Fiscal Restructuring – Bahrain in Focus

Just as a physician examines the sick patient and recommends cure through medication so also there are several tools- fiscal and monetary, which are available to the policy makers and economists to solve the recurring maladies of an economy. These tools come handy during periods of weaknesses or heating up like lack of growth or price instability, unemployment, inflation etc.

In the Bahraini context, the dinar has been pegged to the USD at BD 0.376 since 1980. Bahrain as a small open economy, with significant volumes of imports and exports including capital inflows and outflows, would otherwise have been exposed to considerable exchange rate fluctuations. Yet the peg has completely divested Bahrain of any monetary policy independence. The economist or policy maker is checked from using monetary policy tools for curing maladies of the economy. They can only depend on the fiscal policy tools to correct any undesirable economic situation such as low and volatile oil prices leading to burgeoning budget deficits. The setting is akin to that of a doctor who can only prescribe a specific medication as the patient is intolerant to the rest.

So, what are the fiscal policy tools? These include government spending, taxation, transfer payments (unemployment benefits, government medi-care system, education allowances etc) that can be deployed to correct any imbalance in the economy. In the absence of direct taxation (e.g. income taxation), Bahrain’s policy makers are left only with government spending and transfer payments as potential toolkits of medication for any economic malaise.

According to Bahrain EDB sources, Bahrain’s fiscal deficit (difference between government spending and government revenues) was 3.3% of GDP in 2013 with forecasts of 4.5% in 2014 and 5.3% in 2015. This is primarily due to lack of diversification of government revenues away from oil and oil based products which, in turn, have suffered in recent times due to oil price volatility. There is a need for fiscal restructuring by tapping new and diversified sources of government revenues and by recovering losses made in the past. Bahrain’s growth has remained robust ranging from 4.5% in 2013 to forecasted growth of 3.6% in 2015 with the non-hydrocarbons sector growth rising from 3% in 2013 to a forecasted 4.5% in 2015, highlighting the prospects of increasing diversification away from oil and oil related sectors. Majority of subsidies and grants, representing 20% of the government’s expenditure amount, is supply based and not demand based. Such subsidies put a damper on production and consumption efficiencies and encourage misuse and misallocation of resources. The government plans to redirect subsidies to the poor, away from the rich and the expatriates, in the form of cash subsidies instead of current supply based ones. While most of electricity generation in Bahrain is privatized, yet the government still subsidizes electricity consumption heavily. Moreover, natural gas producing companies benefit from subsidies from government. To help ease the burden of state finances due to oil price lows, the government has additionally encouraged private participation in health care and education under governmental regulation and supervision.

Dr. Subhadra Ganguli currently works in Ahlia Universty as an Associate Professor in Economics. She holds a Ph.D in Economics from University of California in Riverside. Dr. Ganguli has experience in academic teaching, research and Quality Assurance for the last 20 years in India, USA and Bahrain. She has worked at the BIBF during 2004-August 2014 in various capacities. For comments and questions, please feel free to contact her at Subhadra.ganguli@gmail.com