Bahrain’s economy rebounded from the impact of the Covid-19 pandemic and more recently successfully avoided the worst of global inflationary pressure, largely due to the fact that its currency, the dinar, is pegged to the US dollar. Bahrain’s recovery was also aided by forward-thinking policy formulation. While the country faced economic headwinds following the global drop in oil prices in 2014, a $10bn financial aid initiative from Kuwait, Saudi Arabia and the UAE in 2018 helped stabilise the economy and enabled the government to embark on a major fiscal reform programme.
In light of economic challenges related to the pandemic, volatility in energy markets and the fallout from Russia’s invasion of Ukraine, deadlines for macroeconomic targets such as eliminating the fiscal deficit have been postponed. This has allowed key public and private operators to reset to new realities and refocus on achieving the goals of Bahrain Economic Vision 2030, the government’s blueprint for long-term socioeconomic development. Sectors such as financial services, ICT, tourism, energy, manufacturing, and transport and logistics are being harnessed to propel economic growth and attract private investment. While regional competition in those areas is strong, there appears to be an increasing openness across the GCC towards regional cooperation as governments recognise the bloc’s potential in a shifting global geopolitical and economic landscape. Indeed, the region’s location along international shipping routes, and its abundant oil and gas reserves present multiple opportunities for improving trade relations and revenue.
Development Agenda
Bahrain Economic Vision 2030 was formulated through collaboration between local public and private entities, as well as a range of international bodies. The plan was launched in 2008 and is structured around three guiding principles: sustainability, fairness and competitiveness. Bahrain Economic Vision 2030 has at its core the diversification of the economy away from the country’s dependence on hydrocarbons revenue by developing high-productivity, high-value sectors. Bahrain’s economy is experiencing increased digital integration across the board, with advanced technologies harnessed to raise efficiency and facilitate high-income job creation.
In October 2021 the government launched the Economic Recovery Plan to help Bahrain adapt to post-pandemic economic realities and keep the country on course to achieve its long-term development goals. The plan was developed around five pillars: the continued development of strategic priority sectors, the implementation of the Strategic Projects Plan (see Construction & Real Estate chapter), the simplification of commercial procedures, the achievement of sustainable fiscal and economic stability, and the creation of employment opportunities for Bahrainis (see analysis).
Medium-term agendas have also been implemented to guide progress towards the aims of these and other long-term plans. The Government Action Plan 2023-26 was approved by the Council of Representatives in early 2023. The plan prioritises issues including digital transformation, the enhancement of public services and higher standards of living for Bahrainis.
Oversight
Government authorities are key to establishing regulatory frameworks that facilitate economic development and improve fiscal stability. These include the Ministry of Finance and National Economy (MFNE); the Labour Market Regulatory Authority; the Bahrain Economic Development Board (Bahrain EDB), which was established to attract private investment; and the National Bureau for Revenue, Bahrain’s tax authority.
Meanwhile, entities such as the Labour Fund ( Tamkeen), a semi-autonomous agency that supports the development of the country’s private sector and labour market, and the Supreme Council for the Environment are key to the success of the country’s medium- and long-term development agendas. Bahrain’s collective approach to economic development is encapsulated by the Team Bahrain initiative, which was launched in 2018 to foster cross-ministerial and public-private cohesion to enhance agility across different sectors.
The Bahrain EDB, for its part, works to enhance Bahrain’s investment climate, acting as the primary point of communication for international investors. Identifying potential avenues for investment and growth is among the Bahrain EDB’s chief mandates. Since its launch in 2000, the Bahrain EDB has been influential in encouraging leading international companies to set up in Bahrain and has played a pivotal role in securing milestone achievements for the kingdom. Some of these include the introduction of Islamic banking regulations in 2001; the signing of a free trade agreement (FTA) with the US in 2004 and its ratification in 2006; the opening of Khalifa bin Salman Port in 2009; the prioritisation of cloud solutions and the launch of commercial 5G services in 2017; the establishment of cloud innovation centres as part of the University of Bahrain’s migration of its IT infrastructure to Amazon Web Services; and the passing of a new data jurisdiction law.
