Buoyed by a vibrant private sector and increasing interest from foreign investors, Bahrain’s economy is on an upward trajectory. Relatively low inflation has added to the kingdom’s appeal as a place to do business, while interest rates were lowered successively in September and November 2024 to 5.25% (see Banking chapter). Indeed, an advanced financial services sector provides a strong foundation for business growth, as well as supports the diversification of the private sector. The Central Bank of Bahrain (CBB) works to cultivate a more enabling fiscal and regulatory environment, with one of its responsibilities being the development of the kingdom’s ecosystems for start-ups, and small and medium-sized enterprises (SMEs).
A number of ministries continue to cooperate with private sector entities, and multi-sector growth in recent years has provided a degree of insulation from global volatility in energy prices. That dynamic is expected to continue in the coming years, as the government continues with its diversification and infrastructure development agenda, while also investing in deepening the country’s talent pool.
Vision & Strategy
Bahrain Economic Vision 2030, the country’s long-term socio-economic development plan, aims to guide the kingdom’s progress. Formulated with significant input from the local business community, the intent of the strategy is to support the continuing diversification of the country’s economy. Bahrain does not possess the same level of hydrocarbons wealth as some of its peers in the GCC, which led the kingdom to move away from a reliance on oil and gas earlier than most of its neighbours. In 2023 non-oil activities contributed 83.9% of the country’s GDP, with financial corporations the largest economic sector. Oriented around sustainability and competitiveness, Bahrain Economic Vision 2030 establishes a way forward for the continued development of high-value sectors within the kingdom, such as financial services and manufacturing, as well as transport and logistics.
The Covid-19 pandemic forced governments around the world to adapt their development strategies to align with the new economic realities. In October 2021 Bahrain’s government unveiled its Economic Recovery Plan (ERP), featuring a raft of sector-specific development roadmaps curated with the cooperation of the private sector. Under the ERP, Bahrain aims to employ 20,000 Bahraini nationals in the economy and train an additional 10,000 per year through 2024, as well as streamline business procedures to make the kingdom more attractive for investment.
The government also launches short-term development plans to progress towards long-term goals, with the current iteration covering 2023 to 2026. The priorities under the Government Plan 2023-26 are to raise living standards for Bahraini citizens; enhance justice, security and stability; support the kingdom’s economic recovery and sustainable development; and digitise government services to improve service quality, while also making them more competitive.
Authorities & Policy
The Ministry of Finance and National Economy (MFNE) formulates and implements economic and fiscal policy in line with the overarching government agenda, and coordinates with other ministries to ensure multi-sector synergy. Key among the MFNE’s responsibilities is the formulation of the national budget, as well as oversight of public investment to ensure that development projects align with broader fiscal policies and goals. The ministry’s leading role in fiscal activities means that the entity also works closely with the CBB, which is the sole regulator of the country’s financial services sector (see Banking and Capital Markets chapters). Furthermore, the MFNE is working to reinforce and expand bilateral and multilateral investment agreements, treaties on the avoidance of double taxation, free trade deals and memoranda of understanding on economic cooperation – with an open, strong and secure business community and private sector integral to the kingdom’s prosperity.
In 2018 the MFNE launched its Fiscal Balance Programme, which aimed to balance the budget by 2022. The deadline was extended to end 2024 with ongoing efforts to achieve this goal. The challenges that the programme intended to address arose largely from the significant drop in oil prices between 2014 and 2016, leading to Bahrain’s fiscal deficit growing from BD227m ($602m) in 2012 to an average of BD1.5bn ($4bn) from 2015 to 2017. While the oil sector accounted for 18% of the economy in 2017, it generated an estimated 75% of government revenue that year. In October 2018 Kuwait, Saudi Arabia and the UAE provided Bahrain with an interest-free, long-term aid package of $10bn to help strengthen its fiscal position and enable the government to stimulate broad-based growth. For example, Bahrain plans to build five new cities on artificial islands, which together would expand Bahrain’s total landmass by 60%. The project as a whole is expected to drive job creation, industrial output and economic diversification.
The 2014-16 drop in oil prices also encouraged Bahrain to overhaul its regulatory framework to attract higher inflows of foreign investment. At its core, the Fiscal Balance Programme seeks to restructure the kingdom’s budget to better stimulate and capitalise on economic expansion. Central to this are efforts to reduce expenditure and increase the efficiency of service delivery, as well as streamline the distribution of energy and utilities subsidies.
