bbl). Initial steps at the start of 2019 included the introduction of VAT and a voluntary retirement scheme.

However, the Covid-19 pandemic blew the FBP off course, disrupting activity and pushing down oil prices.

The 2021-2022 budget included some reforms, such as reducing electricity and water subsidies and trimming operating expenses like administration and procurement costs. Spending in 1H21 has been restrained, falling by 4% yoy. The rebound in oil prices has, meanwhile, helped to lift budget revenue by 23% yoy in 1H21.

Nonetheless, Fitch forecasts deficits to remain around 8% of GDP over the next few years, assuming oil prices fall back in 2022-2023 (to $54/bbl on average, from Fitch's forecast average of $63/bbl in 2021) and that the government implements some planned reforms. This implies government debt/GDP would continue to rise. It estimates that Bahrains fiscal break-even oil price remains over $90/bbl.

If VAT is raised to 10% and oil averages $60/bbl, it estimates that Bahrain would generate a small primary surplus in 2023, putting debt/GDP on a mild downward path, although it would remain well above the median for B rated sovereigns (65% in 2020), even excluding borrowing from the central bank.

"The original FBP paved the way for a commitment from Bahrains Gulf partners (Saudi Arabia, Kuwait and the UAE) to provide $10 billion in support loans over 2019-2023. Fitch believes a VAT increase would help to ensure ongoing support from the current financial package, while a broader reboot of the FBP would facilitate further Gulf Cooperation Council (GCC) support beyond 2023, in line with our assumptions when we affirmed Bahrains Long-Term Foreign-Currency Issuer Default Rating at 'B+', with a Stable Outlook, in April 2021," it said. - TradeArabia News Service