Bahrain moves forward with economic diversification plans

 

For much of its history, Bahrain was the name for the eastern coast of Arabia. Bahrain means “two seas” in Arabic, and although it is unclear which two seas the name refers to, it has recently come to identify the 33 natural islands of the Awal archipelago.

History

The first notable inhabitants of the region were the Dilmun civilisation approximately 6000 years ago, but throughout history Bahrain’s geographically strategic location has attracted the attention of numerous empires, including the Persians, Sumerians, Assyrians, Babylonians, Arabs, Portuguese and British. Once a commercial centre for the ancient region of Mesopotamia, Bahrain’s key location for trans-Gulf trade continues to draw merchants and multinationals to this day.

Economy

In 1932 Bahrain pioneered oil production in the Middle East, and in so doing established the region’s initial framework for the petroleum industry. The new resource enabled Bahrain to modernise its economy by moving beyond traditional industries such as pearl diving and fishing.

At an early stage the kingdom sought to diversify its economy, and established itself as a leading regional financial centre in the 1970s and 1980s. During Lebanon’s civil war, it was Bahrain’s well-established regulatory system that encouraged various banks seeking safety and stability to move their capital and set up base in Bahrain.

Today, the country’s national plan, Bahrain Economic Vision 2030, aims to enhance private sector growth and continue government investment in infrastructure, affordable housing, human resource development and digital transformation. The kingdom maintains a developed industrial sector and hosts the world’s largest single-site aluminium smelter, Aluminium Bahrain, with downstream businesses creating products for export. Other industries in Bahrain include downstream oil and gas products, as well as a growing food industry that serves the global economy. The authorities are currently working with Indonesia to set up a halal certification agency so that Bahrain can continue to export to Saudi Arabia, one of the country’s main markets, following Saudi Arabia’s ruling that food imports require halal certification.

Model of Development

In the World Bank’s “Doing Business 2020” report, the kingdom ranked 43rd out of 190 countries for ease of doing business. In terms of specific indicators, Bahrain placed first in the paying taxes category, 17th for registering property and 17th for dealing with construction permits. However, it ranked 94th for getting credit and 77th for trading across borders, highlighting room for improvement in these areas. In the World Economic Forum’s 2019 Global Competitiveness Index, the kingdom’s overall ranking rose five places to 45th out of 141 economies. It placed 18th for its product market, 31st for infrastructure, 33rd for its labour market and 37th for its financial system. However, the kingdom ranked 117th for macroeconomic stability. The IMF projects that Bahrain’s GDP will amount to $38.2bn over the course of 2019, and expects this to increase to $39.3bn in 2020. According to its October 2019 estimates, the IMF expects GDP to expand by 2%, 2.1% and 2.4% in 2019, 2020 and 2021, respectively.

Bahrain’s model of development has been studied and formalised by the UN Industrial Development Organisation (UNIDO), in partnership with the Arab Regional Centre for Entrepreneurship and Investment Training, based in Manama. The UNIDO Entrepreneurship Development and Investment Promotion programme, developed in Bahrain, has been implemented with UNIDO support in 42 developing countries around the world. In 2000 the government created the Bahrain Economic Development Board, chaired by the crown prince, Sheikh Salman bin Hamad bin Isa Al Khalifa. The organisation was created to enhance the competitiveness of the kingdom’s economy by improving the ease of doing business and fostering a more attractive environment for foreign investors. In a bid to facilitate increased privatisation and improve efficiency, a fully independent body, the Tender Board, works to increase government transparency and clarity of the public tender system by creating pre-certification, online tracking and standardisation of tenders.

Government Structure

Bahrain gained independence from Britain in 1971 and has been ruled as a constitutional monarchy since 2002 under the leadership of King Hamad bin Isa Al Khalifa, who is the country’s current ruler. He came to power in 1999 following the passing of his father, Sheikh Isa bin Salman Al Khalifa, who began his rule in 1961. Sheikh Khalifa bin Salman Al Khalifa, the country’s prime minister, has served as the head of government since 1971. The crown prince, Sheikh Salman, is also the deputy supreme commander of the Bahrain Defence Force, the first deputy prime minister and chairman of the Bahrain Economic Development Board. Executive authority is entrusted to the king and his appointed Council of Ministers.

A bicameral legislature, known as the National Assembly, was re-established in 2002 after its suspension in 1975. The National Assembly consists of a 40-seat lower house, the Council of Representatives, whose members are elected to four-year terms; and the Consultative or Shura Council, a 40-seat upper house, whose members are appointed by the king. The Shura Council has veto power over the lower house. The latest parliamentary elections took place in November 2018 and garnered 67% voter turnout, despite bans on some opposition figures due to their membership in dissolved political societies. Women doubled their presence in the Parliament that year and now hold six of the 40 seats.

