At the end of its annual review of the Bahraini economy, the fund also called on the Middle Eastern country to diversify its economy away from oil production and to reduce its budgetary reliance on oil revenues.

The country’s breakeven price for oil has reached a ‘critical’ $115 a barrel, leaving it vulnerable to a sustained decline in oil prices. However, the lack of a lasting solution to political unrest will weigh on private sector investment, which means ‘non-oil’ economic growth is expected to remain below 4% in 2013 and in the medium term.

‘Gradual fiscal consolidation, accompanied by strengthening the investment climate, will be key to restoring high levels of private sector-led growth and employment creation for nationals,’ the IMF said in a statement.

Despite posting a better-than-expected budget deficit last year, equivalent to 2.6% of gross domestic product, the budget gap is forecast to widen, while public debt is expected to increase to an ‘unsustainable’ 61% of GDP as soon as 2018.

‘There is therefore an urgent need for a gradual fiscal consolidation over the next three two-year budget cycles, of about 7.7% of GDP, in order to stabilise government debt at 40% of GDP over the medium term, ‘ the statement said.

Recent efforts to raise non-oil revenues were ‘commendable’ but Bahrain should immediately adopt a medium-term fiscal strategy aimed at gradually retargeting subsidies and containing public sector wage increases, it explained. This strategy should also include new ways to raise non-oil revenues, as well as reduce capital spending and ensure the sustainability of the country’s pension fund.

The IMF also welcomed proposals for a debt management office to be established under the auspices of the Ministry of Finance. ‘In addition to providing impetus to financial market development, strategic debt management will help contain interest rate costs at a time of rising public-sector borrowing needs and lower rollover risks,’ it noted.