Bahrain's fiscal reforms aim to support diversification


Benefitting from its robust financial services, industrial and manufacturing sectors, Bahrain’s economy is one of the most mature and diverse in the GCC. Although the kingdom has suffered in the wake of sustained low and volatile international oil prices – which have resulted in sluggish regional and national GDP growth, as well as a widening budget deficit – it has made major strides in implementing reforms that will allow government and citizens to adjust to new economic realities, setting the stage for sustainable long-term growth.

After launching a fiscal transformation programme in late 2018, government stakeholders have been moving to reduce public subsidies and economic inefficiencies in an effort to balance the budget. At the same time, an aid package from GCC peers will support one of the largest infrastructure agendas in the kingdom’s history, in addition to providing crucial macroeconomic stability.

Bahrain remains dependent on hydrocarbons revenue for much of its spending, and a major new offshore discovery is expected to provide the upstream industry with a boost. Meanwhile, ongoing upgrades at the country’s sole oil refinery will support rising levels of refined exports, lending a positive input to medium-term growth forecasts.

Vision 2030

The GCC’s first oil well was drilled in Bahrain in 1932, and since then the kingdom has benefitted from decades of strong growth driven by its powerful oil and gas sector. However, reserves have been declining since the 2000s (see Energy chapter), thus Bahrain is undergoing a transformation to a post-oil economy that is likely to provide some positive examples for other GCC members.

The most important policy document for economic evolution in Bahrain is Economic Vision 2030 (Vision 2030), which was launched in October 2008 by King Hamad bin Isa Al Khalifa. Vision 2030 is organised around three guiding principles: sustainability, fairness and competitiveness. It entails a series of economic and institutional reforms, many of which are carried out by the Bahrain Economic Development Board (EDB), that seek to shift Bahrain “from an economy built on oil wealth to a productive, globally competitive economy, shaped by the government and driven by a pioneering private sector – an economy that raises a broad middle class of Bahrainis who enjoy good living standards through increased productivity and high-wage jobs”.

The ultimate goal of Vision 2030, according to the document, is to ensure that Bahrainis have twice as much disposable income in 2030 as they did in 2008. With this mandate in mind, the policy emphasises increasing the amount of private sector employment opportunities; reducing oil dependency through new domestic and foreign direct investment in high-potential, non-oil sectors such as tourism and financial services; and heavily investing in education and human capital programmes.

GDP Breakdown

Bahrain’s GDP in constant prices has grown steadily since 2015, rising from BD11.6bn ($30.8bn) that year to BD12bn ($31.8bn) in 2016, BD12.4bn ($32.9bn) in 2017 and BD12.7bn ($33.7bn) in 2018, according to the IMF.

Oil and gas operations remain the largest sector of the economy, accounting for 18.1% of the kingdom’s GDP of BD3.24bn ($8.6bn) in the second quarter of 2019, according to that period’s “Bahrain Economic Quarterly” report by the Ministry of Finance and National Economy (MOFNE). While still holding the top spot, this share has dropped significantly in the past two decades, from 43.6% of GDP in 2000.

Financial services represented the largest nonoil industry during the second quarter of 2019, accounting for 16.4% of GDP. The success of this sector is often recognised by players within and outside the country. “Bahrain is a strong regional financial hub. The infrastructure is sophisticated and the Bahraini people are highly educated, which adds to the value proposition. In other countries it is not as easy to find good local talent,” Çetin Yurttas, director of Kuveyt Türk Participation Bank, told OBG (see Banking chapter). Financial services was followed by the manufacturing sector, representing 14.1% of GDP, government services at 13.3%, and transportation and communication services just slightly ahead of the construction sector at 7.6% and 7.4% of GDP, respectively.

While this composition highlights the relative success of ongoing diversification efforts, the leading role of oil in the economy remains problematic for Bahrain: the mid-2014 global oil price crash and more recent regional geopolitical tensions have weighed on investor sentiment, liquidity and the kingdom’s current account balance.