Financial Services

Bahrain’s rise to prominence as a key regional financial centre occurred in the 1970s. The banking sector benefitted significantly from the kingdom’s economic diversification programme and is highly regarded for its regulatory framework under the Central Bank of Bahrain. Throughout 2017 regulations were updated at a quick pace in an ongoing effort to keep up with the impact of new technologies on the sector. According to the central bank, there were over 385 financial institutions in the country as of April 2019, and the sector contributed 16.7% to total GDP. Notably, approximately 66% of employees in the sector are Bahraini nationals (see Banking chapter).

Islamic Finance

As of end-2016 Bahrain was home to the highest number of Islamic financial institutions in the Middle East, and ranked second globally to Malaysia on the 2018 ICD-Thomson Reuters Islamic Finance Development Indicator for the most developed Islamic finance market. The kingdom also hosts a number of regulatory institutions that provide international standards for the emerging sector such as the Accounting and Auditing Organisation for Islamic Financial Institutions, the International Islamic Financial Market, the Islamic International Rating Agency, and the General Council for Islamic Banks and Institutions. The kingdom regularly issues sukuk (Islamic bonds) that are met with full subscription rates. Bahrain is also home to seven takaful (Islamic insurance) companies.

Energy

The energy sector is a pillar of Bahrain’s economy, accounting for the majority of government revenue but a shrinking proportion of GDP. Upstream recovery technology enabled Bahrain to increase its oil production rate to over 58,000 barrels per day (bpd) in 2015, up from 48,000 bpd in 2013. The government’s target to reach 100,000 bpd in 2017 was impacted by the drop in global oil prices, although operations have recovered on the heels of rising prices (see Energy chapter).

The country refines approximately 260,000 bpd, with the majority of crude resources coming from the Abu Safa Field, which Bahrain shares with Saudi Arabia. A new pipeline with the capacity to transfer roughly 350,000 bpd from Saudi Arabia to a Bahraini refinery, commissioned in 2018, replaced an ageing 230,000-bpd pipeline. Looking ahead, gas production is expected to increase from 1.5bn cu feet to 2.7bn cu feet per day.

An offshore shale oil discovery was announced in April 2018; however, it is still in the process of being assessed for its commercial viability, with feasibility studies ongoing. A deep gas block under the country’s mainland was announced that same day, and commercial production is expected to begin in 2020. The kingdom also commissioned a liquefied natural gas terminal in 2018 to serve as an import facility, which is hoped to ensure that the country will be able to meet power and industrial demand. Although there are high-potential oil and gas projects in the pipeline, the authorities remain committed to diversifying the economy as well.

Transport

The kingdom’s geographic location is a strategic asset, enabling it to serve as a satellite transport hub for the region. The Khalifa Bin Salman Port has enhanced the country’s role as a primary supplier of goods to Saudi Arabia, the region’s largest market. Bahrain is also linked to Saudi Arabia via the 25-km King Fahd Causeway, which is being expanded to handle increased traffic. A new causeway is also slated to be tendered in 2019. In addition to this, Bahrain International Airport is currently in the midst of an extensive expansion and modernisation programme, which is expected to further improve the country’s status as a tourist destination and a centre for logistics by 2020. Bahrain Customs Affairs is similarly undertaking the modernisation of various eCustoms initiatives in an effort to streamline processes and increase pre-clearance capabilities.

Additionally, there are infrastructure works under way to improve urban transport. For example, the kingdom’s metro network, which is scheduled to commence operations in 2023, will have six lines spanning 109 km as well as electric, driverless trains. The new metro system is set to significantly improve urban mobility across the nation.

Tourism

Thanks to its vibrant history, rich culture and diverse population, the kingdom attracts a large number of tourists, particularly from other GCC countries. In 2016 Manama was named the Capital of Gulf Tourism by the minister of tourism of the GCC. The annual Formula 1 Gulf Air Bahrain Grand Prix is a significant driver of tourism revenue (see Tourism & Retail chapter).

The kingdom’s Ministry of Tourism was absorbed by the Ministry of Industry and Commerce in 2015 to help accelerate development of the sector. Established in 2015, the Bahrain Tourism and Exhibitions Authority has begun to formalise the sector, encourage investment in tourism facilities and spearhead the sector’s development with a new identity, “Ours. Yours. Bahrain”, to highlight the hospitable and welcoming culture of the country.

Climate

Bahrain’s climate consists of two seasons: a hot and humid summer, and a mild winter. April through October generally mark the summer months, with the average temperature hovering at around 40°C, with highs of up to 48°C. During the winter months – generally November through to March – the temperature ranges between 10°C and 20°C. The country’s annual rainfall averages 77 mm, which typically comes during the winter season.

