2018: “Greece of the Gulf” Subject to Donors’ Dictates: VAT and More
2019-01-09 - 3:04 am
Bahrain Mirror (Exclusive): Just as the political decision in Bahrain is dependent on Saudi Arabia, now the economic decision depends on Riyadh's conditions as well after a new grant worth 10 billion dollars was provided to the island kingdom.
Saudi Arabia, who has provided new support for Manama in cooperation with Kuwait and the UAE, has now imposed strict conditions on Bahrain including lowering public spending and implementing the value added tax (VAT) which it has been avoiding enforcing for a year after being put into effect in Riyadh and Abu Dhabi.
In the beginning of 2018, the financial reports increased regarding Bahrain's need for rapid measures to protect its currency. Saudi Arabia and UAE have not responded, despite their generous support, to secure a new Gulf "Marshal" step. This came after it had previously granted Bahrain funds worth up to 7.5 billion dollars to overcome the protests of February 14, 2011, in addition to Kuwaiti aid.
Reuters also reported on June 26, 2018 that Bahrain's dinar fell to a 17-year low of 0.38261 against the dollar on Tuesday as hedge funds dumped Bahraini bonds because of concern about the country's rising public debt.
Public debt back then had reached 11 billion dinars (29 billion dollars), and the need for loans was continuing, due to the deficit in the public budget in addition to the coverage of due debts throughout the year. However, the interests on Bahraini debts were rising greatly which hindered the capability of borrowing.
Bahrain was incapable of reaching international bond markets. This caused them to increase the interest rates on debts up to 700% in an effort to secure a 150 million dinar loan from two local lenders.
These conditions have led Saudi Arabia, the UAE, and Kuwait to announce that they are ready to help Bahrain contain its financial issues. The three countries also stated on the same day when the dinar regressed that they were conducting talks to help Bahrain and are looking into all their options.
The three states have also pledged to continue "working on designing a comprehensive system to support the economic reforms and public financial stability in Bahrain". It has therefore become clear that these negotiations will be difficult and the grant will now come with conditions.
Gulf bankers and other sources have told Reuters that the three member states in the GCC are discussing the "aid" that they will be granting Manama for more than a year with foreign investors selling Bahraini bonds.
The program, which is set to go on for many years and has been discussed between Bahrain and its allies, will require lowering spending and measures to increase non-oil revenues such as imposing the value added tax. These were the most notable conditions that Saudi Arabia requested.
On October 4, 2018 the four countries announced from Manama that they had reached an agreement whereby Bahrain will receive 10 billion dollars in return for their commitment to the combined reform plan which has been named the "Financial Balance Program". It is a program prepared by Gulf officials and is being supervised by the Arab Monetary Fund. It includes reducing public spending and implementing value added tax in addition to a number of measures.
After Bahrain signed and agreed to the Gulf conditions, the King of Bahrain Hamad Bin Isa Al Khalifa immediately called on the Shura Council and Parliament to hold a special meeting to implement the decree for the value added tax as part of the Financial Balance Program.
On October 7, the Parliament gathered to implement the tax. It passed the decree in a closed meeting, of which Bahrainis expressed their rejection on social media outlets. The following day, the Shura council agreed on the tax, which is to come into effect in 2019.
Two days later, the Public Service Office announced that it would be accepting government employees' voluntary retirement for one month as part of the program, which seeks to reduce public expenditure. Thousands applied for voluntary retirement despite the controversy it brought up regarding the government's intentions.
The program also includes modifying electricity and water tariffs gradually to achieve balance in the electricity and water authority budget over the course of four years. It will also include simplifying distribution of monetary aid to citizens. These measures will increase the burden on citizens and even more on immigrants
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