|22 January, 2020

New optimism over Bahrain's economy

Bahrain is on track to meet its economic goals

Image used for illustrative purpose. Bahrain Manama Skyline at Twilight, Manama Cityscape with office buildings, hotels and the world trade center of the capital of Bahrain illuminated at night under beautiful skyscape.

Image used for illustrative purpose. Bahrain Manama Skyline at Twilight, Manama Cityscape with office buildings, hotels and the world trade center of the capital of Bahrain illuminated at night under beautiful skyscape.

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Bahrain's economy proved buoyant last year with the World Bank projecting a growth of 1.8 per cent, according to a new report.

In its latest document, ‘Bahrain: Year in Review 2019’, global publishing, research and consultancy firm Oxford Business Group (OBG) said that despite ongoing fiscal challenges, Bahrain is on track to meet its economic goals.

EXPANSION

The oil sector is due to move back into the black (0.2pc), reversing the 1.2pc contraction recorded the previous year.

However, the expansion of the non-oil economy is expected to slow from 2.5pc to 2.2pc.

The report charts the kingdom’s progress in diversifying its economy and creating an investor-friendly environment.

“By most estimates, inflation has remained low and stable, and was on track to settle at 1.4pc for the year, according to the International Monetary Fund (IMF) projections from October,” it said.

“Foreign direct investment (FDI), meanwhile, was up 1pc year-on-year at $262.6 million in the second quarter of 2019.”

Kuwait accounted for the largest share of FDI inflows, with $119.8m, followed by India ($57.8m) and Saudi Arabia ($54.3m).

The report also debunked fears by some observers that the 5pc Value-Added Tax (VAT) introduced in January last year would drive up prices.

“Indeed, the World Bank forecast in October that inflation could tick up to 3.3pc by year’s end; however, the latest figures from the Central Informatics Organisation (now merged with Information and eGovernment Authority) showed a rate of 1.9pc as of November.”

The analysis said that after a period of challenging fiscal conditions for Bahrain in 2018, Kuwait, the UAE and Saudi Arabia collectively pledged $10 billion to shore up the country’s finances which will help it achieve a balanced budget by 2022.

The funds were accompanied by a comprehensive reform programme, that included the introduction of VAT, targeted spending cuts and a voluntary retirement scheme – “that has reduced the public sector workforce by 18pc to date”.

REFORM

“While these adjustments are broadly seen as steps in the right fiscal direction – most notably by global credit ratings agency Standard & Poor’s (S&P), which upgraded Bahrain’s outlook from stable to positive in November – estimates vary as to their ultimate impact on the deficit.”

The report said that IMF projects the budget deficit to grow moderately from 4.3pc of the gross domestic product (GDP) last year to 4.4pc in 2020, while S&P expects the fiscal deficit to continue to decline, from 5.7pc to 5.1pc.

S&P further estimates VAT could raise government revenue by 1.5pc of the GDP per year.

“While the introduction of VAT is a notable departure from prior practice in the region, it appears to have been broadly accepted by the business community,” said the report.

It also said Bahrain ranked as the easiest jurisdiction in the world to pay taxes, according to the ‘Paying Taxes 2020’ report published by the World Bank and consultancy firm PwC in December.

The report noted that the inauguration of the Alba Line 6 expansion project in November made it the largest smelter in the world outside of China.

“Aluminium is the largest manufacturing segment in terms of both value and output, and Alba accounts for 12pc of the GDP.

“This is expected to increase to 16pc once the project reaches maximum capacity.”

Another important project recognised in the report is the new $1.1bn passenger terminal which it said is scheduled for inauguration in March this year.

Other projects include the $6bn modernisation of the Sitra Refinery, which began in March last year and is due for completion in 2022, and the construction of the $4bn King Hamad Causeway, set to commence in 2021.

“Given the robust project pipeline, the construction sector is set to remain a driving force behind non-oil growth over the medium term, helping to push non-oil revenue to 5.4pc of GDP in 2019 and 5.7pc in 2020, as per the latest IMF estimates.”

sandy@gdn.com.bh

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