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Bahrain is described as a Category 2 sovereign by fiscal arithmetic alone. On governance, wealth, prices, the current account and banking it reads as Category 1 or better: governance percentiles in the 50s and 60s, GDP per capita near USD 29,000, and banks with 20% capital ratios and 2.6% non-performing loans. On the fiscal pillar it reads as Category 3: debt of 148% of GDP rising toward 157%, interest absorbing a third of revenue, deficits of 10–13% of GDP for three years and a fiscal break-even oil price of USD 125–130.
What keeps Bahrain out of Category 3 is explicit GCC support, from the USD 10 bn package of 2018 to the USD 5.4 bn UAE currency swap of April 2026; in June 2026, during a war on its territory, a USD 1 bn ten-year bond was three times covered at 7.125%. The paper argues that reserves under three months of imports make the peg a promise underwritten by the neighbours, and that banks holding about three-quarters of domestic public debt create a dangerous sovereign–bank nexus. Output is diversified, with non-oil activity at 85–90% of GDP, but revenue is not.
The road map is therefore almost entirely a fiscal and revenue programme, aiming to convert a guaranteed Category 2 into a Category 1 on Bahrain's own balance sheet before the guarantee is tested.
Key findings
- The Fiscal Balance Programme would become a statutory fiscal rule with a debt anchor and an independent fiscal council, and the withheld IMF Article IV staff report would be published.
- The full November 2025 package would be enacted, including corporate income tax from 2027, a 20% cut in administrative spending and cost-based non-residential tariffs, lifting non-oil revenue from about 9% to 14% of GDP.
- A sustained primary surplus of 4–5% of GDP is the level at which a debt stock near 150% of GDP at a 7% cost begins to fall, bringing debt below 100% over seven to eight years.
- Reserves would double to six months through retained surpluses and a standing, disclosed GCC deposit facility that replaces the ad hoc swap.
- Limits on banks' sovereign exposure would cut their share of domestic debt from about 75% to below 50%, and Mumtalakat asset sales would go to debt reduction.
Summary of the paper; the full analysis is in the PDF.