Bahrain needs a comprehensive package of reforms to reduce its fiscal deficits over the medium term, the IMF said, as the island kingdom seeks to secure crucial support from rich neighbours to avoid a currency devaluation.
“Despite planned fiscal consolidation measures, fiscal and external deficits are projected to continue over the medium term, due to the large and growing interest bill,” IMF’s Executive Board said in a report on Sunday.
“Public debt is expected to increase further over the medium term and reserves are projected to remain low,” it added.
Bahrain, one of the most vulnerable Gulf Arab economies to lower oil prices, confirmed last month that it was in talks with Saudi Arabia, the UAE and Kuwait for support that would help reduce ballooning debt and shore up foreign-exchange reserves.
The country hired investment bank Lazard Ltd. to advise on how to repair its strained public finances, people with knowledge of the matter said earlier this month.
The IMF emphasised the need to “introduce direct taxation, including a corporate income tax, while containing the public wage bill and targeting subsidies to the poorest” and said Bahrain’s exchange rate peg to the dollar “remains appropriate for the economy.”
The IMF said it looked forward to the newly established debt management office to develop a contingent financing strategy to mitigate financing risks and costs.
“Delays in implementing a “credible fiscal plan and changes in market sentiment as global financing conditions tighten present downside risks.”