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Bahrain to Hike VAT After Saudi Arabia in Bid to Cut Deficit

·3-min read

(Bloomberg) -- Bahrain plans to double its value-added tax to 10%, the Gulf’s highest rate after Saudi Arabia, in a bid to boost state revenue and curb one of the region’s widest budget deficits.

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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 News. It isn’t clear when the higher VAT rate will be implemented.

Saudi Arabia tripled its VAT rate to 15% last year to bolster state revenue when oil prices slumped. The United Arab Emirates and Oman impose a 5% 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 $10 billion bailout package pledged by its wealthier neighbors 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 in 2020 as the government focused on helping the economy weather the double shock of Covid-19 and low oil prices.

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

Bahrain Puts Economic Recovery Ahead of Boosting Budget Revenue

“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 growth with improving its finances. Pandemic stimulus introduced by the government, including doubling the liquidity support fund to 200 million dinars ($530 million), 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.

A statement published Sunday on the Ministry of Finance and National Economy’s website confirmed that the government will delay its balanced budget target until 2024 and was considering raising VAT, but didn’t provide details.

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 U.A.E., which have sold off stakes in assets including oil and gas pipelines as a way to bring in foreign investors and monetize existing assets.

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

In July, the IMF urged Bahrain to do more to get its finances in shape. Once it recovers from the economic downturn triggered 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.

(Updates with finance ministry confirmation in paragraph 8)

©2021 Bloomberg L.P.

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