Somebody’s got to help Bahrain pay down its deficit, and it looks like the country’s businesses and manufacturers are picking up the tab. Over the weekend, the GCC country announced it will be doubling its VAT tax to 10% in an effort to shrink one of the region’s largest budget deficits.
Bahrain is balancing fiscal responsibility with the steady recovery of its economy after the one-two punched it faced from the pandemic and last year’s historic drop in oil prices. Bahrain’s fiscal strain today is in spite of the $10b bailout package it was given by some of its wealthier Gulf neighbors back in 2018. That package was pledged on the condition that Bahrain implement fiscal reforms to have its budget balanced by 2022.
According to the International Monetary Fund, however, Bahrain is on the right track. The country’s budget shortfall is expected to fall to 9.1% of GDP this year compared to 18.3% last year.
Why it matters
The 10% VAT tax will be levied on goods at every point in the supply chain at which value is added. While businesses and manufactures will be the first to absorb the tax, the fear is that it will eventually be passed down to consumers through increased prices.
