Boosted by rising oil prices and increasing oil production, Bahrain’s short-term economic outlook remains positive, leading to a much higher GDP growth forecast of 4.4% for 2022, double the pace in 2021, a report said.

According to the latest Economic Insight report for the Middle East, commissioned by ICAEW and compiled by Oxford Economics, Bahrain’s positive outlook is underpinned by a 5.5% rise in the oil economy, outpacing an expected 4.1% growth in non-oil activities.

However, the country’s structural changes and fiscal consolidation efforts will slow the overall GDP growth to 2.1% in 2023-24, well below the 2010-19 average of 3.4% annually, the report said.

As Bahrain’s economy recovers from the effects of the Covid-19 pandemic, its GDP grew by 5.5% year-on-year (y/y) in Q1, representing the fastest quarterly growth since Q2 2014. The Kingdom’s non-oil sector grew by 7.8% in Q1, driven by the manufacturing sector, but is expected to slow in the coming quarters and into 2023 as high inflation bites into consumer incomes.

Bahrain’s oil sector growth will be driven by higher oil production, despite a decline in Q1. Since 2015, the annual real growth of Bahrain’s oil sector has only expanded once relative to the previous year, in 2019. Based on the current Opec+ agreement, Bahrain will see a modest increase in oil production in 2022 to 0.19 million barrels per day (b/d) from 0.17 million b/d.

This small increase, combined with elevated prices, will return the oil sector to growth in 2022 before stagnating again as the government continues its diversification efforts. The forecast is for oil production to expand by 5.8% in 2022, compared to 2.4% in 2021.

The rise of inflationary pressures and rate hikes by the US Fed will force the Central Bank of Bahrain (CBB) into more rate increases, beyond the 225bp cumulative increase in the key policy rate already this year. Inflation averaged 3.4% in H1, a level not seen since 2016, before rising to 3.9% in July. ICAEW expects inflation to average 3.9% this year after prices fell annually in both 2020 and 2021. Consumer spending is likely to be increasingly constrained going into 2023, leading to a sharp GDP growth slowdown to below 2% by 2024.

Mark Billington, ICAEW Managing Director, International said: "Oil continues to buffer Bahrain’s economy, but high inflation remains a headwind to non-oil activities. As the Kingdom works towards becoming the first non-oil economy in the GCC, more fiscal adjustment will be necessary to ensure fiscal sustainability and reduce reliance on external financing.”

Scott Livermore, ICAEW Economic Advisor, and Chief Economist and Managing Director, Oxford Economics Middle East, said: "The surge in oil prices and introduction of a 10% VAT is supporting Bahrain’s revenues and will help authorities come close to balancing the budget in 2022, two years earlier than the 2024 target set in the Fiscal Balance Programme. However, the Kingdom needs to be wary of a deficit return as oil prices fall back. Fortunately, ongoing GCC financial aid is helping Bahrain’s debt stay under 100% of GDP so it’s unlikely to create concerns for external financing.”

As of now, the CBB has sufficient reserves to maintain the currency peg with the US dollar and is likely to follow policy moves by the Fed closely so it’s not expected to have significant pressure to devalue the dinar.

The current account returned to surplus in 2021 at 6.7% of GDP, the largest surplus since 2013. ICAEW expects the higher price of oil exports and a continued resurgence of international travel to push this surplus above 10% in 2022. – TradeArabia News Service