Blog Post

Significant disruptions related to COVID-19 compounded by a sharp fall in oil prices weighed heavily on Bahrain’s economy in 2020. Fiscal and external deficits worsened, reversing the narrowing path observed in 2019. Widespread access to the vaccine, higher oil prices, and commitment to implement policies under the Fiscal Balance Program, particularly those pertaining to tackling budget rigidities and providing financial support to the most vulnerable, will improve the outlook. Downside risks arise from the further resurgence of COVID-19 outbreaks, volatility in hydrocarbon prices, and delays in fiscal reforms.

Recent Developments
The COVID-19 crisis and ensuing oil price slump have highlighted the vulnerability of the country’s over-reliance on oil exports for non-oil growth and fiscal revenues. Even prior to the pandemic, lower oil prices since 2014 have generated sizable fiscal and external imbalances and resulted in large financing needs and borrowing costs. The authorities responded by announcing the Fiscal Balance Program (FBP) in 2018 supported by a US$10 billion commitment from GCC peers, which aims to achieve a balanced budget by 2022. While fiscal reforms under the FBP helped to narrow the fiscal deficit prior to COVID-19, protracted low oil prices and large off-budgetary spending kept the fiscal deficit over 9% of GDP in 2019.

Outlook
The outlook for Bahrain hinges on the uncertainty related to the pandemic, the effectiveness of the vaccine, the evolution of global oil markets, and the reforms process. Economic growth is expected to gradually rebound to 3.3% in 2021, underpinned by the rebound in non-oil activity as the rapid rollout of the vaccine will boost the sectors most impacted by the pandemic. Growth is projected to remain modest at an average of 3% over the medium term as fiscal austerity measures will act as a headwind to post-pandemic catch-up.

In the absence of structural reforms, the fiscal deficit is projected to remain sizable at 11% of GDP in 2021 amidst a modest recovery in oil prices. In the aftermath of the pandemic, steadfast fiscal reforms and better-targeted subsidies under the FBP, accompanied by the development of new oil and gas resources will gradually narrow the fiscal deficit. However, the debt to-GDP ratio is expected to increase to over 133% in 2021, and to remain elevated in the forecast period implying still large financing needs. Large current account deficits are likely to persist in 2021-23 albeit at slightly moderated levels thanks to modest oil price gains