Other Entities
Various players have significant roles in Bahrain’s economic development. The Bahrain Economic Development Board (Bahrain EDB) is the country’s dedicated investment promotion agency, with a strong focus on priority sectors that contribute to economic diversification and sustainable economic growth. The Bahrain EDB actively promotes Bahrain’s value proposition, highlighting its free trade agreements, ease of doing business, tax and ownership environment, and talent pool.
Collaboration between the public and private sectors has been integral to achieving the Bahrain EDB’s mandate. Input from the private sector and beyond has helped maintain Bahrain’s ease of doing business and regulatory framework. This approach, known as Team Bahrain, has led to key developments and projects, including the 2001 introduction of Islamic banking regulations; the 2005 establishment of Bahrain International Investment Park; the 2006 signing of the country’s free trade agreement with the US; the 2009 opening of Khalifa Bin Salman Port, Bahrain’s primary commercial sea port; and multiple upgrades to the country’s digital infrastructure and capabilities since 2017. In 2023 Bahrain attracted $6.8bn of FDI – nearly 250% higher than the $2.8bn reported in 2022, according to UN Trade and Development’s World Investment Report 2024.
Employee Initiatives
The Labour Market Regulatory Authority, founded in May 2006, is chaired by the minister of labour and afforded the same level of authority as other government ministries. Its duties include regulating and issuing work permits for expatriates, and communicating with such workers before they arrive in Bahrain to establish an understanding of mutual rights and duties. The authority also has a central role in the visa application and issuance process, and is one of the key bodies involved in the execution of the National Labour Market Plan 2023-26 (see analysis).
The Labour Fund (Tamkeen) is also central to that drive. It is tasked with strengthening the private sector by developing the local workforce, running a diverse array of initiatives aimed at Bahraini individuals and enterprises covering topics such as jobseeker training, on-the-job training, apprenticeships and more. Tamkeen’s flagship initiative, the National Employment Programme, helps subsidise salaries for Bahraini nationals working in the private sector for up to three years.
Tamkeen formulates strategies by identifying the requirements of private-sector entities and any existing gaps in the national talent pool, with its Skills Bahrain initiative helping ensure a future-ready workforce for targeted sectors. According to the report “Tamkeen Business Review 2023” published by the agency, that year there were more than 101,000 Bahraini employees working in the private sector, compared to nearly 459,000 non-Bahrainis. Women accounted for 35.7% of Bahraini employees in the private sector, in comparison to 9.8% among non-Bahrainis.
The kingdom’s National Bureau for Revenue enforces tax laws, such as the 10% value-added tax requirement. Meanwhile, the Ministry of Industry and Commerce (MoIC) is important in developing commercial and trade activities, with entities such as the SME Development Board operating under its umbrella. Meanwhile, independent bodies such as the Bahrain Chamber of Commerce and Industry (BCCI) and the Bahrain SME Society act as bridge organisations between the public and private sectors. In August 2023 Bahrain’s Parliament saw the formation of the Strategic Thinking Parliamentary Bloc, a nine-member body tasked with formulating legislative proposals that are in line with wider goals.
SME Support
The development of SMEs is a core focus of Bahrain’s overarching economic and workforce agenda. As of May 2023 SMEs accounted for nearly 30% of Bahrain’s GDP, while such entities comprised more than 93% of all commercial registrations between April 2022 and the end of the first quarter of 2023. According to the MFNE’s 2023 economic report, Bahraini nationals owned 79% of the kingdom’s total SMEs that year, while women owned 40% and young entrepreneurs 25%.
In April 2024 members of Parliament voted in favour of establishing a new support fund for local SMEs. The fund, which is based on a proposal by the Strategic Thinking Parliamentary Bloc, is designed to provide financial, administrative and technical support to SMEs to help them handle general and enterprise-specific challenges. The initiative also aims to make local SMEs more competitive against expatriate SMEs in similar sectors, with an overall goal of facilitating their growth. Tamkeen and the Future Generations Reserve Fund are set to operate the new initiative, while also supplying human and financial resources. However, this fund has seen some pushback from the BCCI, which is concerned that the overlap of responsibilities between Tamkeen and the new body could cause confusion.
