Boosted by rising oil prices and increasing oil production, Bahrain’s economy is set to grow at 4.4 per cent this year, double the pace in 2021, a new study says.

The latest Economic Insight report for the Middle East, commissioned by Institute of Chartered Accountants in England and Wales (ICAEW) and compiled by Oxford Economics, reveals a positive short-term economic outlook for the kingdom.

According to the Q3 report, Bahrain’s positive outlook is underpinned by a 5.5pc rise in the oil economy, outpacing an expected 4.1pc growth in non-oil activities.

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

As Bahrain’s economy recovers from the effects of the Covid-19 pandemic, its GDP grew by 5.5pc year-on-year in Q1, representing the fastest quarterly growth since Q2 2014.

The kingdom’s non-oil sector grew by 7.8pc 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, the kingdom will see a modest increase in oil production in 2022 to 0.19m bpd from 0.17m bpd.

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 5.8pc in 2022, compared to 2.4pc 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 3.4pc in the first half this year, a level not seen since 2016, before rising to 3.9pc in July.

ICAEW expects inflation to average 3.9pc 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 GDP growth slowdown to below 2pc by 2024.

Commenting on the findings, ICAEW International managing director Mark Billington 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.”

According to ICAEW economic advisor and Oxford Economics Middle East chief economist and managing director Scott Livermore, the surge in oil prices and introduction of a 10pc 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 100pc of GDP so it’s unlikely to create concerns for external financing,” he added.

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 6.7pc 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 10pc in 2022.

avinash@gdnmedia.bh

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