Bahrain cutting budget deficit

The Bahraini government said it expects a deficit of about $1.88 billion.
Sunday 03/03/2019
Positive signs. Bahrain’s Minister of Finance and National Economy Sheikh Salman bin Khalifa  al-Khalifa speaks during a financial conference in Manama, February 27. (Reuters)
Positive signs. Bahrain’s Minister of Finance and National Economy Sheikh Salman bin Khalifa al-Khalifa speaks during a financial conference in Manama, February 27. (Reuters)

LONDON - Bahrain’s cabinet approved the 2019 budget with the target of reducing the deficit by 35% from last year’s levels. The Bahraini government said it expects a deficit of about $1.88 billion.

The 2020 budget projects deficit of $1.6 billion. The government said it looked to balance spending and revenues by 2022.

The current fiscal year budget should have been approved early in the year but was delayed because of the introduction of reforms related to $10 billion in financial assistance from Saudi Arabia, the United Arab Emirates and Kuwait.

The Bahraini News Agency (BNA) reported that the Bahraini cabinet approved budgets for fiscal years 2019 and 2020 and referred them to the Bahraini House of Representatives for discussion and ratification.

Analysts said the expected reduction in the budget deficit represents a significant shift in Bahrain’s fiscal affairs and adds a touch of realism to facilitate the implementation of structural reforms, including a value added tax (VAT) and significant changes in public spending.

The budget deficit last year was about $2.3 billion, a drop of about 33% from $3.4 billion in the 2017 budget.

BNA quoted a cabinet statement as saying: “The government has taken into account in drafting the budget plans to reach the balance point within the framework of the initiatives of the fiscal balance programme until 2022, without prejudice to basic services affecting citizens.”

The draft budget for 2019 estimated public revenues to reach $7.28 billion and public spending to total $8.62 billion. Given those figures, the budget deficit for 2019 should come to about $1.34 billion but the government did not say why it estimated the deficit gap at $1.88 billion.

In the draft budget for next year, expected revenues were estimated at $7.62 billion and expenditures at $8.71 billion.

Key items in the budgets include $1.78 billion for investment projects for each financial year, taking into account the Gulf Finance Programme.

Futures trading in international markets pushed the Bahraini dinar last June to its lowest level in 17 years and Bahrain’s international bond prices plummeted due to worsening fiscal imbalances.

The announcement of the Gulf initiative for Bahrain stabilised the sovereign bond yields as investors stated confidence in Bahrain’s economic future.

The cost of Bahrain’s borrowing from global financial markets fell sharply to 5.625% as the Bahraini sovereign fund issued new bonds, signalling renewed interest by investors in Bahrain’s debt instruments.

Analysts said the developments showed improved confidence in Manama’s economy by financial markets because of structural reforms implemented by Bahrain.

Bahrain’s borrowing cost is comparable to many other countries’ with a high credit rating and high levels of confidence, especially as the demand for Bahraini bonds is six times higher than the offer available.

Fund managers said the final pricing confirmed Manama’s success in the first test of international demand for Bahrain’s new debt instruments since the Gulf aid.

“Bahraini bonds are trading in a narrower range than those like it, in light of the aid package from the Gulf countries,” said Zeina Rizk, head of fixed income at Arqaam Capital in Dubai. The announcement of the package last June rebuffed market speculators.

Bahrain recently quickened the pace of economic reforms by passing a package of laws, notably the introduction of a VAT and pension reforms.

The 5% VAT is one of the key commitments under the Gulf Finance programme. The agreement provides for the imposition of a VAT in all Gulf Cooperation Council countries during the current year.

The tax is to promote and diversify non-oil financial revenues. It comes after the introduction in December of a tax, ranging 50-100%, on tobacco and its derivatives, soft drinks and energy drinks.

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