The Gulf country decided to raise the VAT after detailed spending and revenue review, as the government looks for ways to rebalance its finances without disturbing the economy in recovery mode. As estimated by the International Monetary Fund (IMF), Bahrain’s budget deficit will contract by half this year after oil prices decrease and the Covid-19 pandemic boosted it to a record 18 percent of economic output in 2020.

Last year, Bahrain’s economy contracted by 5.4 percent as the pandemic hurt vital sectors like energy and tourism. The small Gulf state has accumulated a considerable amount of debt since the 2014-2015 oil price shock. In 2018, the country received a $10 billion financial aid programme from its neighbouring countries that helped them avoid a credit crunch.

Bahrain introduced its 5 percent VAT law in 2019 as a part of its plans to fix its finances and increase non-oil revenues, and currently, it is being discussed between the government and parliament as to how it can be amended.

Sources mentioned that it is imperative that the parliament approves such a change in the law as the government was trying to find ways to protect people with low incomes in its country.

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The contraction is mainly due to the restrictions on travel and other preventative measures to counter the spread of the novel coronavirus.

According to the report, the oil sector recorded growth at an annual rate of 1.8 percent at constant prices, driven by an increase in oil and gas production by 0.5 percent and 12.5 percent, respectively, although growth declined in current prices by 11.5 percent.,

The non-oil sector GDP, on the other hand, registered a decrease of 1.7 percent at constant prices and 4 percent at current prices.

According to media reports published earlier this month, the economy of Bahrain will contract by 3.6 percent this year.

Speaking during a webinar organised by the International Monetary Fund (IMF) and Al Iktissad Wal Aamal Group, Mr Al Maraj, who is the governor at the Central Bank of Bahrain (CBB), said he was largely in agreement with the IMF’s assessment of -3.6 GDP growth for the kingdom this year.

“All measures should be embedded in a medium-term fiscal framework and transparently managed and recorded to mitigate fiscal risks, including loans and guarantees that do not have an immediate effect on government debt and deficits,” he said.

The webinar also saw participation from IMF director of the Middle East and Central Asia Department Dr Jihad Azour, Saudi Arabian Monetary Agency Governor Dr Ahmed AlKholifey and Majid Al Futtaim Holding chief executive Alain Bejjani as panelists.

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