Saudi Arabia, Kuwait and the United Arab Emirates earlier this month agreed to give Bahrain $10 billion in financial support, in a bid to bail the island state out of its monetary troubles, but a report published by the Fitch Ratings agency on Wednesday said “achieving the government's fiscal targets will be tough”.
The $10 billion will be in the form of a long-term interest-free loan and aims to get Bahrain’s budget back in the black by 2022
, Reuters reported. The Bahrain government published its Fiscal Balance Program (FBP) last week, which, according to Fitch will include a number of key goals:
- Eliminate the fiscal deficit by 2022 and reduce government debt
- Reduce government operational expenditure by introducing a voluntary retirement scheme for government workers and further reforms of subsidies
- Introduce further fee increases, such as the introduction of value-added tax
The FBP reforms come at a key time as Bahrain will undergo elections in November, the second since 2011, when protesters took to the streets demanding more democracy, Reuters reported. The government is aiming to have all the FBP measures approved by the end of 2018.
The Fitch Ratings report forecast that Bahrain will need around $3 billion of new funding every year in 2018-2020 just to cover its budget deficit and $7-8.5 billion per year to address exsting debt.
“The FBP targets are ambitious for Bahrain, in our view”, the report said, pointing out a number of challenges to its goals:
The government wants to reduce budgetary spending to around 20 percent of gross domestic product (GDP). Fitch pointed out that budgetary non-interest expenditure is already down 11 percent since 2014, which “may limit the scope for further reductions, even with the GCC loan helping Bahrain rein in a rising interest bill.” Fitch estimates that a figure of 23 percent of GDP in 2020 is more realistic.
The government aims to double non-oil revenue. This need has meant the introduction of VAT has now become a higher priority and on Sunday it was announced that Bahraini legislators had approved a draft law to introduce the new tax
“We now expect VAT to come into effect in 2020 instead of 2019, given the complexities involved. It could prove politically difficult to combine increased revenue collection from the private sector with prolonged expenditure restraint, even with what we expect will be a more government-friendly parliament after elections on 24 November,” Fitch said.
The oil price is also a key indicator for Bahrain. Fitch forecast that a price of $70 a barrel would narrow Bahrain’s deficit to 7.9 percent of GDP in 2018, from 12.5 percent in 2017. A price of $70 would narrow the deficit to 3.8 percent of GDP in 2020, but not eliminate it completely.
Bahrain needs a much higher oil price to balance its books than some of its neighbouring countries, as demonstrated by the International Monetary Fund’s latest data.
In its May regional outlook for the region the IMF calculated the breakeven point
for each of the Gulf Cooperation Council (GCC) countries, with Bahrain, Saudi Arabia, and Oman needing to hit $113, $87.9 and $77.1 respectively to stay in surplus, while the United Arab Emirates, Kuwait and Qatar only need $71.5, $48.1 and $47.1, respectively, to stay in the black.
“Looking ahead, I’m a bit more optimistic on the outlooks for Saudi Arabia and the UAE, but still quite cautious on Oman and Bahrain, as I think the latter will eventually be forced to rein in spending,” Jean-Paul Pigat, head of research at Lighthouse Research told Zawya by email last month.
However, further subsidy reforms and austerity measures could be difficult for the government to introduce, the Fitch report said: “Further reducing the bill for utility subsidies may be difficult while continuing to subsidise citizens' primary residences.”
(Writing by Shane McGinley; Editing by Imogen Lillywhite)
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