Bahrain plans to double VAT in bid to curb deficit

Bahrain plans to double its value-added tax to 10 per cent, the Gulf’s highest rate after Saudi Arabia, as it seeks to boost state revenue and curb one of the region’s widest budget deficits.

The Gulf’s smallest economy is seeking ways to cut spending and bring its budget back into balance by 2024, a delay to the previous target, without undermining a fragile recovery, an official close to the government told Bloomberg. It isn’t clear when the new VAT rate will be implemented.

Saudi Arabia tripled its VAT rate to 15 per cent last year to bolster state revenue while oil prices slumped. The UAE and Oman impose a 5 per cent VAT under a common 2018 framework by the six-nation Gulf Cooperation Council bloc.

Kuwait and Qatar have yet to implement the tax.

Bahrain is under fiscal strain despite a $10bn bailout package pledged by its wealthier neighbours in 2018. That package came under the condition that Bahrain implement fiscal reforms to rein in its budget deficit. The aim was to balance the budget by the end of 2022. That timetable had to be put on hold last year as the government focused on helping the economy weather the double shock of Covid-19 and a fall in oil prices.

Bahrain’s budget shortfall is projected to drop to 9.1 per cent of gross domestic product this year compared with 18.3 per cent of GDP in 2020, according to the International Monetary Fund.

“Across the Gulf, government revenues need to be diversified and VAT is a good candidate for doing so,” said Scott Livermore, chief economist for Oxford Economics Middle East in Dubai. While “the urgency is greater in some countries than others,” governments “will observe keenly before assessing whether it is a good opportunity to do the same,” he added.

The Bahraini official said the government considered a range of spending and revenue measures as it sought a way to balance economic growth and improving its finances. Pandemic stimulus introduced by the government, including doubling the liquidity support fund to BD200m ($530m), central bank-enabled loan deferrals, reduced reserve requirements for banks and relief on utility bills, had helped to get the economy back on track, he said.

The country may also look at selling stakes in some of its energy and infrastructure assets as a way to raise new sources of income, Oil Minister Mohammed bin Khalifa Al Khalifa said in an interview with Bloomberg in May. A similar strategy has already been pursued by Saudi Arabia and the UAE, which have sold off stakes in assets including oil and gas pipelines as a way to bring in foreign investors and monetise existing assets.

Like many other countries, economic growth is bouncing back as Bahrain emerges from impacts of the pandemic. Real GDP growth reached 5.7 per cent year-on-year in the second quarter while real non-oil growth hit 7.8 per cent during in that same time.

In July, the IMF urged Bahrain has to do more to get its finances in shape. Once it recovers from the economic downturn instigated by the coronavirus pandemic, the island nation will likely need “an urgent fiscal adjustment,” Ali Al-Eyd, the IMF’s Bahrain mission chief, said in an interview with Bloomberg.

“Whether that counts with Gulf Cooperation Council support – which might help facilitate that adjustment – or not, that’s still the bottom line,” he said at the time.