The recently-announced fiscal plan in Bahrain is a welcome shift towards fiscal consolidation, but there’s a high risk of slippage and the public debt dynamics are alarming. Although other Gulf states would almost certainly step in if Bahrain faced major concerns about public debt sustainability, that would probably be conditional on further austerity. The fiscal squeeze will act as a major headwind to Bahrain’s non-oil economy over the coming years and result in softer GDP growth than most expect.
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