Bahrain¡¯s economy is expected to contract in 2020 due to lower international oil prices and the spread of COVID-19. Fiscal and external deficits are expected to rise sharply in 2020, reversing the narrowing path observed in 2019. The overall budget deficit is projected to only gradually narrow over 2021-22 given lower oil revenues, and the large off-budget spending. Downside risks arise from duration and depth of the twin crises of continued weakness in oil prices and COVID-19.
The decline was caused by disruptions in the non-oil economy which contracted by 1.7% (y/y), weighed down by the lockdown measures and travel restrictions, especially for services and tourism sectors where Bahrain has heavily invested. Weak consumer demand driven by social distancing and rising uncertainties due to the pandemic led to 2% (y/y) deflation in the first 7 months of 2020; rising prices expected in the next two quarters could off-set that on annual basis.
Faced with further pandemic disruptions coupled with only modest recovery in oil prices over the remainder of the year, real GDP is expected to contract by 5% at end-2020. Over 2021-22, growth could bounce back to an average of 2%, supported by infrastructure projects and the pick-up in non-oil activity. Lower oil prices and large off budgetary spending, along with constrained oil production capacity are projected to widen the overall fiscal deficit to over 13% of GDP in 2020. Persistent large fiscal deficits will lead to a rapid rise in public debt estimated to reach 130% of GDP in 2020.