Macroeconomic Performance

Bahrain’s macroeconomic growth has been consistently positive, although somewhat volatile, since the mid-1990s, with World Bank data showing GDP growth peaking at 8.29% in 2007, before sinking to 2.54% in 2009 in the wake of the 2008-09 global financial crisis. Growth dropped again to 1.98% in 2011 as the kingdom felt the effects of the Arab Spring demonstrations. Growth has been somewhat steadier in the years since, rising to 3.73% in 2012 and a fiveyear high of 5.42% in 2013, before moderating to 4.35% and 2.86% in 2014 and 2015, respectively. GDP expansion recovered to 3.47% in 2016 and 3.8% in 2017, although it sank again in 2018 as the kingdom’s economy faced a host of challenges, including global oil market volatility and sluggish regional expansion that weighed on growth in primary non-oil sectors.

In May 2019, following its latest Article IV Consultation for Bahrain, the IMF reported that GDP growth declined to 1.8% in 2018 as a result of lower oil production and a slowdown in key sectors – namely retail, hospitality and financial services. In its first quarter 2019 “Bahrain Economic Quarterly” report, the MOFNE stated that 1.8% is an “unusually low figure by recent standards, partly caused by a 1.3% contraction in the oil sector, which saw a 1.6% drop in total crude oil production compared to 2017”. The kingdom’s non-oil sector recorded more positive results, expanding by 2.5% in 2018.

The fourth quarter of 2018 saw a strong rebound in the oil sector, which grew by 11.3% year-on-year (y-o-y) due to seasonal maintenance in 2017. This led GDP expansion as a whole to hit 4.6% that quarter. Non-oil economic growth was also elevated during the fourth quarter, at around 3.2%.

GDP per capita, for its part, has climbed considerably since 2000, rising from $13,636 that year to $23,068 in 2008, before dropping to $19,357 in 2009, partially due to the global financial crisis. The metric regained ground and hit $22,513 in 2011 before reaching an all-time high of $24,983 in 2014. Recent years have seen this fall back to $22,689 in 2015, $22,561 in 2016 and $23,655 in 2017, the latest year for which World Bank data is available.

Monetary Policy

The Bahraini dinar is pegged to the US dollar, meaning inflation in Bahrain is strongly linked to the monetary policy of the US Federal Reserve. The body began gradually hiking interest rates as it implemented monetary normalisation policies in 2015, raising rates nine times between December 2015 and December 2018 – with four of those hikes in 2018 alone – prompting the Central Bank of Bahrain (CBB) to follow suit. In its 2018 annual report, the CBB highlighted a number of monetary policy measures it took throughout the year, including four interest rate hikes in March, June, September and December, and utilising new instruments aimed at bolstering the banking and Islamic financial services sectors’ liquidity and stability. The central bank raised interest rates from 1.75% to 2.75% over the course of 2018, as well as increased the overnight deposit rate from 1.5% to 2.5%, the one-month deposit rate from 2.4% to 3.25% and the lending rate from 3.5% to 4.5%.

This allowed the central bank to keep inflation under control, with the Bahrain Information and eGovernment Authority (iGA) reporting that the consumer price index (CPI) has not surpassed 3.3% annual growth since it began tracking prices in 2011. According to iGA data, the CPI contracted by 0.4% in 2011 to end the year at 111.6 points, rose by 2.8% and 3.3% in 2012 and 2013, respectively, and grew by 2.6% to end 2014 at 121.6 points. The CPI increased by 1.8% in 2015, 2.8% in 2016 and 1.4% in 2017 to end that year at 129.1 points. Inflation accelerated somewhat in 2018, with the CPI rising by 2.1% to 131.8 points at the end of December, while the first three quarters of 2019 saw y-o-y growth for each month range between -0.4% and 1.3%.

Furthermore, in keeping with its policy of proactive supervision to promote sector stability, the CBB has adopted an approach of risk-based supervision and more engaged monitoring of banks and other financial institutions. This stance helped improve transparency and consumer protection in 2018, leading to recent rating upgrades for the banking sector (see Banking chapter).

Currency Peg Debate

Although the IMF reported in May 2019 that Bahrain’s exchange rate peg has served the country well, delivering low and stable inflation, it also stated that reducing CBB lending to the government – as well as ongoing fiscal adjustment – will be important to support the peg. Some economists have argued that keeping currencies pegged to the US dollar creates external macroeconomic challenges and reduces the GCC’s ability to manage global oil prices.

