Introduction to Bahrain’s Economy
The International Monetary Fund (IMF) recently conducted its 2025 Article IV consultation with the Kingdom of Bahrain. Although the Bahraini authorities have chosen not to publish the Staff Report, the IMF has released key findings and recommendations. This article aims to provide an overview of Bahrain’s economic performance and the IMF’s assessment.
Economic Performance
Bahrain’s real GDP growth slowed to 2.6 percent in 2024 due to a contraction in oil output. However, the non-hydrocarbon sector expanded by 3.7 percent, driven primarily by financial services. Consumer price index (CPI) inflation rose modestly to 0.9 percent. Despite these positive developments, Bahrain’s fiscal position deteriorated, with the overall fiscal deficit increasing to 11 percent of GDP and gross government debt rising to 134 percent of GDP.
Fiscal Challenges
The government’s overdraft at the Central Bank of Bahrain (CBB) decreased by 8 percent through October 2025, while foreign exchange reserves increased by 11 percent. Nevertheless, these reserves remain low, covering only about two months of prospective non-hydrocarbon imports of goods and services. The 2024 current account surplus decreased to 4.8 percent of GDP. The banking sector remains profitable and well-capitalized, but private credit growth was weak.
Future Outlook
Looking ahead, Bahrain’s growth is expected to rise to 2.9 percent in 2025 and 3.3 percent in 2026, driven by a recovery in crude oil production and the expansion of refinery capacity. The non-hydrocarbon sector is projected to account for nearly 90 percent of the economy by 2030. Consumer prices are expected to remain flat in 2025, with CPI inflation gradually rising toward 2 percent over the medium term.
Executive Board Assessment
The IMF Executive Board commended Bahrain’s steady growth performance and efforts to diversify its economy. However, they emphasized the need for sustained medium-term fiscal consolidation to reduce debt and macro-financial vulnerabilities. The Board welcomed the authorities’ recently announced fiscal initiatives, including a corporate income tax and energy price reforms, but stressed that additional efforts are necessary to lower government debt over the medium term.
Recommendations
The IMF recommended that Bahrain reduce extrabudgetary spending, increase tax revenues, and reduce broad subsidies while targeting support to vulnerable households. Improving fiscal transparency, strengthening public financial management, and establishing a robust medium-term fiscal framework are also essential. The Board encouraged the development of the local bond market to facilitate liquidity management and deepen Bahrain’s financial markets.
Structural Reforms
The IMF emphasized the importance of structural reforms to boost medium-term growth and resilience. Upgrading human capital, investing in digital infrastructure, and deepening intra-GCC trade and investment will play key roles in achieving these goals. The authorities’ efforts to improve the quality and transparency of macroeconomic data were commended, and they were encouraged to incorporate the government’s overdraft at the central bank into public debt figures.
Conclusion
In conclusion, Bahrain faces significant fiscal challenges, including high debt and financing needs. While the country has made progress in diversifying its economy, sustained medium-term fiscal consolidation is necessary to reduce debt and macro-financial vulnerabilities. The IMF’s recommendations, including reducing extrabudgetary spending, increasing tax revenues, and improving fiscal transparency, are crucial for Bahrain’s long-term economic stability and growth. By implementing these reforms, Bahrain can ensure a more resilient and prosperous economy for its citizens.