In addition to supporting improvements in the domestic SME ecosystem, the kingdom is focusing on establishing itself as an attractive base for international start-ups and SMEs, with the technology and financial services sectors both being harnessed to draw foreign talent. Bahrain FinTech Bay is instrumental to that drive (see Banking chapter). As the country looks to accelerate its economic diversification, tourism, hospitality and retail are expected to play an important role, aided by the country’s connectivity with larger neighbours. “Bahrain’s jewellery sector, characterised by 10% year-on-year growth, reflects broader GCC trends and highlights the region’s robust consumer demand,” Theo Swart, former CEO of Al Zain Jewellery, told OBG. “As competition intensifies, retailers must prioritise innovative strategies to cater to the growing Generation Z segment, and ensure that offerings resonate with evolving preferences.”
Doing Business
Full foreign ownership of a company or branch office is permitted in Bahrain for the majority of economic activities, without the need for local partners or sponsors. This supportive atmosphere is emphasised by the fact that corporations and individuals do not pay income tax, while wealth, capital gains, withholdings and inheritances are also not subject to taxation. While the government places no restrictions on the repatriation of capital, profit or dividends, enterprises in the hydrocarbons sector are subject to a 46% tax on profit.
The Bahrain EDB and the MoIC work closely together to improve the broader business environment. While the former handles administrative and licensing procedures for foreign investors looking to enter the Bahraini market, the latter works to remove bureaucratic obstacles to facilitate greater volumes of trade and investment. The MoIC maintains a small list of economic and cultural activities closed to foreign involvement, such as press and publications, Islamic pilgrimage, clearance offices and labour force agencies. While international investors note that foreign and domestic companies are treated the same, some entities still opt to enlist local partners to benefit from their familiarity with the Bahraini market. Given Bahrain’s reliance on expatriate labour, the government has formulated competitive residency and property ownership regulations, while also leveraging its Golden Licence scheme – which as of March 2024 had attracted $2.4bn of FDI across nine projects since its launch in April 2023, and it is expected to create more than 3000 jobs (see analysis). In addition, the government’s public-private partnerships law is being harnessed to draw private finance into infrastructure development projects.
The most common obstacles to doing business in Bahrain include bureaucratic, Customs and local tender pre-registration processes. While a lack of market information has also been cited, websites for entities such as Tamkeen and the Bahrain EDB provide helpful sectoral information. In spite of the challenges, the decades-long drive to establish Bahrain as an international centre for business and trade saw the kingdom rank fourth in the MENA region in the Heritage Foundation’s 2024 Index of Economic Freedom, while global logistics operator DHL placed Bahrain 25th out of 181 countries in its 2024 Global Connectedness Index.
National Budget
The 2023-24 budget was announced on the back of a 47% reduction to Bahrain’s fiscal deficit in 2022. A conservative estimated oil price of $60 per barrel was used in the revenue forecast. Total revenue for 2024 is estimated at $9.1bn, while total expenditure is set at $9.5bn, up 0.2% compared to 2023. Development expenditure in 2023-24 covers 50 fully funded projects valued at more than BD1.5bn ($4bn). Key developments include upgrades to Salman Industrial City; Sports City, which is forecast for completion by the end of 2025 and will be home to the country’s largest stadium once finished; and a fourth bridge linking Muharraq and Manama. Around 38% of the development budget is slated for infrastructure; 33% for housing and related facilities; 11% for youth, sport, culture and IT; 4% for health, education and social services; and 13% for other projects.
At the time of the budget’s announcement, the government expected to reduce the country’s fiscal deficit from BD1.1bn ($2.9bn) in 2022 to approximately BD161m ($427m) in 2024, which would equate to less than 1% of the kingdom’s projected GDP. However, in April 2024 international agency Fitch Ratings forecast Bahrain’s fiscal deficit to be 8.2% of GDP in 2024, attributing this to an expected contraction in oil revenue and inefficiencies in the performance of the Electricity and Water Authority. Nevertheless, Fitch maintains a “B+” rating for the kingdom and a stable outlook.
GDP
Having registered real growth of 5.2% and nonoil growth of 6.6% in 2022, the MFNE’s preliminary estimate for Bahrain’s GDP growth in 2023 was 2.4%, while non-oil GDP was expected to have expanded by 3.4%. Despite the kingdom’s subdued growth, the UAE was the only GCC nation to outperform Bahrain in 2023, with the country registering a growth of 3.6% compared to Bahrain’s 3%, according to IMF figures. Notably, Bahrain and the UAE have the most diversified economies in the GCC, in spite of the rapid gains made by Saudi Arabia in recent years.
