tional financial center has been muted BAHRAIN since the political climate tightened in Recent developments 2011, but new sources of growth are emerging in fintech and innovative financ- The consequences of lower hydrocarbon ing instruments. prices continued to weigh heavily on the The economy grew by an estimated 2.5 Table 1 2017 economy. Bahrain sustained an expan- percent in 2017, which was driven by an P o pulatio n, millio n 1.5 sionary fiscal stance in 2017, resulting in a expansion of non-hydrocarbon GDP at a GDP , current US$ billio n 34.5 double-digit deficit for the third year in a rate of 3.1 percent. A raft of project spend- GDP per capita, current US$ 23565 row (down to an estimated 13.2 percent of ing, ranging from an airport expansion to Scho o l enro llment, primary (% gro ss) a 101.2 GDP). Fortunately, due to slightly elevat- social housing developments, has lifted Life expectancy at birth, years a 76.9 ed global oil prices and lower spending on activity in the wider economy. The down- domestic subsidies, the budget deficit nar- side of relying on fiscal stimulus to gener- Source: WDI, M acro Poverty Outlook, and official data. Notes: rowed markedly. Although deficit spend- ate growth, however, has been manifested ing helped maintain economic growth in persistently high financing needs met (a) M ost recent WDI value (2015) within a range of 2-3 percent, it also drew via debt issuances, despite the sovereign down international reserves to a low level credit rating being well below investment of 1.2 months’ worth of imports and in- grade. creased general government debt to over Recently, infrastructure spending has 90 percent of GDP. been bolstered by the allocation of funds Bahrain has introduced a series of initia- under the Gulf Development Program – a tives aimed at fiscal consolidation. Reve- pledge by Bahrain’s neighbors in 2011 to Continued economic growth has been nue enhancing measures such as higher provide some US$10 billion in grants over tobacco and alcohol taxes, removal of sub- 10 years to boost investment in infrastruc- achieved despite low oil prices, but it has sidies on housing utilities, and govern- ture and housing. The government’s in- come at the expense of fiscal and external ment services fees were initiated. The in- vestment program is linked to an industri- stability. The exchange rate peg is a regu- troduction of VAT was postponed in the al strategy based on downstream energy- lar feature of debate given the perceived wake of public opposition, but is expected intensive sectors and digital development, later this year when there is greater assur- and hence is focused on aluminum sector, structural weaknesses. Despite recently ance about mitigation measures. Inflation utilities, roads, renewable energy and enacted austerity measures, Bahrain re- has risen in tandem with the lifting of telecommunications. mains the most vulnerable Gulf country subsidies and imposition of new taxes but Bahrain’s external position faces acute in the face of lower oil and commodity this is expected to be temporary. vulnerabilities which are mitigated by prices due to its limited savings and Financial sector assessments by the IMF implicit backstops from regional partners. and rating agencies indicate that the bank- Due to the drop in global oil prices since sharply rising debt levels, leaving it ex- ing sector has remained resilient with ade- late 2014, Bahrain has run continual cur- posed to financing risks. quate capitalization and liquidity levels as rent account deficits averaging nearly 4 regulation and supervision of the sector percent of GDP through the end of 2017. were strengthened by the Central Bank. As a consequence of this, paired with Growth in the balance sheet of the interna- large draws on its international reserves, FIGURE 1 Bahrain / Growth in GDP and its components FIGURE 2 Bahrain / Government balances Percent Percent of change GDP 5 35 30 4 25 20 3 15 10 2 5 0 1 -5 0 -10 -15 -1 -20 2014 2015 2016 2017 2013 2014 2015 2016 2017 2018 2019 Hydrocarbon GDP Non-Hydrocarbon GDP Real GDP Overall fiscal balance Total revenue Total expenditure Sources: Bahraini Authorities and World Bank staff estimates. Sources: Bahraini Authorities and World Bank staff estimates. MPO 1 Apr 18 the exchange rate peg has come under the forecast horizon once the OPEC+ deal pressure on international reserves and the significant pressure (visible in the 12- terminates at the end of 2018 and the new currency peg. Fiscal solvency and liquidi- month forward foreign exchange rate). 