Business Environment
Bahrain has an open, investor-friendly economy, with the government paying close attention to the needs of the private sector in the formulation of laws and regulations. Bahrain permits 100% foreign ownership in most sectors without the need for local sponsors or partners. The number of sectors open to 100% foreign business ownership was expanded in 2017, while further relaxation in 2019 saw foreigners permitted 100% ownership of firms engaged in oil and gas activities, pending certain conditions. The various special economic zones, industrial zones and trade zones throughout Bahrain offer a range of rates and incentives to investors (see Industry chapter).
Bahrain has been keen to respond to the challenges cited by investors, working towards increasing the efficiency and ease of completing commercial procedures, accelerating the issuance of licenses, and updating laws and regulations to further improve the ease of doing business in Bahrain. Investors should be aware that companies are required to have local commercial registration to bid on government tenders.
Nevertheless, increasing inflows of international investment and capital reflect the kingdom’s overall dynamism as a destination for business. Another attractive factor for foreign investors is the kingdom’s free trade agreements with 22 countries. In addition, Bahrain also has investment protection and promotion agreements with 34 countries and double taxation avoidance agreements with 41 countries.
Construction on the 1.1m-sq-metre, BD75m ($199m) US Trade Zone began in February 2022, and it is slated to become operational by 2025. Meanwhile, the 2022 implementation of a long-term Golden Visa to attract international talent to the kingdom underscores the government’s continuing efforts to improve the investment environment and strengthen the local skill base.
Policy Regulations
Resolution No. 30 of 2022 was released in June of that year to establish an official regulation framework for public-private partnerships (PPPs). The various articles of the document were formulated following a review of a number of existing laws and policies pertaining to government tendering and privatisation released between 2002 and 2021.
The policy is Bahrain’s first dedicated set of PPP regulations, precipitated by the government’s intention to seek private partnerships for its large-scale infrastructure development programme. The policy is designed to enable the government to benefit from private sector expertise and agility, reduce strain on the national budget – historically the majority of national infrastructure works were funded by the government – and to improve transparency in public entities’ business interactions with the private sector.
The policy document contains details regarding tendering, project timelines, proposal submission, ownership of partnership assets and contract closure. Once a project has been approved as a PPP by the ministerial committee, the opportunity will be presented to the private sector, or, in some cases, to specific private entities. Qualifying firms may then submit proposals detailing how they meet government-issued criteria. Investors can form a consortium on the basis that any bid and resulting contract is registered to the consortium rather than to any of its constituent entities.
Taxes
Bahrain is home to a favourable tax regime with no restrictions on the repatriation of capital, profits or dividends. The only form of income tax applied in Bahrain is a 46% corporate income tax for specific operators within the oil and gas sector. The tax is levied on net profit for each tax-paying period. Bahrain implemented 5% value-added tax (VAT) in 2019 that was then doubled to 10% in January 2022. Certain goods and services are afforded a 0% VAT rate or VAT exemption. The National Bureau for Revenue is responsible for VAT oversight and implementation, and the voluntary and mandatory registration thresholds are BD18,750 ($49,700) and BD37,500 ($99,500), respectively.
A unified excise tax agreement among GCC countries came into force in Bahrain in December 2017. Tobacco and energy drinks are subject to a 100% tax, and carbonated soft drinks to a 50% rate. A range of other taxes apply, such as a Customs duty of 5%, except for cigarettes and alcohol and their respective rates of 200% and 225%; a stamp duty of 2% on most real estate transactions; however, in cases when transactions are settled inside two months the rate drops to 1.7%; company registration fees that range from BD25 ($66.30) to BD1000 ($2700), depending on the nature of the organisation; a 10% municipality tax applied to commercial and residential rents for non-Bahrainis; and social security taxes. Employers’ social security contribution requirements are 12% of Bahraini employees’ salaries and 3% of that for expatriate workers.
