Bahrain fastest growing economy in GCC says World Bank report

 Bahrain is estimated to be the fastest growing economy in the GCC this year at 3.5 per cent, with the six-nation bloc posting an aggregate growth rate of 2.6pc, says the World Bank in its latest report.

The latest issue of the World Bank Gulf Economic Update (GEU) titled ‘Seizing the Opportunity for a Sustainable Recovery’, has forecast the country’s real GDP growth dipping slightly to 3.2pc next year and 2.9pc in 2023.

Analysis by the World Bank says the region’s robust recovery, which is due to stronger oil prices and the growth of non-oil sectors, will accelerate into 2022 as Opec+ mandated oil production cuts are phased out and higher oil prices improve business sentiment and attract additional investment.

The GCC economies contracted by 4.9pc in 2020 as a result of the compound shock of the spread of Covid-19 and countermeasures, and the decline in global oil prices.

Overall, the output cost of Covid-19 in the GCC is estimated at almost $120 billion, a number estimated by comparing the region’s forecast GDP level in 2020 with a scenario where there was no pandemic.

This corresponds to a loss in growth of 7.3pc relative to the World Bank’s projections in 2019.

Nevertheless, the rapid roll-out of Covid-19 vaccines coupled with a recovery in global trade, rising oil production and higher oil prices have led to the upward adjustment in the real GDP projections, the report says.

Economic growth returned in Q2–2021 in Bahrain after a contraction in Q1–2021, mainly due to a low base effect.

The non-oil sector led the recovery (7.8pc in Q2), specifically the transportation and hospitality sectors.

However, the oil sector continued to weigh on overall growth, declining 2.4pc in Q2–2021.

With the increase in oil prices seen in H2-2021 this is likely to be reversed by the end of the year.

Official figures for the first half of the year indicate that Bahrain’s revenues increased by 23pc (year-on-year) primarily due to a 33pc increase in oil revenues.

Other gains are related to non-oil revenues which increased by 4pc mainly on the back of VAT proceeds introduced in 2019.

This has helped the fiscal deficit to narrow to 3.7pc of GDP in H1–2021, which may help to bring the total debt slightly down by end-2021.

As a result, the government debt is expected to slightly decline by 3.5 percentage points of GDP in 2021.

Moreover, authorities are planning to double the VAT to 10 per cent in a bid to boost revenues and support fiscal sustainability by 2024.

High frequency data disclose that Bahrain’s trade deficit slightly narrowed to 1pc of GDP in Q2–21, as the value of exports increased by 75pc (year-on-year) driven by hydrocarbon exports revenues.

These favourable oil market conditions have shrunk fiscal and external imbalances as export earnings recover.

However, the outlook in the medium-term is subject to risks from slower global recovery, renewed coronavirus outbreaks, and oil sector volatility.

The report focuses on addressing the wage bill in the GCC — the amount of government spending devoted to the salaries and benefits of state employees.

Well-paid, public sector jobs are part of the region’s social contract, as well the free health care, education, social security benefits, and subsidised housing and utilities which citizens are often also offered.

“With high population growth and limited options in the private sector, the wage bill has become unsustainable in some GCC countries, as it is a large part of government spending and of the economy overall,” said Issam Abousleiman, World Bank regional director for the GCC.

“Given their improved fiscal situation, this is an opportune time for GCC governments to accelerate their reforms agenda and reach the goals they set for themselves.”

According to the report, the average GCC wage bill over the past two decades has exceeded the Organisation for Economic Co-operation and Development (OECD) average.

Many GCC countries have public sectors that are well within OECD norms size-wise, in terms of the numbers of employees.

However, public servants are paid a wage premium of between 50–100pc, which results in a high wage bill relative to the countries’ total spending and GDP.

Despite the oil price crash, spending on the wage bill and the numbers of people employed in the public sector have both risen inexorably upwards.

These high wage bills are adding excessive pressure to GCC budgets, especially in countries with fewer resources and limited fiscal buffers.

In consequence, most are either introducing or expanding their tax bases, trimming back benefits, and exploring early retirement options for some staff.

Rather than providing a prescriptive solution in their report, World Bank economists highlight some of the options adopted by other countries and suggest GCC countries reach consensus among stakeholders before moving forward.




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