An increased budget deficit plus a rising inflation  rate are key challenges facing Bahrain, a leading banker has warned.According to BBK chairman Murad Ali Murad, inflation reached a high of 3.8 per cent during late last year, primarily driven by a rise in housing and utility costs and also affected from an increase in food prices."This has to be seen against a backdrop of depleting oil reserves and a recovering socio-political arena," he was quoted as saying in the Gulf Daily News, our sister publication.Murad said that in a move to prevent the budget deficit widening further and avert the possible risk of a future fiscal crunch, the government is looking to introduce new ways to redirect subsidies to those most in need and create a more long-term sustainable public spending model."Despite these challenges, it is important to bear in mind that Bahrain's current fiscal position is stable, the ratio of government debt to gross domestic product is below 40 per cent as a result of a long history of prudent management and fiscal sustainability, which is a recognised government priority," he added.Murad pointed out that 2013 brought an improved financial outlook for the country's economy ."Indicators such as control on unemployment, a healthy growth rate of around 4.8 per cent, and robust governmental spending for 2013/2014 all suggest a good degree of recovery for the country," he stated."The economy has grown and performed well thanks to the generous support of the government, as well as from the non-oil sector where a number of significant undertakings were started or are about to be launched," he explained."These anticipated key infrastructure projects, funded both locally and through the GCC Development Fund, should in turn have positive implications for a number of other sectors and businesses while increasing consumer confidence and optimising future growth trajectory," said Murad.The BBk chief said despite some improvements to the economic climate, the lender anticipates another challenging year with increased competition, tight margins and pressure on the bottom line."Much will depend on government investment and BBK is prepared to do its part in partnering in government-led economic initiatives as they arise," he added.