RIYADH

Bahrain needs to make significant spending cuts to restore stability to its budget and improve investor confidence as the smallest economy among Gulf Arab nations tries to manage the impact of lower oil prices, the International Monetary Fund (IMF) said.

The Washington-based lender said on Monday the drop in crude prices has largely offset “significant fiscal measures that were implemented,” causing the budget deficit and public debt in 2016 to stand at 18 per cent and 82 per cent of gross domestic product (GDP), respectively.

“A sizeable fiscal adjustment is urgently needed to restore fiscal sustainability, reduce vulnerabilities, and boost investor and consumer confidence,” the IMF said in a statement after concluding regular consultations with Bahraini authorities.

Bahrain, a close Saudi Arabia ally and the home of the US Fifth Fleet, has been more vulnerable to slumping oil prices than other Gulf Cooperation Council (GCC) states. The country’s 2016 budget deficit of 1.5 billion dinars ($4 billion), which is larger than its foreign exchange assets, spurred the government to tap both domestic and international markets to fund spending last year.

The central bank’s foreign exchange assets fell 11 per cent in January to 725.9 million dinars from December. Overall, they’re down 68 per cent from a peak of 2.24 billion dinars in November 2014, according to data compiled by Bloomberg.

More declines?

“We expect reserves to drop to about $1 billion by year-end on the financing of the currency account deficit,” said Carla Slim, Dubai-based economist at Standard Chartered. “This is well below reserve adequacy levels in the context of a fixed-exchange rate regime.”

The IMF said fiscal measures could include valued-added taxation and further rationalising of spending on subsidies and social transfers. “The wage bill, which is nearly 12 per cent of GDP and among the highest in the GCC, can be reduced in the near term by streamlining allowances and freezing nominal wages,” it said.

Economic growth is projected at 2.3 per cent in 2017, which will be “driven by strong infrastructure spending from GCC funds,” the IMF said.