Bahrain’s economy to pick up in 2011: IMF

Bahrain’s economy grew by around three per cent in real terms in 2009 and is expected to grow by nearly four per cent in 2010 and five per cent in 2011, according to the International Monetary Fund (IMF).

A mission from the Washington-based IMF visited Manama in December and found that the Gulf Kingdom had managed the 2008 global fiscal crisis well, projecting a good outlook for its economy in the near term.

“The near-term outlook is favorable. Buoyed by the rebound in oil prices, the continuing recovery in the global economy, and fiscal stimulus, growth is expected to accelerate from the three per cent recorded in 2009 to four per cent in 2010 and further to five per cent in 2011. Inflation is anticipated to remain contained at around 2.5 percent next year,” said the mission, which went to the island nation during December 1-13 to conduct the 2010 Article IV Consultations.

“The economy of Bahrain has managed the global crisis well. The crisis produced a sharp fall in oil prices, a tightening of global capital markets, and declines in regional and local real estate markets. High initial levels of bank capital and sound prudential norms established by the Central Bank of Bahrain ensured the resilience of the financial system, without recourse to the extensive direct interventions seen in many countries.”

It said the country’s wholesale banking system started a deleveraging process at the beginning of 2009 with balance sheets continuing to be scaled back, reflective of a move to more conservative portfolios.

The IMF noted that managing the recovery and the exit from fiscal stimulus creates a number of policy challenges but added it also provides an opportunity to address underlying imbalances.

It said increased government borrowing in the last couple of years to finance fiscal deficits has boosted Bahrain’s debt levels and highlighted the need to rebalance the fiscal accounts in order to ensure the existence of sufficient fiscal space to respond to external shocks in the future.

“Reorienting spending away from untargeted subsidies—accompanied by compensatory transfers to needy households—would provide room for an increase in public investment as well as providing fiscal savings. Non-oil revenues are currently low, and broadening the revenue base would not only raise revenues but also provide insurance against fluctuations in oil prices.”

The IMF expected interest rates in Bahrain to remain low given the existing peg between the country’s currency, the dinar, the US dollar.

It said the CBB’s existing macro-prudential tools have worked well in preventing excesses from building up in the financial system and will continue to play a key role in insulating the economy from fluctuations in global capital markets.

“With private sector credit growth gradually recovering, this will provide additional support for growth. The current high level of excess liquidity within the banking system provides an opportunity to foster the growth of the domestic debt market and push out the yield curve. A further strengthening of debt management capacity would be beneficial. While Islamic products have been an important growth area, there remain areas of uncertainty in the legal and regulatory framework that should be remedied,” it said.

The IMF gave no figures on Bahrain’s debt but according to the central bank, it stood at around BD2.23 billion ($5.8 billion) at the end of November.

The debt is sharply higher than its level of about BD705 million ($1.8 billion) at the end of 2008, when the country’s coffers were flush with petrodollars after average oil prices climbed to their highest level of nearly $95 a barrel.

In the first half of 2010, the public debt soared by nearly 47 per cent compared with its level at the end of 2009 as the government pushed ahead with a fiscal expansion measures to mitigate the impact of the crisis.

The debt at the end of June last year accounted for around 25.6 per cent of the country’s 2009 gross domestic product of BD7.743 billion ($20.2 billion).

The debt included about 55 per cent in normal loans while the rest are in Islamic sukuk and other debt instruments, the central bank figures showed.

According to Bahrain’s Alayyam Arabic language daily, the debt at the end of June remains far lower than the maximum 60 per cent level within the requirements of the Gulf Monetary Union, which was launched early last year by Bahrain, Saudi Arabia, Kuwait and Qatar.

“The surge in the public dent was a result of lower oil prices and high budgetary expenditure with the main of keeping growth in the economy,” the paper said.

Bahrain has the most diversified economy in the Gulf region given its limited crude and gas resources. Its other key sources of income are taxes, tourism, petrochemicals and aluminium exports.

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