For example, in a January 2018 editorial, Nasser Saidi, the former minister of economy of Lebanon, argued that GCC countries are raising interest rates based on US actions rather than their own needs. According to Saidi, monetary conditions will result in lower spending and investment, exacerbating difficulties in accessing credit, and raising the cost of borrowing for governments, businesses and individuals. “This will dampen economic activity and growth prospects… exacerbating the negative effects of fiscal austerity, recently imposed taxes (value-added tax [VAT] and excise duties), geopolitical risks and uncertainty,” he explained.

Bahrain ranked 94th out of 190 economies in terms of access to credit on the World Bank’s 2020 ease of doing business index, meaning Saidi’s suggestion that greater exchange rate flexibility through adopting a currency basket that includes the dollar, euro and yuan could benefit GCC nations.

The MOFNE, for its part, reports that with the global and regional backdrop improving in 2019 “the gradual outlook for monetary policy normalisation in the US should provide a more accommodative monetary environment for the planned fiscal consolidation in Bahrain”. When the US Federal Reserve cut interest rates in July 2019 – the first such move in more than a decade – the CBB announced that it had also cut its interest rate on one-week deposit facilities from 2.75% to 2.5%. In addition, the bank eased the overnight deposit rate from 2.5% to 2.25%, the one-month deposit rate from 3.1% to 2.85%, and the lending rate from 4.5% to 4.25%.

Foreign Exchange Reserves

Rising debt obligations and a surge of capital outflows kept the kingdom’s foreign exchange reserves low in 2018. In July of that year regional media reported that these factors were draining the kingdom’s foreign currency reserves at an average pace of $400m per month between January and April 2018. According to World Bank data, the kingdom’s total reserves measured in months of imports has not surpassed three months since reserves in 2010 could cover 3.75 months of needs, and prior to that time not since 1989. Bank data shows that total reserves in months of imports rose from 2.1 in 2013 to 2.47 in 2014, but declined to 1.62 in 2015 and 1.25 in 2016, the latest statistics available.

Meanwhile, in its May 2019 Article IV review, the IMF shows that reserves in months of imports fell from 1.9 in 2015 to 1.2 in 2016 and 2017, and to an estimated 0.9 in 2018. The fund projected that reserves will remain at 0.9 months of imports for 2019 and drop to 0.8 months in 2020.

Fiscal Constraints

Heightened capital outflows and sluggish macroeconomic growth also weighed on Bahrain’s balance of payments in 2018. This added to a trend of heavy government borrowing that has seen public debt rise from 12.6% of GDP in 2008 to more than 110% in mid-2019.

In August 2018 global credit rating agency Moody’s downgraded the government of Bahrain’s long-term issuer rating from B1 to B2, maintaining a negative growth outlook, as a result of the kingdom’s rising external and liquidity risks to “particularly elevated levels”. According to Moody’s, the government’s “persistently high external financing needs” contributed to its negative outlook, with the agency projecting Bahrain’s financing needs would amount to more than 30% of GDP that year.

In May 2019 the IMF reported that Bahrain’s overall deficit improved to 11.7% of GDP in 2018, from 14.2% in 2017, even as public debt hit 93% of GDP by the end of 2018 and the current account deficit rose from 4.5% in 2017 to 5.8% in 2018. In line with Moody’s projections, the IMF reported that all financing needs amounted to 30% of GDP.

State revenue came in at 18.2% of GDP in 2015, 17.5% in 2016, 18.2% in 2017 and an estimated 21.7% in 2018. However, state expenditure has remained well above revenue levels, equal to 31% of GDP in 2015, 30.9% in 2016, 28% in 2017 and an estimated 27.6% in 2018. State revenue is forecast to reach 21.3% of GDP in both 2019 and 2020, while expenditure is projected at about 25.7% and 25.3% of GDP in 2019 and 2020, respectively.

The IMF reports that CBB policies will see Bahrain’s fiscal and external deficits continue over the medium term, noting that with public debt approaching 114% of GDP in May 2019 reserves will likely remain low. Additional downside risks include delays in fiscal adjustment, deteriorating global financing conditions and lower oil prices.

