Bahrain to implement several fiscal reforms to bolster public finances

The Kingdom of Bahrain, which was downgraded last month by S&P Global, is taking some tough measures to rectify its worsening fiscal situation.

Among the several steps being taken, Bahrain is raising fuel prices, increasing the tariffs on electricity and water, and increasing dividends from state-owned companies (⁠to increase the contributions of these companies to the Kingdom’s general budget), apart from other fees and taxes.

There are plans to raise natural gas prices for businesses, as well as cut administrative government expenditure by 20 per cent, and introduce a new law on corporate income tax for local companies.

Cabinet approves new spending measures

Exact dates for implementing the new measures were not specified.

Following a Cabinet meeting chaired by Crown Prince and Prime Minister Prince Salman bin Hamad Al Khalifa on Monday, the Government announced a package of measures to curb government spending, raise new revenues and protect key subsidies for citizens.

The Cabinet confirmed that electricity and water prices will remain unchanged for the first and second tariff bands for citizens’ main homes, including extended families, but there will be price changes for other user categories, which will take effect from January 2026.

The cabinet referred a draft law to the Legislative Branch to impose 10 per cent tax on the profits of local companies whose annual revenues exceed BHD1 million (US$2.65 million) or net annual profits exceed BHD200,000 (US$530,570). The law is expected to be implemented in 2027.

A sewage services fee is also being planned, excluding citizens’ primary residences. This will be calculated at 20 per cent of water consumption charges, and could come into effect from January 2026.

In downgrading Bahrain’s rating to ‘B’ from ‘B+’, S&P Global had said: “The downgrade reflects our view of the risks related to high government debt that has accumulated because of persistently pressured fiscal positions and high fiscal deficits. We project the fiscal deficit will widen to about 7.6 per cent of GDP in 2025, compared with 5.8 per cent in 2024 and 7.1 per cent in our previous review.

“Moreover, we forecast the rise in net debt will be larger, at about 10 per cent of GDP in 2025, owing to significant off-balance-sheet expenditure. Dampened oil prices, higher fiscal financing costs because of the surging debt burden, and persistently higher social spending will keep fiscal deficits elevated.

“Bahrain remains sensitive to oil prices given about 55 per cent of government revenue and 50 per cent of goods exports are driven by hydrocarbons, although it contributes only about 15 per cent of GDP.”

Fiscal deficit deepens over time

S&P Global estimated that the gross government debt rose by about 27 percentage points over the past four years. Given the large fiscal deficits and assuming 3 per cent of GDP for off-balance-sheet spending, S&P Global projected Bahrain’s net debt will continue to increase, reaching 139 per cent of GDP by 2028 from 100 per cent in 2022 and 118 per cent in 2024.

Given the high debt burden, government interest payments were expected to remain elevated and average about 33 per cent of general revenue over 2025-2028, up from 21 per cent in 2022.

The government has raised US$5 billion from global debt markets this year, tapping into healthy investor appetite for its debt, especially sukuk.

Bahrain’s government and parliament, the Council of Representatives, held several meetings to discuss measures to support the state’s public finances, the parliamentary speaker said in a separate statement dated December 28.