Size & Performance
Bahrain’s GDP contracted by 2.8% year-on-year (y-o-y) in the first quarter of 2021, according to figures from the MFNE, but has since followed an upward trend. Indeed, real GDP increased by 5.5%, 2.1% and 4.3% during the second, third and fourth quarters of 2021, respectively, with GDP for the year rising by 2.2% to reach $34bn. Growth continued into 2022, with a 5.3% y-o-y increase during the first quarter, 6.8% during the second, 3.3% during the third and 4.1% during the fourth. The year closed with a 4.9% rise in real GDP, the highest such rate since 2013.
Oil’s contribution to GDP saw 0.1% y-o-y growth in the fourth quarter of 2022, due in large part to an increase in global prices. Crude averaged $100.80 per barrel in 2022 compared to around $70.70 per barrel the previous year. Further supporting the sector’s contribution to GDP, domestic consumption of petrol rose 13.1% in 2022. Meanwhile, annual oil production from Abu Safa field reached 54.7m barrels in 2022, accounting for 79% of the kingdom’s total oil production – a 0.3% decrease compared to 2021. Oil production from Bahrain Field reached 14.4m barrels in 2022, recording a decline of 7.2%. Natural and associated gas production fell 1.1% y-o-y in the fourth quarter of 2022. Looking towards the future, it is expected that global oil prices will drop in 2023, even as progress on a modernisation drive by the Bahrain Petroleum Company, the national oil company, is expected to reinforce sector performance. The project, which is set to increase refining capacity to 380,000 barrels per day (bpd) from 267,000 bpd, is due for completion in the fourth quarter of 2023. Additionally, in November 2022 the government announced the discovery of two unconventional gas reservoirs.
The year 2022 saw significant growth in the non-oil sector, which contributed 83.1% to GDP, led by financial corporations, outpacing oil and gas for the first time. Indeed, financial corporations grew by 4.1% that year, recording 8.2% expansion during the fourth quarter. Data from the MFNE for 2022 shows the fastest nonoil growth since 2013, at 6.2% in real terms. Financial corporations contributed 17.5% to GDP, followed by oil and gas at 16.9%. Other major sectors included manufacturing (14%), government services (13.1%), construction (7.2%) and transport and communication (6.8%). Smaller sectors included real estate and business activities (5.3%), social and personal services (5.2%), trade (4.3%), and hotels and restaurants (1.7%).
In March 2023 ratings agency Fitch reported that non-oil sectors – such as construction, real estate and those related to tourism – were the drivers behind the country’s GDP growth in 2022. However, the agency forecast expansion would slow to 2.8% in 2023, with the expected lower oil prices and resulting fiscal consolidation among the reasons behind the slowdown. The IMF has taken a more moderate view, estimating Bahrain’s real GDP expansion at 4.2% in 2022 and projecting growth will contract to 3% in 2023.
Inflation & Interest Rates
According to the IMF, Bahrain’s consumer price index (CPI) dropped from 1% to -2.3% between 2019 and 2020, before rising to -0.6% in 2021 and 3.6% in 2022. The Middle East average across those years was 6.3%, 9.8%, 12.1% and 14.5%, respectively. The IMF projects headline inflation in Bahrain to fall from 3.6% in 2022 to 2.2% in 2023, while staying almost the same at 14.8% for the MENA region.
The Bahraini dinar has been pegged to the US dollar since 1980, which has enabled the government to maintain stability for its currency. Indeed, 2022 saw the US dollar appreciate in value next to a number of major global currencies. That, in turn, boosted the dinar’s purchasing power at a time when sharp increases were seen in the cost of imported goods, benefitting Bahrain-based businesses and consumers.