350,000 b/d offshore oil pipeline connect- ty risks remain high, despite the recent Proceeds from the US$3 billion bond from ing to Saudi Arabia is completed. successful public debt issuance in Septem- September 2017 were important to replen- Average inflation is expected to increase ber 2017. Key elements of the social con- ish reserves, which subsequently rose to a to 3.4 percent in 2018 due to a raft of one- tract—public employment and subsi- more than two-year high of US$3.4 billion off measures including the institution of dies—are unaffordable in this context. Yet (from US$1.4 billion in August). new tax measures and reduction of subsi- a key component of Saudi Arabia Vision Absolute poverty is believed not to exist dies, and then moderate to 2.4 percent in 2030—the liberalization of the entertain- in Bahrain, at least for Bahraini nationals. 2019. The current account deficit will par- ment sector—will undermine Bahrain’s Little comprehensive welfare analysis is tially narrow to 4.1 percent of GDP in 2018 appeal as a weekend destination for Sau- available due to restricted access to house- and then again to 3.5 percent of GDP in dis. Meanwhile, Brexit is likely to intensify hold survey data and limited capacity. 2019, driven by improved export perfor- competition among international financial Existing and planned measures on subsi- mance. General government debt is pro- centers. Some combination of more radical dy reform and taxation are likely to re- jected to near 100 percent of GDP in 2018 structural reform (which will need more quire more attention to mitigation of and reach nearly 107 percent of GDP in political consensus than exists at present) household level impacts. 2019, as debt issuances are foreseen to and explicit GCC financial support is like- continue. ly to be needed. Outlook Risks and challenges Economic growth is expected to moderate over the forecast period. Real GDP growth Despite efforts to diversify and boost non - projections have been revised down to 1.7 oil fiscal revenues, hydrocarbons account percent in 2018 and 2.1 percent 2019, as for approximately 75 percent of govern- low oil prices weigh on domestic demand ment revenues in Bahrain. Delays in im- and market uncertainties prevent the plementing proposed fiscal consolidation economy from performing at its full po- and structural reforms, or an unexpected tential. However, project spending is fore- decline in oil prices or wider market un- seen to increase thanks to multilateral and certainties could trigger additional sover- private sector commitments. In addition, eign rating downgrades making access to oil GDP is expected to expand again over external financing harder and intensifying TABLE 2 Bahrain / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2015 2016 2017 e 2018 f 2019 f 2020 f Real GDP growth, at constant market prices 2.9 3.0 2.5 1.7 2.1 2.1 Private Consumption 1.9 1.8 1.7 1.6 2.0 2.2 Government Consumption 0.3 -1.0 -1.9 -1.4 0.4 0.4 Gross Fixed Capital Investment -12.1 5.0 4.7 1.2 4.8 5.1 Exports, Goods and Services 1.3 2.5 3.0 3.1 2.0 2.2 Imports, Goods and Services -5.6 0.2 2.4 2.6 2.5 2.6 Real GDP growth, at constant factor prices .. .. .. .. .. .. Agriculture .. .. .. .. .. .. Industry .. .. .. .. .. .. Services .. .. .. .. .. .. Inflation (Consumer Price Index) 1.8 2.8 0.9 3.4 2.4 2.4 Current Account Balance (% of GDP) -2.4 -4.7 -4.5 -4.1 -3.5 -2.7 Fiscal Balance (% of GDP) -18.4 -17.8 -13.2 -11.5 -10.2 -8.8 So urce: Wo rld B ank, P o verty & Equity and M acro eco no mics, Trade & Investment Glo bal P ractices. No tes: e = estimate, f = fo recast. MPO 2 Apr 18 MPO 3 Apr 18