Bahrain economic growth in 2024 remains strong, but Fiscal Health challenges and rising inflation demand ongoing structural reforms

Bahrain’s economy is forecast to expand by 3 per cent in 2024, a signal of resilience as the Gulf nation implements vital fiscal reforms, according to the International Monetary Fund (IMF). The IMF’s latest projections also anticipate further growth of 3.5 per cent in 2025, underscoring Bahrain’s efforts to navigate both economic and geopolitical challenges.

The IMF credits much of this growth to the ongoing refinery upgrades in Bahrain’s manufacturing sector and a revival in private sector credit. These developments reflect the country’s ability to adapt to fluctuating financial conditions and the uncertain regional landscape. Despite the challenges, Bahrain’s economy performed robustly in 2023, achieving a 3 per cent growth rate. However, the IMF warns that fiscal pressures remain significant, especially with a widening deficit and rising government debt.

In its 2024 Article IV consultation, the IMF revealed that Bahrain’s overall fiscal deficit grew to 8.5 per cent of GDP last year, while government debt surged to an alarming 123 per cent of GDP. This 12 percentage point increase poses a serious risk to the country’s long-term financial health.

“Bahrain must prioritise a multi-year, pre-committed fiscal consolidation and reform package to ensure a durable downward trajectory for its government debt-to-GDP ratio,” said John Bluedorn, IMF’s mission chief.

Inflation and Economic Diversification

While inflation dipped to a mere 0.1 per cent in 2023, the IMF projects a rise to 1.2 per cent in 2024, eventually stabilising at 2 per cent over the medium term. This gradual increase in inflation is expected to accompany a major transformation in Bahrain’s economy. Non-hydrocarbon GDP is forecast to become a critical driver of economic activity, projected to account for 90 per cent of the country’s total economic output by 2029.

Signs of this shift are already visible. The growth of non-oil sectors led to a 1.3 per cent year-on-year increase in economic activity, lifting Bahrain’s economy to a value of 3.7 billion Bahraini dinars (£7.9 billion) in the second quarter of this year. According to the Ministry of Finance and National Economy, this diversification is vital for Bahrain’s future prosperity.

Over the medium term, the IMF expects Bahrain’s overall GDP growth to hover around 3 per cent, largely due to the expanding influence of the non-hydrocarbon sectors. However, despite these positive indicators, the IMF expressed concerns about Bahrain’s fiscal health. The organisation urged Bahrain to continue implementing structural reforms, such as increasing non-hydrocarbon revenues, curbing unnecessary expenditure, and rationalising subsidies.

Fiscal Challenges and Reforms

To address its widening fiscal deficit, Bahrain recently introduced a domestic minimum top-up tax under the Organisation for Economic Co-operation and Development (OECD) and G20 Inclusive Framework. While this step is seen as a positive move, the IMF stressed that more comprehensive measures are necessary to ensure long-term fiscal sustainability.

“Bahrain must sustain its fiscal efforts over several years, staggering them to smooth the adjustment process,” Bluedorn noted, emphasising the importance of balancing fiscal discipline with social welfare. Protecting vulnerable communities remains a priority as Bahrain advances its fiscal reforms.

The IMF also encouraged the Central Bank of Bahrain (CBB) to further develop the local currency bond market and enhance the non-bank financial sector’s role in the economy. The IMF anticipates that global monetary conditions will ease, mitigating the impact of fiscal consolidation on Bahrain’s growth. Nevertheless, the CBB must continue closely supervising the interconnectedness between banks and non-bank financial institutions to safeguard financial stability.

Additionally, the IMF highlighted the need to formalise a bank resolution framework, which would build on Bahrain’s history of sound financial supervision and regulation. This framework would help maintain the country’s financial stability in the face of economic pressures.

Sustainable Growth and Environmental Goals

Bahrain’s efforts to diversify its economy are essential not only for growth but also for sustainability. The IMF acknowledged Bahrain’s progress in expanding its non-oil sectors but called for further reforms to promote inclusive and sustainable development. These reforms should focus on improving human capital through education, addressing skill gaps, and enhancing access to finance for small and medium-sized enterprises (SMEs).

By boosting economic growth, these reforms would also help reduce Bahrain’s debt-to-GDP ratio, easing the fiscal burden in the long run. Bluedorn added, “Such measures will accelerate the fiscal adjustment process while supporting social equity.”

Environmental sustainability remains a key priority for Bahrain as well. The IMF praised the country’s efforts in renewable energy investment and reducing energy subsidies, both crucial steps in achieving Bahrain’s emissions reduction targets. The IMF encouraged the government to continue these initiatives to ensure a smooth transition to a greener economy.

In a further sign of progress, Bahrain recently implemented its National Summary Data Page, aligning with the IMF’s General Data Dissemination Standards. This advancement in data transparency will help national stakeholders and decision-makers monitor Bahrain’s economic progress more effectively, ensuring that future fiscal and economic policies remain well-informed.

While challenges persist, Bahrain is making steady strides towards economic diversification and fiscal reform. With continued efforts in both areas, the country looks set to maintain a trajectory of growth and stability in the years to come.