Dubai: Bahrain last week announced plans to raise the VAT rate to 10% from 5% from January 2022, which analysts say is a good move in its tax reform efforts.
“A restart of Bahrain’s Balanced Budget Program (PBF), including a VAT rate hike, could improve the country’s public finance trajectory,” Fitch Ratings said.
“We believe that progress with other fiscal measures would be necessary, in addition to the VAT increase, to bring the budget deficit back to balance, based on our current oil price assumptions.”
Fitch estimates that such a VAT hike could increase revenue by 1.5-2% of GDP.
Moody’s rating agency said the VAT increase marks a renewal of the tax reform momentum that is a prerequisite for Bahrain to secure continued financial support from its Gulf Cooperation Council (GCC) neighbors.
According to Moody’s, the additional VAT revenues will only partially solve the significant challenge the government faces in reducing its debt burden, which stood at over 130% of GDP (including central bank loans) to the end of 2020.
“Bahrain’s plans to double value added tax to 10% from January 1, 2022 are credit friendly. In addition to adding another 1.8% of GDP to public revenue, the implementation would mark a renewal of the momentum of tax reform, which we consider to be the prerequisite for increasing the GCC financial support program which is about to run out. in early 2023, ”said Alex Perjessy, senior analyst vice president at Moody’s
Elusive budget balance
Bahrain launched its Balanced Budget Program (PBF) in late 2018, aiming for a balanced budget in 2022, a goal Fitch now expects to achieve further.
The original PBF predicted that public debt / GDP without PBF would reach 106% of GDP, but would fall to 82% in 2022 with the reforms. He assumed an average oil price of $ 60 / barrel (bbl). The first steps in early 2019 included the introduction of VAT and a voluntary pension scheme.
However, the Covid-19 pandemic has deviated the PBF, disrupting activity and lowering oil prices.
Fitch expects government debt / GDP to rise to around 125% of GDP in 2021 (including central bank borrowing worth around 14% of GDP which the government does not include. not in its own debt figure). We expect the debt ratio to increase further in 2022-2023.
The 2021-2022 budget included some reforms, such as reducing electricity and water subsidies and reducing operating expenses such as administration and supply costs. Spending in the first half of 2021 was tight, down 4% year on year. The rebound in oil prices, meanwhile, helped increase fiscal revenues by 23% year-on-year in the first half of 2021.
Fitch’s latest forecast, which does not envisage any increase in VAT, forecasts a decrease in the budget deficit to 7.9% of GDP in 2021, from 16.8% in 2020.
“This implies that the public debt / GDP would continue to increase. We estimate that Bahrain’s balanced oil price remains above $ 90 a barrel, ”Fitch said.
Support for CCG
The initial PBF paved the way for a commitment from Gulf of Bahrain partners (Saudi Arabia, Kuwait and United Arab Emirates) to provide $ 10 billion in support loans over 2019-2023. Fitch believes that an increase in VAT would help ensure continued support for the current financial package, while a broader PBF restart would facilitate additional support from the Gulf GCC beyond 2023.
Fitch believes Bahrain, which faces a large amortization schedule, will need additional support from the GCC in the medium term, as external liquidity remains very tight and debt and debt service measures are weak .