The MFNE tracks and weighs inflation across nine categories. In 2022 clothing and footwear; and housing, water, electricity, gas and other fuels both experienced deflation, slowing by rates of 4.9% and 0.9%, respectively. Restaurants and hotels recorded the highest increase that year at 12.5%, with the other categories experiencing inflation within that range.
While inflation in Bahrain has been moderate in the global context, in January 2023 the government outlined plans to mitigate and stabilise rising prices for businesses and consumers. Approvals and fees normally required by the Ministry of Commerce related to supermarket promotional campaigns were suspended for three months, and additional financial support was rolled out for low-income families.
Rising commercial bank interest rates reflect a series of 0.75% increases to the US Federal Reserve’s policy interest rate. Given the dinar-to-dollar currency peg, the CBB has also increased its own policy interest rate by the same margin, with the rate reaching 5.75% as of March 2023. The measures have been put in place in response to rising global inflation.
These increases were reflected in commercial bank interest rates. In January 2022 the average interest rate on loans to construction and real estate companies was 3%, while for manufacturing and trade-related companies it was 2.9% and 4.6%, respectively. By February 2023 rates had undergone considerable increases, with loans to manufacturing firms offered in the range of 5-10.5%, with an average of 6.9%. Loans to construction companies carried the highest average interest rate of 9%, with lower and upper bounds of 7.7% and 9.9%. Interest on loans to trade-related organisations placed in the range 10.5-4.9% with an average rate of 8.8%.
“Amid the global macroeconomic situation with rising inflation and interest rates, the government has demonstrated its commitment to bolstering the local business ecosystem. The positive results of these efforts are now more visible, which creates confidence in the immediate economic future of Bahrain,” Dalal Ahmed Qais, group CEO of Bahrain Development Bank, told OBG.
Budget Initiative
Bahrain launched the Fiscal Balance Programme (FBP) in late 2018 with the original target of eliminating the fiscal deficit by 2022 extended to 2024 to account for the economic disruption related to the pandemic. The MFNE is responsible for guiding progress towards that goal, with the formulation of Bahrain’s two-year national budgets as one of its key duties. The 2021-22 budget was designed to align with overarching development plans. In the budget, the ministry forecast total revenue of BD2.4bn ($6.4bn) in 2021 and BD2.5bn ($6.6bn) in 2022. Meanwhile, government expenditure was expected to reach BD3.61bn ($9.58bn) and BD3.57bn ($9.47bn), respectively. Between 2017 and 2021 the fiscal deficit narrowed from 14.2% of GDP to 9.9% of GDP. Bahrain posted its largest current account surplus in decades in 2022 at 15.4% of GDP, compared to 6.6% of GDP in 2021. This was the result of a 52% rise in government revenue, from BD1.1bn ($2.9bn) in 2021 to BD1.7bn ($4.5bn) in 2022, in part due to increased oil factors and higher VAT receipts.
Lowering spending is a core element of the FBP, and reduced energy subsidies for businesses in recent years are a key component of that drive. However, public expenditure increased nearly 2% y-o-y during the first six months of 2022. Despite the shift from deficit to surplus for the period, Fitch projected in a December 2022 report that Bahrain would end the year with a deficit equal to 3.6% of GDP. The agency forecast that this figure would widen over the course of 2023 to 4.1%. Nevertheless, Bahrain’s recovery from the pandemic prompted rating agency Moody’s to raise the kingdom’s outlook from “negative” to “stable” in April 2022.
Trade
Bahrain’s non-oil trade deficit decreased between 2021 and 2022 from $1.8bn to $400m, a trend the MFNE attributed to the higher value of local exports, reflecting the government’s focus on increasing production as a means of diversifying its economy. In 2021 exports of national origin carried a value of $10.6bn, compared to $13.2bn in 2022. Re-exports also rose from $1.8bn in 2021 to $1.9bn, with total exports rising by 22% in 2022, reaching $15.1bn, according to figures from the Information & eGovernment Authority.