Drops in global oil prices between 2022 and 2023 were felt across the GCC, which is still reliant on hydrocarbons revenue despite diversification efforts. Bahrain’s real oil GDP registered contractions of 1.4% and 2.4% in 2022 and 2023, respectively, with the latter due in part to maintenance work on the Abu Safah field, which accounts for most of Bahrain’s oil output. The MFNE projects the oil sector to contract another 1% in 2024 before showing zero growth in 2025.
Bahrain’s fastest-growing sectors in 2023 were hotels and restaurants, financial corporations, trade, and real estate and business activities, which registered growths of 8%, 5.7%, 5.3% and 4.1%, respectively. Meanwhile, the highest contributing sector to GDP was financial corporations, which accounted for 17.8% of real GDP in 2023, while hydrocarbons were second, contributing 16.1%.
Although the manufacturing sector contracted 0.4% in 2023, it remained the third-largest economic sector during that year, accounting for 13.6% of the kingdom’s total GDP. The contraction followed growth of 4.3% in 2022, when additional capacity came online at Bahrain Energies’ new refinery and Aluminium Bahrain reported a 2.5% increase in production to roughly 1.6m tonnes.
Trade
Due to the government targeting growth in non-oil exports, the 18% contraction in this category reported by the kingdom in 2023 is notable; however, oil exports also recorded a significant decline that same year, down by 17.7% from the previous year. In 2023 Bahraini exports totalled roughly BD9.3bn ($24.7bn), with that value split evenly between oil and non-oil goods.
Data from the Information & eGovernment Authority shows that metals and basic metals were the highest contributing exports of Bahraini origin by value in 2023, accounting for 57.2% of the kingdom’s non-oil export revenue, followed by mineral products (17.9%) and chemicals (6.6%). That same year imported merchandise carried a total value of BD7.6bn ($20.2bn), down 7.5% from 2022. In 2023 the highest-value import categories were mechanical and electrical equipment, which comprised 19.8% of the country’s total non-oil imports, with chemicals and mineral products constituting 15.4% and 14.8%, respectively. In 2023 oil imports were valued at BD2.4bn ($6.4bn), accounting for nearly 32% of total imports, but down 18.6% from 2022. Based on these figures, in 2023 Bahrain registered a trade surplus of close to BD1.7bn ($4.5bn) – testament to the progress that has been made by industry- and trade-related authorities despite the decline in export value, dip in manufacturing output and drop in global oil prices.
In 2023 Saudi Arabia was the kingdom’s primary market for non-oil, Bahraini-origin exports, accounting for 24% of the total value of such goods. The UAE and the US rounded out the top three, accounting for 11.4% and 9.5%, respectively, followed by the Netherlands and Egypt. The kingdom’s top source markets for non-oil imports were China, with 14%; the UAE, with 9.5%; and Brazil, with 9.1%, followed by Australia and Saudi Arabia.
Bahrain and the US signed a free trade agreement in 2006, stimulating increased volumes of trade and economic cooperation between the two countries. Reinforcing that economic and diplomatic bond, in February 2022 the US Trade Zone in Salman Industrial City broke ground. The area is positioned to serve as a regional manufacturing and logistics centre for US firms that are located within the kingdom. In total, Bahrain is party to 25 free trade agreements and trade pacts, encompassing countries and territories such as the European Free Trade Association, the GCC, the Greater Arab Free Trade Area and Singapore. Those agreements have played an instrumental role in the success of the MoIC and the Bahrain EDB in establishing the kingdom as a regional centre for trade and commerce.
Outlook
In spite of fiscal challenges and unexpected declines in some key sectors and metrics, Bahrain’s economy is in good health, backed by prudent policy formulation and an expanding private sector. The investment-friendly regulatory environment has been key to the country’s success in attracting private finance amid strong competition from its larger GCC neighbours.
Moving forwards, the kingdom appears to be well positioned to continue to harness those strengths and its future-ready workforce to attract more international companies and investors. Deepening the country’s stock markets is another priority for the kingdom over the coming years. If successfully executed, this initiative could potentially provide an additional dimension to Bahrain’s economic growth, as well as help further reduce the country’s reliance on hydrocarbons revenue.
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