Bahrain's VAT hike to shore up economy, pave way for aid from GCC states

However, the additional VAT receipt will only chip away at debt burden

Image used for illustrative purpose

Image used for illustrative purpose

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Last week Bahrain’s government sent a draft bill to parliament for approval to amend the value-added tax (VAT) rate. According to media reports, the government is planning to revise the rate from the current 5 percent to 10 percent. If approved by the parliament, the amended tax could come into effect on January 1, 2022.

The move is widely seen as a positive step by the GCC's smallest member to shore up its public finances and as a way to ensure continued financial support from its GCC neighbours. Bahrain’s economy shrank 5.4 percent last year amid the pandemic and lower oil prices. According to the IMF, Bahrain’s public debt rose to over 130 percent of GDP in 2020 from 102 percent in 2019.

Credit rating agency Moody's Investor Services said Bahrain’s plans to double the VAT to 10 percent are credit positive.

"Aside from adding up to another 1.8 percent of GDP to government revenue, the implementation would mark a renewal of the fiscal reform momentum, which we see as the pre-requisite to the augmentation of the GCC financial support package that is about to run out in early 2023," said Alex Perjessy, VP-Senior Analyst at Moody’s.

However, the additional VAT receipts will only partly address the significant challenge the government faces in reducing its debt burden, Moody's said.

Bahrain has undertaken reforms under the Fiscal Balance Programme 2019-22 (FBP) which looked at ways to narrow the budget deficit by 2022.

The reforms included measures such as reducing electricity, water subsidies and cutting administration costs and boosting non-oil revenue.

Last week Fitch Ratings Agency said a reboot of FBP, including a rise in the VAT rate, could improve the trajectory of the country’s public finances.

It said the original FBP paved the way for a commitment from Bahrain’s Gulf partners (Saudi Arabia, Kuwait and the UAE) to provide $10 billion in support loans over 2019-2023. A VAT increase would help to ensure ongoing support from the current financial package, while a broader reboot of the FBP would facilitate further GCC support beyond 2023, it added.

The London-based consultancy Capital Economics agrees that the VAT hike could strengthen Bahrain’s case if it is required to ask other Gulf states for further support in the future.

It added that Bahrain's budget deficit widened to 13.2 percent of GDP last year and "we estimate it is likely to record a 5 percent shortfall this year".

However, the debt repayment schedule is a key concern, Capital Economics said.  “Nearly two-thirds of outstanding debt is in the form of Eurobonds, of which $8.5 billion is due by the end of 2025. This is equivalent to 40 percent of Bahrain’s total sovereign wealth fund assets and FX reserves. So even with stronger hydrocarbon revenues, fiscal consolidation is needed to help meet these Eurobond repayments,” it added.

(Writing by Brinda Darasha; editing by Seban Scaria)

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