Regional Support

Bahrain is better equipped to mitigate these challenges after the October 2018 announcement that Saudi Arabia, the UAE and Kuwait signed an agreement to provide $10bn of financial support to the government. This followed an earlier announcement in June that talks had begun for an aid package that would be linked to undertaking fiscal reforms, including introducing VAT to boost revenue and overhauling the pension system to decrease expenses.

Bahrain had previously received $7.5bn from regional partners in 2011 that was used to deliver a series of major infrastructure projects, including King Abdullah Medical City, the Sheikh Zayed and Sheikh Jaber highways, and residential areas such as Khalifa Town and Salman Town.

According to IMF projections, the 2018 package is worth around 25% of Bahrain’s annual GDP and 28% of public debt, and will cover more than two years’ worth of state budget deficits. Like the funding from 2011, a significant portion of the assistance will be allocated to implementing another major infrastructure agenda, which includes upgrades at the Sitra refinery and Bahrain International Airport, as well as a host of roadworks.

Bahrain’s economy has benefitted from the support. Moody’s upgraded its outlook for the kingdom from negative to stable in December 2018, reporting that while its external liquidity risks remain elevated, they have “materially reduced following the announcement of a $10bn financial support package from Bahrain’s GCC neighbours”.

In February 2019 Bloomberg reported that corporate and sovereign Bahraini bonds delivered an average return of almost 5% in the months since the $10bn funding was announced, supported by steps taken to reduce the budget deficit and Bahrain’s inclusion in JPM organ Chase’s emerging market bond index in January 2019. Additionally, the aid package has helped jump-start necessary economic reforms, including an ambitious fiscal transformation programme that should see the kingdom significantly reduce its current account deficit over the medium term.

Fiscal Balance Programme

Although the $10bn commitment from GCC peers is a major pillar supporting near-term growth, medium-term focus will remain on addressing Bahrain’s reliance on hydrocarbons revenue, the country’s generous subsidy system and its rising budget deficit. As a result – and as part of its aid package – the kingdom has moved to implement a major reform effort known as the Fiscal Balance Programme 2019-22 (FBP), which takes a multi-pronged approach to eliminating the budget deficit by 2022.

Also announced in October 2018, the FBP identifies six initiatives that are expected to help the country save approximately BD800m ($2.1bn) annually over the 2019-22 period. These are reducing public expenditure, instituting a voluntary retirement scheme for government employees, balancing expenditures and revenues of the state-owned Electricity and Water Authority (EWA), streamlining the distribution of cash subsidies, reducing inefficient operational expenditure of government processes, and enlarging the share of non-oil revenue.

One of the most significant reforms under the FBP was the introduction of VAT on goods and services at the rate of 5%. On January 1, 2019 Bahrain became the third GCC country to institute the tax – albeit on a staggered schedule – joining Saudi Arabia and the UAE, which introduced the tax on January 1, 2018. According to the plan, businesses in Bahrain recording more than BD5m ($13.3m) in annual turnover must register for VAT in the first six months of 2019, while firms with turnover equal to at least BD500,000 ($1.3m) register in June and companies with turnover of more than BD37,500 ($99,500) register in December. Although the limit was only in place for a short period, a June 2019 report by SME Advisor Middle East noted that the BD5m ($13.3m) turnover was the highest VAT threshold in the world, outpacing Singapore’s threshold of $680,000.

The new tax is expected to have a profoundly positive impact on state income generation once fully implemented, with the IMF reporting that it could increase non-oil revenue by 1.5-3% of GDP.


Another pillar of the FBP is a voluntary retirement scheme that was implemented by the Civil Service Bureau (CSB) in November 2018. The policy came in response to what some have characterised as unsustainably high levels of government employment, which has kept recurrent expenditure elevated due to a high number of salaries and accompanying benefits, lessening the government’s ability to finance new capital expenditure.

World Bank data shows that Bahrain’s employment-to-population ratio has risen significantly since 63.9% in 1991, increasing to 65.1% in 2000, 67.9% in 2005 and to a high of 71.4% in 2010. This ratio moderated to 70.9% in 2015 before reaching an all-time high of 72.1% in 2018.