In 2022 the value of imports increased as well – albeit at the slower rate of 9.2% – reaching $15.5bn by the close of the year. The monthly trade deficit narrowed from $200m in December 2022 to $100m in January 2023. The value of imports decreased from $1.3bn to $1.2bn during that period, while that of exports remained steady at $1.1bn. However, the value of exports of national origin dipped from $988m in December 2022 to $948m in January 2023. Meanwhile, re-export value rose from $143m to $154m.
The top-five destinations for Bahrain’s exports in 2022 were Saudi Arabia, the US, the UAE, the Netherlands and Oman; and the top-five countries from which Bahrain imported goods were China, Brazil, Australia, the UAE and the US. That year the top-five export and re-export products included unwrought aluminium alloys, agglomerated iron ores and concentrates, non-alloyed unwrought aluminium, non-alloyed aluminium wire over 7 mm and urea. Notably, all of those goods were of Bahraini origin.
Foreign Investment
Provisional figures from the fourth quarter of 2022 show total foreign direct investment (FDI) stock in Bahrain to have been BD13.3bn ($35.3bn), compared to BD12.6bn ($33.4bn) the previous year. In terms of individual categories, financial and insurance activities, and manufacturing accounted for the highest levels of foreign investment for both years, a statistic that reflects the sectors’ status as the two highest non-oil contributors to GDP.
In 2022 FDI in financial and insurance activities stood at BD8.37bn ($22.20bn), a slight drop from BD8.38bn ($22.23bn) in 2021, and the manufacturing sector at BD2.12bn ($5.62bn), up from BD1.86bn ($4.93bn) the previous year. Other sectors also witnessed higher investment, with wholesale and retail activities expanding to BD720m ($1.9bn) in 2022, up from BD596m ($1.6bn); and ICT at BD465m ($1.23bn) in 2022, a slight increase from BD450m ($1.19bn) in 2021.
Liabilities
In 2021 portfolio investment accounted for BD8.9bn ($23.6bn) and other investments stood at BD23.2bn ($61.5bn). According to the most recent figures from the Central Bank of Bahrain (CBB), in the fourth quarter of 2022 FDI increased to around BD13.3bn ($35.3bn), while portfolio investment expanded to BD9.4bn ($24.9bn) and other investments contracted to BD23.1bn ($61.3bn).
In 2020 Kuwaiti investors accounted for the highest proportion of FDI in Bahrain, at 28.1% of the total. By the close of 2021, however, Saudi Arabia was the largest source of foreign investment, accounting for 29.4% of the total, or around BD3.7bn ($9.8bn). Indeed, Saudi Arabia’s sovereign wealth fund, the Public Investment Fund (PIF), announced in October 2022 that Bahrain was one of five destinations in which it planned to establish investment funds. Agriculture, financial services, health care, ICT, infrastructure, manufacturing and real estate are among the sectors of the economy expected to receive PIF investment.
Outlook
Policy interventions and an investor-friendly regulatory environment continue to attract investors to Bahrain as both a place to establish a business, and as a gateway through which to enter the markets of the broader GCC and MENA regions. A more strategic and sustainable funding model has been adopted by the government, and this shift in approach is beginning to be reflected in the fiscal balance, while the balance of trade is shifting into more positive territory – a notable achievement for a small country that is traditionally dependent on imported goods and materials.
GDP growth has been bolstered by high international oil prices, However, the fact that non-oil GDP growth consistently outpaces that of the kingdom’s oil economy suggests Bahrain is well insulated against the anticipated moderation in global hydrocarbons prices.
There are likely to be challenges in the years ahead, which means that smaller firms may need to shift their perspective to improve their scalability and promote growth. Moving forwards, however, market consolidation is likely to lead to greater investment opportunities. With a renewed focus on reforming the kingdom’s labour market and providing quality employment opportunities for its citizens (see analysis), the country appears likely to remain an investment destination of choice for international entrepreneurs and enterprises.
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