Press Release No. 24/445

IMF Executive Board Concludes 2024 Article IV Consultation with The Kingdom of Bahrain

November 27, 2024

Washington, DC: On November 22, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation^[1] with The Kingdom of Bahrain.

Despite tight financial conditions and heightened geopolitical uncertainty, Bahrain’s real GDP grew at 3 percent in 2023, while annual average CPI inflation fell to 0.1 percent from 3.6 percent in 2022. However, the fiscal position deteriorated, with the overall fiscal balance falling to –8.5 percent of GDP and gross government debt increasing to 123 percent of GDP. This marked a change from large improvements over 2021–22. The ratio of nonhydrocarbon revenues to primary recurrent expenditures (excluding extrabudgetary spending) remained slightly above its Fiscal Balance Program (FBP) target of 40 percent in 2023. Additional fiscal efforts are needed to put debt on a durable downward path. The 2023 current account stayed in surplus but down to 5.9 percent of GDP. Given the US dollar peg, the monetary stance has appropriately evolved with that of the Federal Reserve. Reflecting a tradition of sound financial sector supervision and regulation, the banking sector remains well-capitalized and profitable.

Looking forward, growth is anticipated to remain at 3 percent in 2024 and rise to 3.5 percent in 2025, with refinery upgrades in the manufacturing sector and a pick-up in private sector credit growth, related to easing of financing conditions, supporting greater private investment. Medium-term real GDP growth is projected at around 3 percent, driven by nonhydrocarbon GDP, accounting for close to 90 percent of the economy by 2029. CPI inflation is projected to rise to 1.2 percent in 2024, before steadily converging to 2 percent over time. However, uncertainty is high and downside risks large, including from potential escalation and expansion of regional conflicts, commodity price volatility, and greater geoeconomic fragmentation.

The authorities agree that fiscal efforts should continue, beyond the conclusion of the FBP this year, to bring government debt significantly down over the medium term. Additionally, they highlighted progress in continuing to improve the financial regulatory and supervisory framework, bolstering financial stability. They also emphasized their aims to continue diversifying the economy, increasing private sector employment, and further lifting female labor force participation. Finally, the authorities are committed to improving data quality and transparency, with the aim to eventually subscribe to the Special Data Dissemination Standards (SDDS).

Executive Board Assessment^[2]

Executive Directors agreed with the thrust of the staff appraisal. They commended Bahrain’s economic resilience and steady growth performance, supported by efforts to further diversify the economy toward the nonhydrocarbon sector. Amid elevated uncertainty and downside risks to the outlook, Directors emphasized the importance of a well‑designed fiscal adjustment plan, combined with competitiveness‑enhancing structural reforms, to reduce vulnerabilities, safeguard financial stability, and ensure external sustainability. 

Directors encouraged the authorities to intensify their fiscal consolidation efforts to durably put debt on a downward path. They underscored the importance of adopting a multi‑year fiscal and structural reform package that appropriately balances fiscal risks and growth and equity considerations. Directors recommended increasing nonhydrocarbon revenues through broadening the VAT base and introducing a broad corporate income tax, containing the wage bill, reducing extrabudgetary spending and bringing it into the budget, and reforming energy subsidies, while increasing targeted transfers to the most vulnerable and raising public investment.

Directors agreed that the exchange rate peg continues to serve Bahrain well as a monetary anchor and that the policy stance should continue to follow the U.S. Federal Reserve. They concurred that discontinuing the use of government overdraft at the central bank and putting in place a plan for its gradual repayment is key to bolster reserves, support the credibility of the peg, and reinforce the operational independence of the central bank.

Directors noted that the banking system remains sound and well‑capitalized. They encouraged continued close monitoring of financial stability risks and further strengthening the macroprudential toolkit. Directors welcomed the progress in implementing the 2017 FSAP recommendations and stressed the importance of continuing improvements to the bank resolution framework and to the regulatory and supervisory frameworks for non‑bank financial intermediaries. They also saw the merits of developing the local currency bond market to facilitate liquidity management and further deepen financial markets.

Directors welcomed Bahrain’s structural reform agenda, making Bahrain the most diversified economy in the region. They encouraged further efforts to improve labor market flexibility, increase female labor force participation, and leverage opportunities from regional integration and digitalization. Climate mitigation policies, including through a gradual phasing out of energy subsidies and additional investments in renewable energy, would help ease Bahrain’s climate transition and create fiscal space.

Directors commended the authorities’ efforts to improve the dissemination and quality of macroeconomic data and to meet the conditions for subscription to Special Data Dissemination Standard (SDDS). Continuing to leverage Fund technical assistance would be helpful in this regard.

It is expected that the next Article IV consultation with the Kingdom of Bahrain will be held on the standard 12‑month cycle.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.