The public sector is an important employer for Bahrainis. The Social Insurance Organisation reported that there were 53,707 citizens working in civil service at the end of 2018 and 93,571 Bahrainis employed in the private sector, for a total of 147,278 local workers. The Labour Market Regulatory Authority (LMRA) reports that the number of employed Bahrainis rose to 153,103 in the second quarter of 2019, out of 748,047 workers in the country, meaning the vast majority are expatriates. Between the second quarter of 2018 and the same period of 2019, private sector Bahraini employment increased by 1.8%, while the number of female Bahrainis working in the private sector grew by 3.4%. Although private sector employment is rising, wage data from the LMRA shows why public jobs remain the preferred choice: citizens in the public sector earned a median salary of BD696 ($1850) per month compared to BD431 ($1140) per month in the private sector in the second quarter of 2019.

Both Vision 2030 and the FBP emphasise increasing the number of Bahrainis employed in the private sector. Designed to streamline public operations and encourage government workers to find employment in private business, the voluntary retirement scheme offered employees, on top of their normal pension, a one-time cash compensation equal to the benefits of five years of service beyond the actual number of years worked, an end-of-service promotion and an additional end-of-service benefit.

As stipulated by the CSB, only employees at government entities subject to CSB regulations were eligible for the scheme, and only those who had served 10 years or more and were not senior employees. Participants are not able to re-join the civil service after voluntary retirement.


The FBP also includes the initiative to streamline and gradually reduce spending on the kingdom’s generous subsidy system, which has historically kept the prices of fuel, electricity and basic goods artificially low. Bahraini citizens are granted free education, health care and subsidised mortgages as well, all of which has contributed to a rising current account deficit. Prior to the FBP, Bahrain had already lifted petrol subsidies in January 2018, pushing the price of fuel up by between 12% and 25%. Additional early efforts to address the deficit included placing excise taxes on tobacco products, energy drinks and soft drinks.

In 2018 Prime Minister Prince Khalifa bin Salman Al Khalifa ordered his Cabinet to reach an agreement with Parliament to implement a rationalised cash payment system that would continue to provide for low and medium-income citizens in some capacity. However, in May 2019 the government rejected lawmakers’ proposals to merge meat and living allowance subsidies into one package, as stipulated by the programme mandate to streamline the distribution of cash subsidies. Slow progress on this front fed into IMF and budget projections that fiscal reserves are expected to remain low, as public debt approached 114% of GDP that month.

Another of the FBP’s six pillars is related to subsidies in the form of balancing the EWA’s expenditure and revenue by 2022. In its economic report for the first quarter of 2019, the MOFNE noted that initiatives to date had included “gradual adjustments to electricity and water tariffs, while preserving benefits for Bahrainis in their primary households”. This referenced the March 2018 announcement that electricity and water tariffs were being hiked for domestic users of up to 3000 kWh per month, from 13 fils ($0.03) per kWh to 21 fils ($0.06) per kWh. At the same time, water tariffs for usage of up to 60 cu metres per month rose from 200 fils ($0.53) to 450 fils ($1.19) per cu metre.

According to a report in regional media, the move was expected to save the government BD435.4m ($1.2bn) in subsidies in 2018, with BD290m ($769.2m) being electricity savings. Prices increased again in March 2019, with electricity tariffs boosted to 29 fils ($0.08) per kWh and water to 750 fils ($1.99) per cu metre. The structure applies to expatriates and the secondary residences of citizens.

Gradual Progress

In May 2019 the kingdom revised its budget deficit forecasts upwards for the next two years, with estimates for higher non-oil revenue and lower government expenditure both expected to miss targets. Budget forecasts based on IMF GDP estimates show that Bahrain’s non-oil revenue is expected to reach 5.4% and 5.7% of GDP in 2019 and 2020, respectively, against targets of 6.2% and 6.6% outlined in the FBP. Public expenditure is simultaneously forecast to be 24% and 23.1% of GDP in 2019 and 2020, against targets of 22.6% and 21.6%, respectively. Nonetheless, some headway is being made: that same month the MOFNE reported that without the guidance of the FBP, government expenditure would likely account for 25.5% of GDP in 2019 and 25.2% in 2020.

