VAT rise ‘could generate 2pc of GDP in revenue’

MANAMA: Bahrain’s plans to raise the VAT rate to 10 per cent from January 2022 could raise an additional 1.5pc-2pc of GDP in revenue, says Fitch Ratings.

According to the US-based rating agency, if the consumption tax is raised to 10pc and oil averages $60/barrel (bbl), Bahrain is estimated to generate a small primary surplus in 2023, putting debt/GDP ratio on a “mild downward path”.

Reacting to the reboot of Bahrain’s Fiscal Balance Programme (FBP), including a planned rise in the VAT rate,

Fitch said it could improve the trajectory of the country’s public finances.

The FBP was launched at end-2018, targeting a balanced budget in 2022 – a target which the agency now sees being achieved later.

Assuming an average oil price of $60/bbl, the initial programme projected government debt/GDP without the FBP would rise to 106pc of GDP, but would decline to 82pc in 2022 with the reforms.

The original FBP paved the way for a commitment from Gulf partners – Saudi Arabia, Kuwait and the UAE – to provide $10 billion in support loans over 2019-2023.

Initial steps at the start of 2019 included the introduction of VAT and a voluntary retirement scheme.

However, the Covid-19 pandemic blew the FBP off course, disrupting activity and pushing down oil prices.

Fitch expects general government debt/GDP to stand at around 125pc of GDP in 2021 (including borrowing from the central bank worth around 14pc of GDP that the government does not include in its own debt number).

Bahrain’s 2021-2022 budget included reforms such as reducing electricity and water subsidies and trimming operating expenses like administration and procurement costs.

Spending in the first half of 2021 (H1-2021) has been restrained, falling by 4pc year-on-year (YoY).

The rebound in oil prices has meanwhile helped to lift budget revenue by 23pc YoY in H1-2021. However, Fitch is forecasting deficits to remain around 8pc of GDP over the next few years, assuming oil prices fall back in 2022-2023 (to $54/bbl on average, from its forecast average of $63/bbl in 2021) and that the government implements some planned reforms.

The agency believes a VAT increase would help to ensure ongoing support from the current financial package, while a broader reboot of the FBP would facilitate further GCC support beyond 2023.



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