Bahrain: Focus on boosting revenues

Shady Elborno - Head of Macro Strategy
Published Date: 14 October 2021

 

Bahrain is considering doubling its 10% value added tax to reduce its budget deficit and boost state revenues. According to parliamentary sources quoted in local and international media, amending the law on 5% VAT, which Bahrain introduced in 2019 as part of plans to fix its finances and increase non-oil revenues, is currently being discussed between the government and parliament. As parliament works to approve the law, policymakers are looking at ways to protect people with low incomes should the change be made according to the sources. Bahrain raised BHD 250m from VAT at 5% in 2019, but this declined to an estimated BHD 220mn in 2020 due the pandemic.  We have revised our 2022 budget deficit forecast down by 1.5pp to -4.0% of GDP on the assumption that parliament will approve the increase in the VAT rate to 10%.

Bahrain’s COVID-19 dynamics continue to improve, with one measure ranking it as second globally for its coronavirus response and recovery in September. In Nikkei's COVID-19 Recovery Index, Bahrain scored 72%, only one point behind Malta, the top scorer, and ahead of the UAE (71%) and Saudi Arabia (70.5%). The index ranks 121 countries and regions based on infection management, vaccine rollouts and social mobility, with a higher ranking indicating faster recovery.

Improving Covid-19 picture in Bahrain.

Source: Our World In Data

Bahrain’s economy grew 3.5% q/q and 5.7% y/y in Q2 21 according to press reports.  The oil sector contracted -2.4% y/y while non-oil the non-oil sectors grew 12.8% off the low Q2 2020 base, on the back of a recovery in the transport and hospitality sectors. We forecast 2021 GDP growth at 3.4% following a contraction of -5.8% in 2020.

The transport ministry will soon begin calling for bids to pre-qualify developers on phase 1 of Bahrain Metro, according to the Kingdom’s minister of transport. Phase 1 of the Bahrain Metro includes two lines with an estimated length of 29 kilometers, with 20 stations with two interchanges. The entire network of the electric driverless train system covers 109km and will be executed in phases. The system will have the capacity to transport 43,000 passengers per hour upon completion. The project is valued at USD 1.5-2.0bn and falls in line with the country’s long term mobility goals.

In mid-October, Bahrain launched the “Bahrain Global Sea-Air Hub”, the fastest regional multi-modal logistics hub in the region with only a 2-hour turnaround time for all containers, which would reduce average lead times by 50% compared to pure sea freight and reduce costs by 40% compared to pure air freight for goods transiting from Bahrain International Airport to Khalifa bin Salman Port and vice versa. The launch of the hub is seen as an important milestone for one of the key non-oil sectors (logistics) that Bahrain is seeking to develop.