Bahrain is reportedly planning to double its standard VAT rate to 10% as it seeks to boost state revenue and tackle one of the Middle East’s most severe budget deficits.
If it confirms the increase, it will become the second Gulf Cooperation Council (GCC) member to raise VAT from the starting rate of 5% adopted by all six member nations, after Saudi Arabia implemented a 15% rate last year.
Bahrain is looking to shore up state revenues after oil prices slumped during the pandemic and is aiming to balance its budget by 2024. The country’s budget is projected to be 9.1% of GDP this year; an improvement on the 18.3% deficit suffered in 2020.
The package of measures come despite Bahrain receiving a $10 billion bailout package from its wealthier neighbours last year.
It was also a plunge in oil prices that persuaded Saudi Arabia to increase its VAT rate from 5% to 15% in a bid to drive additional government revenue. Of the other members of the GCC, the UAE and Oman have retained the 5% rate to date, while Kuwait and Qatar have yet to implement VAT.
Scott Livermore, chief economist at Oxford Economics Middle East in Dubai, says: “Across the Gulf, government revenues need to be diversified and VAT is a good candidate for doing so. While the urgency is greater in some countries than others, [governments] will observe keenly before assessing whether it is a good opportunity to do the same.”
A Bahraini official told Bloomberg that the government has considered a range of spending and revenue measures with the objective of balancing growth with improving finances.
It appears that an increase in VAT will be the cornerstone of its new approach, with the Ministry of Finance and National Economy issuing a statement that confirmed the government will delay balancing the budget until 2024 and is considering a VAT rise.
Earlier in the summer, the IMF suggested Bahrain will require “an urgent fiscal adjustment” to get its finances in shape following the impact of the pandemic.
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