Strong progress has taken place on a number of other FBP initiatives since the programme’s launch, with the MOFNE stating that the government has been addressing the mandates to simplify government processes and increase non-oil revenue by launching new online systems to improve the ease of doing business, including the Benayat system for issuing building permits and the Sijilat system that allows for easier commercial registration.

The government has also established new bodies tasked with improving public financial management, including the Office of Public Debt Management, the Central Internal Control Unit, the Central Government Procurement Unit and the Central Efficiency Unit, all operating under the MOFNE.


The inflationary effects of the kingdom’s fiscal reform efforts have been relatively minimal. In its first quarter 2019 “Economic Quarterly” report, the MOFNE reported that inflation “remained subdued by historical standards in spite of ongoing fiscal consolidation measures” in 2018, with CPI inflation hitting 2.1%, compared to 1.4% in 2017, largely as a result of the government reducing gasoline subsidies. According to the MOFNE, housing and food prices recorded modest inflation throughout 2018, although a decision to remove utilities subsidies saw inflation in that category accelerate to around 4% in the early months of 2019.

The ministry further reported that while transport inflation was elevated in 2018, recording a 15% y-o-y rise in December 2018, its overall inflationary contribution was kept to a minimum after price increases, and y-o-y inflation in the category in February 2019 dropped to nearly 0%. Weaker-than-expected inflationary pressures were also owed to strength of the US dollar in 2018 and early 2019, which kept the cost of imports relatively stable. Moreover, the introduction of VAT on January 1, 2019 did not have a large, immediate effect. CPI inflation for the second quarter of 2019 showed a y-o-y rise of just 0.6%.


Looking to a more external driver of economic performance, total trade in Bahrain has risen significantly over the previous decade. Data from the European Commission shows the total value of Bahrain’s trade jumping from €10.95bn in 2009 to €29.24bn in 2018 – a 167% increase. The country’s historic trade deficit has also shifted to a surplus in recent years, supported by recovering oil prices and rising manufacturing output.

The European Commission shows Bahrain’s trade deficit falling from €9.28bn in 2008 to €7.4bn in 2011 and €6.16bn in 2013, and recording a surplus of €2.4bn in 2014 when oil prices were very high in the first half of the year. The oil price crash brought the trade balance back into the red by 2016, when Bahrain recorded a €1.84bn deficit, although exports recovered to push the trade balance to a €1.87bn surplus in 2017. In 2018 the kingdom hit a 10-year record with a trade surplus of €4.06bn.

One measure of diversification efforts is the balance of non-oil trade. The MOFNE reports that non-oil exports rose by 7.7% in 2018, while imports increased by 12.6%. The value of the kingdom’s nonoil exports hit $7.5bn that year, with the value of exports of domestic origin rising by 9.2% to $6.1bn. Merchandise imports simultaneously jumped to $14.9bn, resulting in a non-oil trade deficit of $7.4bn in 2018 – indicating the importance oil exports still hold for the overall trade balance.

Total exports rose by 19.3% y-o-y in the first quarter of 2019, to $2.1bn, supported by a 33% surge in exports in March. The value of imports fell by 10.5% y-o-y in the same quarter to rest at $1.9bn, for a $200m trade surplus. The quarter’s import value was 20.9% lower than what was recorded in the final quarter of 2018, leading the MOFNE to believe that a late-year import surge was spurred by the impending VAT implementation in January 2019.

This positive trend was reversed by September 2019, however, with iGA data showing the total value of exports for the first three quarters of the year at $6.2bn, while the total value of imports stood at $9.9bn, for a trade deficit of $3.7bn.

Top Partners

The European Commission lists Bahrain’s top-five trading partners by overall trade value in 2018 as the UAE with €5.47bn, or 18.7% of the total, the EU with €3.79bn (12.9%), Saudi Arabia with €3.24bn (11.1%), China with €2.39bn (8.2%) and the US with €2.2bn (7.5%). Bahrain recorded its largest trade surplus in 2018 with the UAE (€3.25bn), followed by Saudi Arabia (€1.39bn) and Japan (€653m). Bahrain ran its largest trade deficits with the EU (€1.22bn) and China (€785m).

