What Does it Mean that Bahrain Pays Debt with Debt?

«ŠŌŪš«— «Š»Õ—ŪšŪ
«ŠŌŪš«— «Š»Õ—ŪšŪ

2020-04-23 - 8:42 p

Bahrain Mirror (Exclusive): Last month, Bahrain borrowed $1.25 billion (BD470 million) to pay bonds due by the end of March.

Bonds are one of the debt forms, which states resort to because their interests and risks are lower than borrowing. This means that Bahrain has resorted to borrowing to pay a debt that has been due; however, it did not have sufficient funds to pay or wished to extend maturity.

This gives the impression that the country's financial situation is getting more complicated by the difficult effects of the Coronavirus outbreak on public finances.

In a statement issued in early April, the Ministry of Finance said the repayment of international bonds was an indication of the strength of the financial balance program launched in October 2018.

If we consider that borrowing under the poor financial conditions of the market has been a success for the country's finances, it could be a deceptive success. Borrowing more money means increasing public debt (government debt) and thus increasing the interest on the loans themselves.

With all three major credit rating agencies downgrading Bahrain's credit rating, the interest rate on government loans will be at high levels.

The interests of public debt are the largest item in the country's budget. The Government of Bahrain pays BD640 million annually to cover interest on its debt only. This figure represents about one third of the country's budget and is subject to increase as debt increases.

Certainly, the BD470 million increase in public debt means that the government's debt has hit a new record at around BD15 billion.

Deficit

As the government seeks to reach a deficit-free budget in 2022 under the financial balance program, this year's expected deficit could reach 15.7% of the GDP, according to Reuters.

If we estimate that the country's GDP will be around BD14.7 000 million, the public budget deficit will exceed BD 2 billion and 205 million by the end of the year.

Deficit means the difference between government expenditures and revenues.

In the same context, information indicates that the Government failed to issue international bonds to pay outstanding bonds, forcing it to resort to borrowing, contrary to what the Ministry has tried to promote.

This failure means that market conditions may have been poor due to the spread of the virus or that lack of investors trust in Bahrain's ability to pay its debts. 

The financial consequences of this year will have a major impact on the country's finances in the coming years, and adding more loans to the finances is by no means a permanent success.

Bahrain's public debt exceeds its GDP (the value of what is produced in the country annually), so the country's finances is not far from the risk of bankruptcy, and durable solutions must not be at the expense of the poor. 

Arabic Version