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VAT in a nutshell

In economics, the majority is always wrong – John Kenneth Galbraith

As the VAT final countdown reaches single digits there seems to be a panic and frenzy in the air. It reminds me exactly of the Y2K threat of 1999; where most of the world believed that all computers would crash when the clock resets in 2000, leaving us in the dark. The VAT implementation is a complex subject with some negative and some positive angles. I will try to break it down as simply as possible in this article with a bird’s eye view of the matter.

Let’s begin with Bahrain’s economy, rating, and general outlook. Bahrain’s oil-based economy was generally stable in the high B to A range with a stable or positive outlook for most of its history until 2011 (following the global financial crisis and Arab Winter, otherwise known as the Arab Spring). We had a mismanagement of funds, wastage, and didn’t spend enough on developing our exports, services, and integrating into the global economy. But we also built a great infrastructure, had a blanket of subsidies, and offered free health and education to everyone. After 2011 we started dipping into the low B’s (Moody’s S&P Ratings) and hovered around the Junk bond rating, comparing with poor African nations because of low oil prices, wars in the region, Global general negativity, and our inability to spend less than what we made from oil revenues. Our deficit ballooned to 80% of our GDP and remains around 14 Billion Dinars or so. A serious problem.

Our government must keep spending to keep vital services running (including the government itself), and without borrowing it can’t stay open. Compounding that are the low oil prices (upon which our annual budget is calculated), mismanagement of our sovereign wealth (The National Audit Bureau has a report on it annually), and a population boom. Our Neighboring countries (Saudi Arabia and UAE) have agreed to bail us out with ten Billion dollars, but this time it has some strings attached. We need to rectify our fiscal position and they want to be sure we get out of this crisis; because as a GCC unit there is a dangerous risk of having a domino effect: Any economy that is unstable could spread that lack of confidence or trust to its neighbors thus magnifying any economic uncertainties they may have. This will in turn reduce local investments and growth. If the Bahraini Dinar is devaluated, that would be catastrophic to our economy as well as that of neighbors, as confidence in the unit decreases. As it’s purchased less and less it could lead to a total crash of the economy as panic selling (and transferring to a more stable currency as the Euro, Dollar, and other currencies) ensues and further reduces our standard of living. Immigration could decrease, and it could become a very dangerous spiral.

As the government tried to reign in spending it began removing our subsidies, which increased the price of petrol, electricity and water, and some other items since transport became more expensive. Unfortunately, accountability remains a large issue as the population hasn’t seen any clear rebukes or changes to officials and ministers who were responsible for those gross errors. Furthermore, transparency remains lacking to a certain degree which reduces confidence.

In December our rating was upgraded to B2 stable, which is close to Greece. It’s better than the past, but far from where we want to be. We need to ask ourselves a serious question. Do we want the ship to continue in the same direction or do we want to check its path? Well, that is what the government is doing with the VAT. It’s simply a value added tax to increase revenue to the government to make sure we don’t go into total collapse. Do I like it? No. I am used to living in a tax haven with many benefits and subsidies. Is it necessary? Absolutely. At least our economy can recover, our currency remains stable (as one of the strongest in the world), and we can expect a stronger, more robust economy in a few years or so. Besides, it keeps our ability to borrow open as an option and our rating can only go up.

With the new push towards transparency I hoped there would be a major reshuffle to our ministerial cabinet this year. There were only four changes, and many of the ministers have been in their posts a little too long. There needs to be young fresh blood, hip to technology and who can understand and predict regional and global trends. I believe we also need a major reshuffle every four to eight years to ensure our ministries don’t get stagnant and remain a drain on the national economy. Wastage needs to be reigned in, and accountability assigned.

I respect my brothers and sisters in the new parliament and see they have a lot of energy, but I also believe that their solutions of black or white don’t benefit the populace and may harm them; even though they have good intentions. What would a roll-back or cancellation of the VAT achieve? How else can the government stay afloat? 94 essential goods are not taxed, such as foods and other consumables that would affect the needy. Companies with a revenue under BD 18,500 will not need to register for VAT, so this value added tax won’t harm lower income people much. That being said, the government needs to adjust allowances and salaries to help people cope with these changes since buying a car, paying your phone bill, or buying school supplies will inevitably be taxed also.

It’s a double-edged sword, and in general macroeconomics the government can’t make money out of thin air. As long as oil prices are low, we will be in economic jeopardy. The only option is to diversify and support Small and Medium enterprises and locals to grow. That way there will be an increase of investment and cash-flow into Bahrain, which will spread around the country and increase the standard of living. I wish the parliament proposed a slow roll-up of VAT implementation instead of trying to delay or ban it. It may have been a better solution for both sides. If we started at 2% as we got our regulations in order and gotten used to it. It could have increased by 1% every year until we reached the 5% needed. I believe it’s a little too late for that now, but our proposals need to be carefully studied before blurting them out into a microphone.

In conclusion I would like to remind everyone old enough to remember the panic of Y2K where the world was going to end: But it didn’t end. I would like to assure the reader that we will pass this hump eventually and it will only be a memory. If we take accountability, change, and transparency as the clear path of the future there can only be prosperity for our country and region. So, don’t panic, and that’s VAT in a nutshell.

Hamed Fakhro

Hamed is a contributor, writer, inventor, and speaker. He is also the founder of Fakhro Properties, Seef Business Center, A’Ali Views Compound, Hack Arabia, and Wudu. Follow him at @fakhro1