Dubai: Bahrain’s economy is expected to slow further in 2016 and 2017, weighed down by weak investor sentiment and fiscal adjustments, with financial outflows expected to continue, according to the International Monetary Fund (IMF).

The fund expects Bahrain’s fiscal deficit to touch 19.5 per cent of gross domestic product (GDP) this year and sees it remaining high over the medium term, despite measures to ensure fiscal sustainability, according to the IMF’s latest Article IV Consultation paper on the Gulf country.

The Gulf country has seen revenues take a hit from falling oil prices, with its GDP slowing to an estimated 3.2 per cent in 2015 from 4.5 per cent the year before.

“Fiscal and external buffers are limited and vulnerabilities rose,” the IMF said in the paper. “Consumer and investor sentiment weakened.”

The country’s current account deficit is projected to reach over 8 per cent of GDP this year, before narrowing gradually while inflation is expected to register a modest increase – driven by an increase in energy prices in the country but “easing over the medium term with weak economic activity containing the pass-through to wages.”

The IMF urged Bahrain to address impediments to private investment if the Gulf nation is to achieve diversified and sustainable growth, and stressed the importance of a fiscal contingency plan and a strong debt management strategy.

While hailing the reforms undertaken by Bahrain to safeguard its macro-economic stability, the IMF stressed that “additional efforts are needed to further reduce the fiscal deficit, while continued reforms to diversify the economy should strengthen the country’s growth prospects.”

The fund added that “additional sizeable and front-loaded fiscal adjustment is needed to put debt on a downward trajectory over the medium term and rebuild fiscal space over time,” and urged the Gulf country to “further reduce energy subsidies by replacing them with targeted transfers.”

It also called for fiscal prudence as regards current expenditure, including the country’s wage bill, and recommended steps to protect capital spending, in addition to efforts to raise the country’s non-oil revenues such as the introduction of value-added tax.

Bahrain’s financial sector was given a clean bill of health, with the IMF saying “…the banking sector remains well capitalised and liquid.”

The IMF commended the sector’s strong liquidity and capital buffers as well as efforts by the Central Bank of Bahrain to strengthen the regulation and supervision of the sector.

The fund, however, urged monetary authorities to “to further enhance supervision, including for Islamic banks and cross-border activities, and have a contingency plan for liquidity support.”