In addition to a landmark free trade agreement (FTA) signed with the US in 2004 and ratified in 2006, Bahrain has signed a number of regional trade agreements (RTAs). These include an RTA with other GCC members that led to the creation of a common market in January 2008, as well as the GCC-Singapore RTA and the Pan-Arab Free Trade Area. In June 2009 the GCC signed an FTA with the European Free Trade Association that includes Iceland, Liechtenstein, Norway and Switzerland. The agreement entered into force in November 2014.

In July 2004 China and the GCC began negotiations for an FTA, although no discussions have taken place since December 2016. The GCC has also worked to negotiate FTAs with Australia and Japan, although both these deals have stalled as well.

Hydrocarbon Exports

Although domestic oil production has been flat for years, petroleum products from the Sitra refinery, which receives the bulk of its crude inputs from Saudi Arabia, dominate the Bahraini export base.

Hydrocarbon exports could remain a major revenue generator over the longer term, after the National Oil and Gas Authority (NOGA) announced in 2018 the kingdom’s largest-ever oil and gas discovery in the shallow waters of the Khaleej Al Bahrain basin. Early estimates, formulated by US upstream consultancy DeGolyer & MacNaughton, as well as US oilfield services firm Schlumberger, state that there could be 80bn barrels of shale oil and 10trn-20trn cu feet of tight gas reserves located in the area.

Commercial production could see Bahrain become one of the first offshore shale gas producers, while the country’s proximity to the region’s largest petrochemical facilities would offer a competitive advantage to Bahraini crude producers (see Energy chapter). According to NOGA, officials hope to begin commercial production at the site by 2023.

Diversified Base

Although new oil and gas discoveries offer considerable long-term potential for bolstering exports and reducing the trade deficit, Bahrain already has one of the most well-diversified export sectors in the GCC, with manufacturing accounting for nearly one-third of total receipts. According to data from the World Trade Organisation (WTO), Bahrain’s export base was dominated by petroleum products in 2016, the most recent year for which statistics are available. Fuel and mining products accounted for 65% of exports that year, followed by manufacturing (31.5%), agricultural products (3.1%) and others (0.4%).

Non-Oil Exports

Bahrain’s top non-agricultural exports by value in 2016 were non-crude petroleum oils ($3.7bn), crude petroleum oils ($2.2bn), iron ores and concentrates ($777m), aluminium wire ($700m), and aluminium plates, sheets and strip ($503m). The kingdom’s top agricultural exports by value were food preparations ($90m), cane or beet sugar ($67m), cigars, cheroots and cigarillos ($47m), and cheese and curd ($39m).

When it comes to services exports, the WTO shows a 2016 composition of other commercial services (59.5%), travel services (35%), goods-related services (3.9%) and transport services (1.6%). iGA statistics, which track non-oil exports and re-exports, found that the single-largest export earner in 2018 was agglomerated iron ores and concentrates, with $989.5m in receipts. This was followed by non-alloyed aluminium wire ($748.2m), unwrought aluminium alloys ($504.9m), rectangular alloyed aluminium plates ($361.8m), and other semi-finished iron and steel products ($309.1m) to round out the top-five categories. Although output from the Aluminium Bahrain plant holds a lot of weight in the country’s non-oil export base, value-added manufacturing also makes a significant contribution; air conditioning machines added $71.4m to export earnings in 2018, while wooden furniture and cotton bed linen accounted for $63.2m and $52.8m worth of exports, respectively. This composition remained largely the same in 2019, with gold ingots valued at $29.4m sitting just outside the top-five export earners in September of that year.


Despite internal fiscal challenges, Bahrain remains an attractive place for investment, with the World Bank’s 2020 ease of doing business index ranking the kingdom 43rd out of 190 economies across 10 categories related to establishing and operating a private business. This is a significant rise over its ranking of 62nd in the 2019 edition, with the country improving its score in almost every category. The new ranking places Bahrain ahead of other GCC member states Saudi Arabia (62nd), Oman (68th), Qatar (77th) and Kuwait (83rd). Furthermore, Bahrain’s overall score out of 100 rose by 5.9 points in 2020 to 76, putting it well above the Middle East and North Africa average score of 60.2.

