Summary: Bahrain’s economy continues to face significant challenges; a Bahraini company takes a stake in Las Vegas real estate; and a bipartisan appeal from US senators urges the Secretary of State to call the regime to account for human rights abuses.
Bloomberg, quoting an unnamed official, has said that Bahrain will hike VAT from 5% to 10% in an attempt to cope with a rising tide of debt. Such a step, if taken, will confirm that the government is walking a tightrope in attempting to keep a modest economic recovery moving forward while trying to contain a public debt load that last year stood at 133% of GDP.
James Swanston a MENA economist with London’s Capital Economics emerging markets team told Arab Digest that the decision is a positive sign that the government is taking debt reduction seriously. “Bahrain was slow to act but this step should help to reduce the deficit.” He noted that higher oil prices, with Brent currently at US$80, has given the government some breathing space. But with a US$1.5 billion Eurobond payment coming due in July 2022 concerns about financing the debt remain.
Fitch Ratings in commenting on the VAT hike said that it could raise an additional 1.5% – 2% of GDP in revenue. In 2018 the government was bailed out with a US$10 billion GCC recovery fund backed by Saudi Arabia, Kuwait and the UAE. The loan is tied to a commitment to achieve a fiscal balance by 2023. The Fiscal Balance Programme (FBP) was knocked sideways by COVID and the collapse in oil prices. Still Bahrain’s GCC backers want to see clear evidence the government is serious about managing its debt obligations. Hence the decision to double VAT.
As Fitch notes: “if VAT is raised to 10% and oil averages US$60/bbl, we estimate that Bahrain would generate a small primary surplus in 2023, putting debt/GDP on a mild downward path.” That in turn would help to convince the Saudis, Kuwaitis and Emiratis to step in with further cash infusions should it become necessary to bail out the economy yet again.
For ordinary Bahrainis, the jump in VAT means more pain. The government had already slashed subsidies on meat and petrol last year as part of the FBP. Hikes in electricity are looming and milk and other dairy products imported from Saudi Arabia saw prices at the end of August jump abruptly by 30%-50%. The Saudis say they are facing much higher costs of shipping, logistics and procurement of raw materials and need to pass those costs on.
James Swanston notes that the doubling of VAT, coupled with rising costs will inevitably eat into household incomes which in turn will mean less consumer spending. As one Bahraini told us “people are living paycheque to paycheque, now they will have even less to spend on consumer goods so how is this VAT jump going to help bail out the government?” He suggested that a “new black market with cash payments and no receipts” will emerge.
Meanwhile a Bahraini financial investment group has announced that it has signed a deal worth US$200 million on what it called “prime residential properties” in Las Vegas. There is no question that America’s gambling capital is a hot market as it recovers from the COVID slump, so it may be that GFH Financial Group, headquartered in Bahrain’s Financial Harbour, is placing its money on a winner.
Federal stimulus cash during the pandemic, coupled with pent-up demand helped drive Vegas betting and betting wins to record levels. That in turn has helped to fire up an already hot housing market. But as one analyst commented , what happens when the stimulus money is gone? “We spent our way to prosperity (but) a bigger economic cliff is being created by our response policy. At some point, the bill is going to come due.” GFH is banking on that not being anytime soon. Still like everything else in Vegas, it’s a gamble.
Finally, a bipartisan group of US senators, led by the Florida Republican Marco Rubio and Oregon’s Democratic senator Ron Wyden, has addressed a letter to Secretary of State Antony Blinken decrying persistent human rights abuses in Bahrain. There are thousands of political prisoners still detained in Jau Prison, amongst them the human rights advocate Abdulhadi Alkhawaja and the political activist Abduljalil al-Singace who has been on hunger strike since 8 July. Both men were sentenced to life in prison after trials widely seen as travesties of justice.
The letter to Blinken reads in part:
We are deeply concerned about the impact this violent repression has on Bahrain’s citizens and on the country’s longer-term stability. We believe the U.S. must hold allies to a higher standard, just as we hold ourselves to a higher standard. Indeed, we have long raised concerns about the situation in Bahrain precisely because Manama is an important ally in a strategic region.
Since the 2011 Arab Spring protests that rocked the country and were brutally suppressed by the authorities, US policy has been to politely register and then largely ignore human rights abuses in Bahrain. Take it as a safe bet that the Biden administration will follow a path already well-trodden by Presidents Obama and Trump.