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Bahrain’s near-term economic outlook remains positive, driven by higher oil prices and rising oil production, leading to a much higher 2022 GDP growth forecast of 4.4 percent, double the pace of 2021, a report said.
According to the latest Middle East Economic Insights report commissioned by ICAEW and compiled by Oxford Economics, Bahrain’s positive outlook is supported by a 5.5% growth in the oil economy, outpacing the expected 4.1% increase in non-oil activity.
However, the country’s structural changes and fiscal consolidation efforts will slow headline GDP growth to 2.1% in 2023-24, well below the 2010-19 average of 3.4%, the report said.
As Bahrain’s economy recovers from the impact of the Covid-19 pandemic, its first-quarter GDP grew by 5.5% year-on-year, the fastest quarterly growth since the second quarter of 2014. The country’s non-oil sector grew at 7.8% in the first quarter, driven by manufacturing, but is expected to moderate in the coming quarters and 2023 as high inflation eats into consumer incomes.
Growth in Bahrain’s oil sector will be driven by higher oil production despite a decline in the first quarter. Since 2015, the annual real growth of Bahrain’s oil industry in 2019 has only expanded once compared to the previous year. Under the current OPEC+ deal, Bahrain’s oil production will increase marginally to 190,000 barrels per day (b/d) in 2022 from 170,000 barrels per day.
This small increase, combined with higher prices, will see the oil industry return to growth in 2022 before stalling again as the government continues its diversification efforts. Oil production is expected to grow by 5.8% in 2022, compared to 2.4% in 2021.
Rising inflationary pressures and a rate hike by the Federal Reserve will force the Central Bank of Bahrain (CBB) to do more hikes on top of its key policy rate, which has already raised rates by 225 basis points this year. Inflation averaged 3.4% in the first half of the year, the highest level since 2016, before rising to 3.9% in July. ICAEW expects inflation to average 3.9% this year, after prices fell on average in 2020 and 2021. Consumer spending is likely to be increasingly constrained by 2023, leading to a sharp slowdown in GDP growth to below 2% by 2024.
ICAEW International Managing Director Mark Billington said: “Oil continues to buffer Bahrain’s economy, but high inflation remains a headwind for non-oil activity. As the kingdom strives to become the first non-oil economy in the GCC, more fiscal adjustment will It is necessary to ensure fiscal sustainability and reduce reliance on external financing.”
Scott Livermore, ICAEW economic adviser and chief economist and managing director for the Middle East at Oxford Economics, said: “Surge in oil prices and the introduction of a 10% VAT are supporting Bahrain’s revenue and will help the authorities to get closer to a balanced budget in 2022, more than fiscal 2022. The 2024 target set in the balancing plan was brought forward by two years. However, as oil prices fall, the kingdom needs to be wary of deficit returns. Fortunately, continued financial aid from the GCC is helping Bahrain’s debt stay below 100% of GDP , so this is unlikely to raise concerns about external financing.”
As of now, the CBB has enough reserves to maintain a currency peg to the U.S. dollar and is likely to closely monitor the Fed’s policy moves, so pressure on the dinar to depreciate is not expected to be significant.
In 2021, the current account returned to a surplus of 6.7% of GDP, the largest surplus since 2013. ICAEW expects higher oil export prices and a continued recovery in international travel to push the surplus to more than 10% in 2022. arab trade news agency
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