Bahrain saw its largest gains in the categories of resolving insolvency and dealing with construction permits. The former’s score rose by 13.6 points and the latter’s by 9.7 points. The kingdom continued to perform well in the categories of paying taxes (1st place, up from 5th in 2019) and registering property (17th place, up from 26th in 2019), but ranks less favourably in getting credit (94th) and trading across borders (77th). However, these categories also saw gains in the 2020 edition.

According to the EDB, Bahrain’s investment promotion agency, direct investment was up by 13% in 2018, with investment in companies rising by 29% and investment in job creation by 68%. The EDB’s 2018 annual report showed Bahrain realising $830m of new direct investment at 92 new and expanding companies that year, with 4772 employment opportunities created as a result.

The board identified a host of sectors that received direct investment and helped support economic diversification in 2018, including financial services, tourism, real estate, education, health care, manufacturing, transportation, ICT and startups. The EDB reports that the tourism, real estate, education and health care sectors accounted for the largest portion of direct investment that year (63%), bringing in $526.4m, followed by manufacturing, transport and logistics at $200.3m, or 24% of total investment. Financial services came in third with $64.4m in investment, or 8% of the total, and ICT welcomed $39m in funds, equal to 5% of the total. In terms of job creation, manufacturing, transport and logistics held the lead, with direct investment in these areas allowing for 2222 new local jobs.

Much of the success of Bahrain’s business environment can be attributed to the government’s drive to implement reforms aimed at making the kingdom an attractive place to live and work for both locals and expatriates. “All foreigners are welcome in Bahrain; there are 100 different nationalities active on the bourse alone,” Narjes Jamal, COO of Bahrain Bourse, told OBG. “Bahrain is a very small country, but compared to others in the region, it is making very good progress towards major economic achievements. Five years back, every ministry was working at a different pace, but now you can see the changes happening: there is a real spirit of collaboration.”

The Right Environment

In a testament to this drive and open sentiment, in July 2016 the Cabinet approved an amendment to the kingdom’s Commercial Companies Law that allows for 100% foreign ownership of businesses across an array of sectors in an effort to “spur growth, generate rewarding jobs for citizens and attract businessmen to invest”. The latest version of the law approves full foreign ownership in sectors such as residency, food, administrative services, arts, entertainment and leisure, health and social work, information and communications technology, manufacturing, mining and quarrying, water supply, real estate, and professional, scientific and technical services.

Beyond its liberalised domestic market, Bahrain also benefits from its membership in the GCC Common Market, offering investors duty-free access to a regional market of 30m people and, more broadly, 1.5bn people in the Middle East and North Africa. There are no restrictions on capital repatriation in Bahrain, and duty-free import of machinery and raw materials is often possible.

In addition, the Ministry of Industry, Commerce and Tourism reports that Bahrain’s advanced road network linking it to the GCC and Middle East via the King Fahd Causeway has supported logistics, while reasonably priced energy – a crucial consideration for energy-intensive manufacturing industries – has also offered investors a sizeable advantage. Ongoing infrastructure development at Salman Industrial City, Bahrain Financial Harbour and Khalifa bin Salman Port is also expected to support growth, while upstream oil development and refinery upgrades spur activity in construction and associated sectors.

Bahrain’s human capital pool – a young and well-educated population with high bilingualism and one of the highest literacy rates in the region – is also viewed as a major advantage for both businesses and new expatriates looking to establish a social circle. Bahrain ranked first in the world for expatriate satisfaction in 2017 and 2018, according to InterNations, an expatriate community organisation present in some 420 cities worldwide.


Bahrain’s economy is set to benefit from a host of supportive policies, projects and fiscal reprogramming over the near and long term. The $10bn allocation from GCC peers will provide much-needed liquidity and stability to the country’s finances, while also increasing capital expenditure capacity in 2019 and 2020. The kingdom’s liberal, diverse and incentivised business environment should continue to attract new investment, even as subsidy reforms weigh on investor sentiment and cloud the near-term outlook.

At the same time, the kingdom’s recent oil and gas discovery and large-scale infrastructure projects are expected to support macroeconomic expansion in the coming years, as well as bolster private sector employment, add to Bahrain’s quality of life and expedite reaching the goals within Vision 2030.

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The Report: Bahrain 2020

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