Bahrain making efforts to improve its fiscal position

According to the IMF, Bahrain’s economy grew by 5.3% in 2013; however, this was expected to slow somewhat to 3.9% for the following year. One of the main challenges faced by the Bahrain government is how to reduce public spending, especially given downward pressure on oil prices in the latter half of 2014. In this respect, the government has been moving away from the counter-cyclical spending of recent years and is taking steps towards making expenditures more sustainable. An example of these efforts came in the third quarter of 2014, when spending on government services expanded by only 3% year-on-year, compared to overall economic growth of 5.1% for the period.

At the end of the Article IV Consultation mission to Bahrain in March 2014, IMF mission leader May Khamis said, “Fiscal adjustment must be a priority. The state budget deficit is expected to continue to rise in the medium term. Without additional fiscal measures, government debt is projected to increase and become an important source of vulnerability to the economy in the medium term.” The IMF report suggested a series of measures to address this – namely, a gradual re-targeting of subsidies to those on low incomes; controlling the growth of recurrent public sector spending with an emphasis on wages, goods and services; diversifying sources of fiscal revenue to reduce the impact of oil price shocks; and placing the pension fund on a more sustainable path.

New Subsidy Targets

Subsidies on gas, electricity and water, petroleum products and a limited range of foodstuffs are used to pass on a proportion of Bahrain’s oil wealth to its residents. The kingdom’s total subsidy bill for 2013 was BD1.28bn ($3.4bn), according to Bahraini MP Jasim Ali. The IMF argues that these funds could be more effectively targeted to alleviate suffering and poverty in specific segments of society, rather than as a universal benefit for the country.

In March 2013 the IMF published a paper on the use of energy subsidies in MENA, which found that half of all global energy subsidies were spent in the region. The paper said, “Whilst these subsidies provide some support to poor consumers, their benefits go mainly to the better-off. They also weigh on government budgets at the expense of much-needed investment in health care, education and infrastructure.” The report acknowledged that reining in subsidies may be a bitter pill for consumers to swallow and advocated for the careful planning and timing of reforms; clearly targeted cash transfers for those hit hardest; and a communications campaign that spells out the concerns about the effectiveness of subsidies and the need for reform.

Bahrain’s first attempt to reduce a subsidy on diesel in December 2013 led to an outcry in parliament and a last-minute reprieve from the prime minister, who claimed to be heeding the concerns expressed by politicians. Ali argues that the government would do well to look at the issue again, but with an initial focus on the gas subsidy, which accounted for 47% of total subsidy costs in 2013, and much of which is passed on to large corporations that use gas as a feedstock in manufacturing. Ali also says the country should heed the IMF’s advice to reconsider the ways in which subsidies are used, particularly in light of the country’s growing deficit. “Among other things, subsidies undermine Treasury revenues by charging lower-than-market prices for petroleum products on the one hand and compensating poultry importers on the other hand.” Many politicians in Bahrain also argue that the current subsidies pass on the benefits of the country’s oil wealth to expats in addition to citizens, further undermining their intended purpose.

Public Sector Spending

Although the citizens of many GCC countries are predominantly employed by the public sector, Bahrain prides itself on having a skilled workforce that operates in both the public and private sectors. According to statistics produced by the government’s pension agency, the Social Insurance Organisation (SIO), there were 582,141 people in the workforce in the third quarter of 2014 – 141,100 of which were Bahraini nationals. Of these, 38%, or 54,193, were working for the civil or public sector, while 62%, or 86,907, were employed in the private sector. In 2009 there were 53,418 Bahrainis in the civil sector, though this declined by 2% in 2010, to 52,524; by another 3% in 2011, to 50,865; and by a further 2% in 2012, to 50,057. However, between end-2012 and the first quarter of 2013, the workforce grew by 6%, with government payroll figures increasing to 53,007 before expanding by a further 1% in the second and third quarters, to stabilise at 54,047.

In its final accounts for 2012, when there were some 4000 fewer people on the government payroll, the Ministry of Finance reported that the total manpower bill for 2012 was BD1.2bn ($3.2bn) – up 20% over 2011, when it stood at BD1bn ($2.65bn). According to the SIO, in 2012 the total monthly salary bill for the civil sector was BD39.56m ($104.83m); however, by the fourth quarter of 2013, it had risen to BD42.48m ($112.6m), a 7.37% increase. These figures came on the back of a 15% general increase in the salaries of all government employees in 2011.

As Bahrainis live longer, the number of pensioners and their beneficiaries is growing. According to SIO figures, there were 23,057 people receiving state pensions in 2010. This rose to 32,776 by the fourth quarter of 2013 – a 52% increase in three years. Pension payments are paid out of contributions made by working expatriates and Bahrainis, with revenues currently sufficient to cover expenditures. The government has appointed an independent organisation called Osool to manage pension investments, which may help to increase returns on savings and thereby stave off any immediate need to raise the retirement age.

Diversifying Revenue Sources

Income tax is not a source of revenue for the Bahrain government, as it is not levied on workers. Combined revenue from other taxes stood at BD217.7m ($576.9m) in 2012, which represented 7% of total government revenues. Under the tax regime, the government collects fees from companies employing expatriate workers, diverting 80% of this revenue to Tamkeen – the agency tasked with training young Bahrainis to work in a variety of sectors and providing support to those setting up their own businesses in order to stimulate the small and medium-sized enterprise (SMEs) sector.

Since its inception in 2006 Tamkeen has helped some 30,000 SMEs, including 2500 in 2013. “The idea was to liberalise the labour market and give business owners the option to employ expats,” Mohammed Ali Bucheery, the vice-president of private sector support at Tamkeen, told OBG. “With these two objectives – human capital development and private sector support – our aim is to reduce the unemployment rate and to make Bahrainis an employee of choice.” Although the government exempted companies from paying these fees for employing expatriate workers in the immediate aftermath of the unrest in 2011, the fees were reinstated for all but micro-enterprises employing fewer than 10 people in September 2013.

Viewing the situation from the perspective of the private sector, Abdulla Bukhowa, the head of global markets for Bahrain at Standard Chartered, would like to see greater use of public-private partnerships and capital investment as a means to provide economic growth and employment. “We need projects that will sustain growth and create employment for generations, not just one-off projects,” he told OBG.

Boosting Oil & Gas

While the government of Bahrain has led the way in the Gulf when it comes to diversifying the economy and educating and training its workforce for a variety of new sectors, it has also been looking at ways to increase production of oil and gas, while at the same time reducing consumption.

On the supply side, according to the Bahrain Economic Development Board, the kingdom is hoping to have a liquefied petroleum gas terminal in operation by 2016, in addition to completing the expansion and modernisation of its Sitra refinery by 2017. Bahrain was also able to increase the capacity of its oil import pipeline from Saudi Arabia from 225,000 barrels per day (bpd) to 350,000 bpd, and is currently spending around BD50m-100m ($132.5m-265m) per well on exploratory deep gas wells.

In terms of reducing consumption, the Electricity and Water Authority – in conjunction with the UN Development Programme – is launching a Conservation Centre that will set policies to reduce the use of hydrocarbons and promote renewable energy and fuel-efficient buildings – steps it hopes will save 200m standard cu feet of natural gas per day.

The government has been very proactive in its efforts to improve its fiscal position. However, given that its break-even point is above $120 per barrel and the price of Brent crude was at $56 at year-end 2014, there is an increasing sense of urgency to tackle the country’s sizeable budget deficits.

Totalling BD410.1m ($1.1bn) in 2013, the deficit looks set to rise in 2014. With crude oil prices expected to remain low in the near term, decisions that were put off in the past have now become more pressing.