(Bloomberg) -- Bahrain should consider implementing corporate income tax to shore up its finances as rising interest rates hinder its ability to borrow, the International Monetary Fund said.
“Notwithstanding notable measures implemented since 2015, a credibly large fiscal adjustment is a priority,” the IMF said in a report dated May 30. “The implementation of a value-added tax, as planned, would be important. Additional revenue measures -- including consideration of a corporate income tax -- would be welcome.”
Bahrain was one of the hardest-hit Gulf economies after oil prices began falling in 2014, with authorities seen slower to react than countries such as Saudi Arabia. Even as oil prices recovered this year, the country’s debt risk, as measured by five-year credit default swaps, climbed to a 2016 high of 385 basis points this month, according to CMA data compiled by Bloomberg.
“Changing global risk sentiment could prove a headwind,” Carla Slim, an economist for Standard Chartered Plc in Dubai, said in an email. The country needs “further issuance to cover the 2018 fiscal deficit” as rising interest rates makes borrowing more expensive, she said.
Bahrain has been borrowing regularly from the international debt market, but had to shelve a sale in March because investors sought higher yields. Slim said it needs to issue again to cover a budget shortfall in 2018.
Last year, Bahrain was said to ask Gulf allies for financial assistance as it sought to replenish its foreign-exchange reserves and avert a currency devaluation. Central bank Governor Rasheed Al-Maraj said this month that the country has enough foreign reserves to maintain its currency’s peg to the dollar.
The central bank’s foreign assets in March dropped to the lowest level in seven months, before recovering in April.
Other key points from IMF staff visit to Bahrain in May:
- Public debt increased to 89 percent of gross domestic product last year, while the current-account deficit remained unchanged at 4.5 percent
- Reserves remain low, covering only 1.5 months of prospective non-oil imports at end-2017
- Consideration should be given to better targeting subsidies and addressing the large wage bill
- Reforms to strengthen the fiscal framework, including by operationalizing the debt management office, are crucial
- Growth is projected at 3.2 percent in 2018, with a recovery in oil production, continuation of GCC-funded projects, and rising refinery and aluminum production capacity
- Fiscal deficit seen at 11 percent of GDP in 2018, down from 14 percent in 2017
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