IMF calls for Bahrain corporate tax as debt rises

• Bahrain suffers rating downgrade
• Government gross debt above 133% of GDP
• GDP growth expected to rise

Bahrain’s long-running struggle to contain its government debt has attracted calls for structural reforms and led to a rating downgrade.

Analysts say the downgrade underscores the urgency for Bahrain to tackle its growing debt burden and advance long-discussed fiscal reforms, even as the kingdom continues to rely on support from its Gulf neighbours to steady its public finances.

S&P Global Ratings lowered Bahrain’s sovereign credit rating one notch, from B+ to B, as it projected debt to grow to nearly 140 percent of GDP in 2028 from 118 percent of gross domestic product last year, amid lower oil prices and large fiscal deficits.

Bahrain credit ratings

This “will add further pressure to the government’s interest burden, which is among the highest of our rated sovereigns,” the agency said in a press release last week. 

The ratings agency maintained its “stable” outlook for the Gulf state’s finances because it expects continued support from other GCC member countries, especially Saudi Arabia.

International Monetary Fund staff separately visited the capital Manama last week and found still-rising government debt even in the face of “resilient” economic growth and inflation that grew “modestly” last year. 

Bahrain’s GDP expanded by 2.6 percent in 2024, according to an IMF press release on Monday. It is expected to further pick up pace, to nearly 3 percent this year and 3.3 percent in 2026, on the back of upgrades to oil refining infrastructure and well-performing tourism and financial services.

Nevertheless, the country’s fiscal balances worsened. The deficit hit 11 percent of GDP in 2024, and gross debt surpassed 133 percent of GDP. Both are on a trajectory that the IMF forecasts will continue unless action is taken.

Bahrain economic indicators

As Bahrain’s indebtedness increased, so has its debt repayment burden, according to AGBI calculations. 

“To bring debt down durably and reduce risks, the priority is to commit to a steady, multi-year fiscal consolidation package, with efforts appropriately staggered to smooth the adjustment, alongside structural reforms to boost growth,” said John Bluedorn, the IMF mission chief for Bahrain, in a statement. 

Bluedorn urged the Gulf state to introduce a “general corporate income tax” and cut down on energy subsidies while protecting vulnerable citizens through dedicated benefits.

“Structural reforms to boost labour productivity through human capital and digital infrastructure investments would contribute to growth and ease the necessary fiscal consolidation,” Bluedorn said.

Difficulties in identifying social spending that could be ripe for cutting without stoking “persistent” internal divisions have long hampered Bahrain’s ability to rein in its debt, according to S&P, which calculated that public salaries and subsidies account for 61 percent of total government outlays.  

“Also, in our view, policy responses are difficult to predict because of the government’s centralised decision-making,” the agency said.

Further reading:

• Tough decisions ahead for Bahrain as debt looms large
• Bahrain economy grows almost 3% in Q2
• Bahrain’s current account surplus shrinks on high debt servicing