IMF projected inflation will rise to 1.2% in 2024 and gradually stabilize at 2% over the medium term Non-hydrocarbon GDP is projected to become a cornerstone of Bahrain’s economy RIYADH: Bahrain’s economy is on track for growth, with gross domestic product expected to expand by 3 percent this year and 3.5 percent in 2025, according to the International Monetary Fund. The growth, driven by refinery upgrades in the manufacturing sector and a revival in private sector credit, underscores the country’s resilience amid significant economic and geopolitical challenges, the IMF said in a statement. Following its 2024 Article IV consultation, the IMF said Bahrain’s showed strong economic performance in 2023, achieving a 3 percent growth rate despite tight financial conditions and regional geopolitical uncertainty. It added that fiscal challenges persist, with the overall deficit widening to 8.5 percent of GDP last year, and government debt surging to 123 percent of GDP, a 12 percentage point increase. “To put government debt to GDP onto a durable downward path, a multi-year and pre-committed fiscal consolidation and reform package is the policy priority,” said John Bluedorn, the IMF mission chief. The financial agency projected that inflation, which fell to a low of 0.1 percent in 2023, will rise to 1.2 percent this year and gradually stabilize at 2 percent over the medium term. Non-hydrocarbon GDP is projected to become a cornerstone of Bahrain’s economy, expected to account for 90 percent of total economic activity by 2029. The shift is already evident, with growth in Bahrain’s non-oil sectors contributing to a 1.3 percent year-on-year increase, bringing the economy to 3.7 billion dinars ($9.8 billion) in the second quarter of this year, according to the latest report from the Ministry of Finance and National Economy. The IMF’s forecast suggested that over the medium term, overall GDP growth will remain around 3 percent, driven largely by the sectoral shift. While growth prospects remain positive, the IMF said Bahrain’s fiscal health poses a significant challenge. It called on the need to continue structural reforms, including raising non-hydrocarbon revenues, cutting unnecessary spending, and rationalizing subsidies. The recently introduced domestic minimum top-up tax under the Organization for Economic Co-operation and Development/G20 Inclusive Framework is seen as a positive step, but more comprehensive measures are needed. “Additional steady fiscal efforts over multiple years, appropriately staggered to smooth the adjustment, remain necessary,” Bluedorn added. He stressed the importance of balancing fiscal sustainability with social equity, ensuring that vulnerable groups are protected as Bahrain moves forward with these fiscal adjustments. The Central Bank of Bahrain has closely followed the policy stance of the US Federal Reserve. The IMF anticipated that the expected easing of global monetary conditions would mitigate the impact of fiscal consolidation on growth. The IMF also recommended that the CBB continue developing the local currency bond market and enhancing the role of the non-bank financial sector, while maintaining close supervision of the interconnections between banks and non-banks. “Formalizing and implementing a bank resolution framework would build on a tradition of sound financial sector supervision and regulation and help safeguard financial stability,” said Bluedorn. Bahrain’s economic diversification efforts are another key focus. The IMF acknowledged the progress made but urged further reforms to boost inclusive, sustainable growth. These include expanding programs to enhance human capital, addressing skill gaps, and improving access to finance for small and medium-sized enterprises. “By raising growth, these measures would also hasten the decline in the debt-to-GDP ratio and ease the fiscal adjustment,” Bluedorn added. The fund also stressed the importance of Bahrain’s environmental policies, urging the government to continue investing in renewable energy and gradually reducing energy subsidies. The steps will support Bahrain’s emission reduction goals and help ensure a smooth energy transition. The global body welcomed the recent implementation of the National Summary Data Page, which aligns with the IMF’s General Data Dissemination Standards. According to the IMF, these improvements in data dissemination will help national decision-makers and stakeholders better monitor Bahrain’s economic and financial progress.