Bahrain’s economy slowed last year as oil output declined, but growth is expected to regain momentum over the next two years, according to the International Monetary Fund’s latest assessment. The bigger concern, the IMF warned, is a sharply deteriorating fiscal position that is pushing government debt to new highs.
In its 2025 Article IV consultation, concluded on January 23, the IMF said Bahrain’s real GDP growth eased to 2.6 percent in 2024, down from 3.9 percent a year earlier. The slowdown reflected weaker hydrocarbon production, while the non-oil economy continued to expand at a healthy pace of 3.7 percent, led by financial services.
Inflation remained subdued. Consumer prices rose by just 0.9 percent in 2024, keeping cost pressures among the lowest in the region.
Behind the steady growth, however, public finances worsened further. The IMF estimates Bahrain’s fiscal deficit widened to 11 percent of GDP in 2024, while gross government debt climbed to 134 percent of GDP, exceeding levels seen during the 2020 recession.
The government’s reliance on overdrafts from the Central Bank of Bahrain increased sharply last year, exceeding a quarter of GDP at its peak. Although this overdraft declined by 8 percent through October 2025, and foreign exchange reserves rose by 11 percent, reserves remain thin at just over two months of prospective non-oil imports.
Externally, Bahrain continued to post a current account surplus in 2024, but it narrowed to 4.8 percent of GDP. The banking sector stayed profitable and well capitalized, though private credit growth remained weak.
Growth outlook improves, risks remain
The IMF expects Bahrain’s growth to strengthen to 2.9 percent in 2025 and 3.3 percent in 2026. The pickup is tied to a recovery in crude oil production, the full operation of expanded refinery capacity, and continued strength in non-oil sectors such as finance, tourism, logistics, and the digital economy.
Over the medium term, real GDP growth is projected to hover around 3 percent, driven almost entirely by the nonhydrocarbon economy, which the IMF expects to account for nearly 90 percent of output by 2030.
Inflation is projected to remain flat in 2025 following recent deflationary pressures, before gradually rising toward 2 percent over the medium term.
Despite the positive growth outlook, the IMF flagged significant downside risks. High debt levels and large financing needs leave Bahrain vulnerable to lower oil prices and tighter global financial conditions. Delays in fiscal adjustment, the Fund warned, could further strain debt sustainability and access to financing.
IMF urges stronger fiscal action
IMF Executive Directors praised Bahrain’s diversification efforts and steady growth but stressed that fiscal consolidation is now urgent.
They welcomed recently announced measures, including the introduction of a corporate income tax, other revenue-raising initiatives, and reforms to energy and utility prices. Still, Directors said these steps will not be enough on their own to reverse the debt trajectory.
The IMF called on the authorities to curb extrabudgetary spending, expand the tax base, and reduce broad subsidies while protecting vulnerable households. Improving fiscal transparency, strengthening public financial management, and adopting a clear medium-term fiscal framework were also highlighted as priorities.
Currency peg, banks, and reforms
Directors reaffirmed that Bahrain’s long-standing peg to the U.S. dollar continues to serve as an effective monetary anchor. They supported efforts to reduce monetary financing by gradually scaling back government overdrafts at the central bank, while urging further reserve accumulation.
The IMF also encouraged the development of the local bond market to improve liquidity management and deepen financial markets.
Bahrain’s banking system was described as healthy, with strong capital buffers. The Fund advised continued close monitoring of financial stability risks, further enhancements to macroprudential tools, and timely adoption of upgraded bank resolution and crisis management frameworks. Directors also emphasized vigilance over crypto-asset activity.
On the structural side, the IMF pointed to human capital development, digital infrastructure investment, and deeper intra-GCC trade and investment as key drivers of future growth and resilience.
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