Much to their credit, the authorities in Bahrain appreciate the scale of the economic challenges and the need for steady reforms. The government views taxes as less inflationary than fees imposed on services. Also, there is a realisation of immigrant workers’ contributions to the local economy, and hence the objection to applying taxes on outgoing remittances.
What’s more, the government intends to go ahead with economic reforms even in the case of any future rise in oil prices. These views were expressed by the Minister of Cabinet Affairs, Mohammad Bin Ebrahim Al Mutawa, during a meeting with the press corps. Al Mutawa is exceptionally qualified to make such comments having served in the government since the 1970s.
He noted that the economy is heavily reliant on the oil sector for its well-being, and petroleum accounts for nearly 80 per cent of treasury income, something that may not abnormal by standards within the Gulf.
Bahrain’s economy is diversified with regards to its gross domestic product (GDP), but not on treasury and export earnings. Financial services is a vital contributor to GDP thanks to Bahrain serving as a regional banking hub. The two sectors compete for supremacy in the GDP make-up.
The need to diversify the economy is one of the vital lessons of the oil price debacle of recent few years. Prices plunged from mid-2014 reflecting an abundance of supply caused by production of shale oil from the US.
The minister rightly argued about the dangers associated with raising fees and introducing new ones to avoid causing inflationary pressures. Fees add to retail level prices and hence add to inflationary hike. Also, taxes lead to a reduction in income and thereby spending capability.
Like the rest of GCC countries, Bahrain is not known for imposing taxes but as tax-havens. The first formal tax has now been adopted and await implementation in 2018.
The excise tax allows for the imposition of 100 per cent tax on tobacco as well as energy drinks like Red Bull. A 50 per cent tax is levied on sugary fizzy drinks. The tax is designed to discourage consumption of sin products on the one hand and to enhance treasury revenues on the other.
Saudi Arabia started implementing an excise tax in July and the UAE followed in October. The difference in prices of cigarettes has encouraged questionable trading practices across the King Fahd causeway, with motorists and consumers taking advantage of lower retail prices in Bahrain.
Turning to expatriate workers, the Bahraini minister showered them with appreciation for their contributions to the country’s development. He was right in rejecting the notion of singling outgoing remittances for possible taxation. In fact, many expatriates are underpaid or receive remunerations not commensurate with their contributions.
Numerous studies confirm Bahrain’s popularity with expatriate workers and for good reasons. The Expat City Ranking 2017 by InterNations ranks Manama as the best place for expatriates. Expatriates seem pleased with the local culture, including an absence of pressure to learn Arabic.
Certainly, public finance must be handled with care, as mistakes could be end up being costly and irreversible. There are lessons to be learnt from the experiences of other nations concerning accumulation of debts and over-taxation.
