Economy and Trade
An archipelago of 36 islands, the Kingdom of Bahrain was the first Gulf state to discover oil, but its reserves are due to run out within the next 10–15 years. With its highly developed communication and transport facilities, Bahrain is home to numerous multinational firms with business in the Gulf. Today, petroleum production and refining account for more than 60% of Bahrain’s export receipts, more than 70% of government revenues, and 11% of GDP (exclusive of allied industries).
The production and refining sector has underpinned Bahrain’s strong economic growth in recent years. Aluminum is Bahrain’s second major export after oil. Other major segments of Bahrain’s economy are the financial and construction sectors. Bahrain is focused on Islamic banking and competes on an international scale with Malaysia as a worldwide banking center. Continued strong growth hinges on Bahrain’s ability to acquire new natural gas supplies as feedstock to support its expanding petrochemical and aluminum industries. Unemployment, especially among the young, and the depletion of oil and underground water resources are long-term economic problems.
Economic Policy over 12 Months
In its December 2010 report on Bahrain, the IMF said that “the economy of Bahrain has managed the global crisis well. The global crisis produced a sharp fall in oil prices, a tightening of global capital markets, and declines in regional and local real estate markets. High initial levels of bank capital and sound prudential norms established by the Central Bank of Bahrain (CBB) ensured the resilience of the financial system, without recourse to the extensive direct interventions seen in many countries. The wholesale banking system started a deleveraging process at the beginning of 2009 with balance sheets continuing to be scaled back, reflective of a move to more conservative portfolios.” However, the report preceded the violence and unrest seen in Bahrain in 2011, which has derailed economic growth.
Bahrain had one of the most diversified economies in the Gulf region, with financial services contributing to about 20% of GDP, eclipsing the contribution of the oil sector. Tourism is also important. But the violence seen in 2011 has had a severe impact on both sectors. In March 2011, Gulf states agreed to provide Bahrain with US$10 billion over the next ten years to help with the financial implications of the unrest. In May 2011, the chairman of the Bahrain Chamber of Commerce and Industry said that the island-state had lost up to US$2 billion due to the recent political unrest in the country.
In January 2010 Bahrain, along with three others of the six-member Gulf Cooperation Council (GCC), agreed to create a joint central bank, but the introduction of a single GCC currency remains a distant goal. Although Kuwait, Qatar, and Saudi Arabia, as well as Bahrain, want to push ahead with the central bank, Oman said that it was not able to meet the prerequisites needed for monetary union, while the United Arab Emirates objects to locating the headquarters of the central bank in Saudi Arabia.
Facing the near-term exhaustion of its oil reserves (gas reserves should last another 50 years), Bahrain is actively working to diversify and privatize its economy in an attempt to reduce the country’s dependence on oil. As part of this effort, in August 2006 Bahrain and the United States implemented a free trade agreement, the first between the United States and a Gulf state.
In addition to banking, the country is putting substantial resources into developing service industries such as information technology, healthcare, and education. It has made use of oil revenues to build an advanced infrastructure in transportation and telecommunications, according to the US State Department.
Economic Performance over 12 Months
The Bahrain economy has slowed sharply in 2011 as a result of violence and unrest in the country. In February, Bahrain’s majority Shi’ites—inspired by uprisings elsewhere in the Middle East—started a campaign for greater freedoms and an end to the Sunni hold on power. By June 2011, following a successful crackdown on the protests, the economy was reported to be recovering. Earlier in the month, King Hamad bin Isa al-Khalifa approved a US$16.44 billion budget for the next two years—a 44% rise in spending on subsidies and other public expenditures.
The economy is expected to grow by just 2.7% in 2011 as a result of the unrest, down from an estimated 4.1% in 2010. Economic growth slowed sharply in Bahrain in 2009 but the country was still able to post positive growth of around 3%, down from 6.8% in 2008. The property sector was the worst affected by the slowdown.
The success of ventures such as the Bahrain Grand Prix has raised the Kingdom’s international profile, and, combined with the boom in Islamic banking, has encouraged major airlines to resume services to the country. Bahrain’s international airport is one of busiest in the Persian Gulf, serving 22 carriers. A modern, busy port offers direct and frequent cargo shipping connections to the United States, Europe, and the Far East. However, in the wake of the violence in February 2011, Bahrain lost its Formula One Grand Prix, its flagship international event, while tourism numbers plummeted.
The country’s reputation as a regional financial center has also been damaged. Many institutions pulled out staff following the violence in 2011, moving operations to Dubai, and it is questionable if they will return.
In June 2011, Moody’s downgraded Bahrain’s sovereign credit rating to Baa1 from A3, citing the political turmoil and fundamental weaknesses in the country’s large banking sector as a motivation for the downgrade. According to the ratings agency, Bahrain is the only GCC member state that “does not have a large sovereign wealth fund of offshore financial assets.” Moody’s added that poor management of the government’s finances had driven up the oil price at which the government can break even with its revenues. Even with crude oil topping US$100 per barrel, Bahrain has struggled to balance its budget.
Support for Inward Investment and Imports
The Bahrain Economic Development Board (EDB) is the public agency responsible for formulating and overseeing economic development strategy in Bahrain and has responsibility for attracting direct investment into the Kingdom. It offers an investor-facilitating service to first-time investors.
The Kingdom operates a policy of zero corporate taxes. More information can be obtained from the EDB.
GDP growth: 4.19% (2010 est.)
GDP per capita: US$40,300 (2010 est.)
CPI: 3.3% (2010 est.)
Key interest rate: n/a
Exchange rate versus US dollar: BD0.376 (fixed)*
Unemployment: 15% (2010)
FDI: US$15.77 billion (December 31, 2010 est.)
Current account deficit/surplus: US$589 million (2010 est.)
Population 1,214,705 (July 2011 est.)
* Bahraini dinar
Source: CIA World Factbook except where stated