Geography

Due to land-reclamation projects, the country has increased its overall landmass to more than 765 sq km, up from its original size of 665 sq km. The archipelago consists of 33 islands and is situated off the eastern shores of the Arabian Peninsula. The four principal islands are Bahrain Island – accounting for 76% of the total landmass – Al Muharraq Island, Sitra Island and Umm Al Nasan Island, all of which are interconnected by causeways. Bahrain Island is the site of the King Fahd Causeway. The capital Manama sits at the northern-most part of Bahrain Island and is the country’s most populous city. Other major cities include Riffa, Muharraq, Isa Town and Sitra. Bahrain International Airport is located in Muharraq. Jebel Al Dukhan is the kingdom’s highest point, at 122 metres, as the majority of the landmass consists of low-lying desert. Less than 3% of land is arable, and the primary agrarian area is situated on a 5-km strip on Bahrain’s northern coast, which produces dates, almonds, figs and pomegranates.

Natural Resources

The country’s primary natural resources are oil, gas, fish and pearls. The traditional industries of fishing and pearl diving have diminished substantially since Bahrain began oil production, but they remain culturally significant. Despite the fact that the kingdom was the first GCC country to discover oil, it has smaller petroleum reserves than its neighbours.

Water is another finite local resource for the kingdom, and the island’s primary aquifer has been depleted by overuse. Bahrain currently depends on desalination for approximately 90% of its potable water, as fresh water sources are scarce.

Population

The kingdom hosts a diverse, multicultural population which, according to World Bank data, totalled approximately 1.57m in 2018. The population expanded by more than 40% in the decade leading up to 2018, from 1.11m in 2008. According to the Central Informatics Organisation, the percentage of foreign nationals in Bahrain has increased from 38% of the population in 2001 to approximately 53% in 2016, with the majority hailing from Asia. Due to the large size of the expatriate workforce, males account for more than 62% of the population. Almost 90% of people live in urban areas, with most in the Capital Governorate covering Manama. A 2016 report by Euromonitor projects the population is likely to reach 2.6m by 2030, with 53% of foreign citizens from South and South-east Asia.

Language

The official language of the kingdom is Arabic. There are several colloquial tongues, however, some closer to Khaleeji (Gulf) Arabic and others closer to Iraqi Arabic. English is widely spoken due to the sizeable expatriate community and international business environment. Most street signs and documentation also include English, which is a compulsory second language in the school system. However, protectionary laws exist that require most signage to include an equal amount of Arabic at a minimum. Other languages that are widely spoken in the country are Farsi, Urdu, Hindi, Malayalam and Tagalog.

Religion

Islam is the official religion of Bahrain.

Approximately 98% of Bahraini nationals are Muslim and are adherents to either the Shia or Sunni denominations, but the kingdom is considered to be tolerant regarding the practice of different religious beliefs. The 2010 census stated that 70% of the country’s population classified themselves as Muslim and 30% as members of other religions.

The expatriate population includes substantial Christian, Hindu, Buddhist and Sikh communities. The country is also home to a small indigenous Jewish community that originally emigrated from Iraq in the late 19th century. Bahrain’s freedom of faith is considered a defining characteristic of the Gulf state, and the travelling delegation, “This is Bahrain”, has been promoting awareness of Bahrain’s culture internationally since 2014, highlighting the kingdom’s ethnic and religious diversity.

Education

Bahrain was the first Gulf country to initiate public education – for boys in 1919 and for girls in 1928. Since then, Bahrain has invested heavily in the education sector, and the government currently spends approximately 11-12% of its budget on education development. Bahrain’s literacy rate is the second highest in the Arab world, at 97.5% as of 2018, according to the World Bank. In line with Bahrain Economic Vision 2030, the government launched the Quality Assurance Authority for Education and Training, which has a mandate to develop and implement standards for institutions.

Each employed expatriate worker has to make mandatory contributions to Tamkeen – the semi-autonomous state agency charged with development of the private sector. These are then invested throughout Bahrain’s education and training system with a view to cultivating the local workforce.

For its part, the Bahrain Institute of Public Administration aims to improve the technical and soft skills of public administrators. One of its focuses is on sharing knowledge by bringing in outside experts and offering its services to foreign governments across the GCC (see Education chapter). A number of the private universities that operate in Bahrain are partnered with international institutions, such as the British University of Bahrain, and the American University of Bahrain, which officially opened its doors in the 2019/20 academic year.

Health Care

As has been the case with other sectors, Bahrain has historically led the GCC states in health care. The American Mission Hospital (AMH), established in 1902, is the region’s oldest health care institution. Bahrain created its Ministry of Health in 1973 and modelled its policies on the successful operations of the AMH. The government subsidises health care costs for all of its citizens.

In an effort to reduce costs and improve service quality, the Supreme Council of Health has developed an e-Health initiative, which connects the country’s hospitals to a central database of medical records. The Parliament and the Shura Council approved Law No. 23 of 2018, also known as the Health Insurance Law, which applies to all nationals, residents and visitors. It has as an overarching goal to increase the privatisation of the health sector. The law requires expatriates and their employers to pay health insurance contributions (see Health chapter).

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