Bahrain follows the trend of other Gulf countries, including strong economic growth, worrisome inflation, and a vision towards economic diversification to non-oil sectors. The strength of Bahrain’s economy comes from continued price increases of oil. Price rises in the commodity brought the government’s budget from the red in 2005, at a deficit of $556.3 million, to a surplus of $686 million. Rigorous diversification efforts have lowered Bahrain’s dependence on oil, relative to other GCC economies, but oil price rises have blurred the contributions of non-oil sectors to the economy.
In addition to oil production, Bahrain plans to maintain its place as a regional refiner of crude oil. According to the Oxford Business Group (OBG), “currently, Bahrain’s sole refinery has a capacity to process 250,000 barrels per day (BPD), though less than 20% of this comes from the kingdom’s own fields, with the vast majority of crude coming from nearby Saudi Arabia through a single 54 km long pipeline.” Current projects aimed at expanding storage capacity and oil infrastructure carry an estimated value of $1.2 billion
the third largest contributor to gdp is the manufacturing sector which contributed 13%
Regional banking hub
After the oil and gas sector, the highest contributor to the country’s GDP is the banking and financial institution sector. The country is growing as a regional hub for banks wanting to tap into Middle Eastern markets, according to a report by Global Investment House. Total banking system assets grew by 26.1% from 2002 to 2006. Net foreign assets of the banking system increased 9.1% from 2005, to remain at $6.41 billion by the end of 2006.
According to Arab Press Digest, a group of businessman and companies from GCC countries plan to establish an international Islamic bank with $2 billion in initial capital. The new bank, United Islamic International Bank, will be one of the largest in the Gulf.
The third largest contributor to GDP is the manufacturing sector, which contributed 13% to the country’s GDP in 2005, from a contribution of 10.6% in 2004. Global Investment House uses this as evidence that diversification efforts are “bearing fruits.”
Building infrastructure
Much of the government’s diversification effort has focused not only on directly building up non-oil industries, but facilitating growth in the sectors through infrastructure improvement efforts, most of which were implemented with the intent to strengthen the country’s manufacturing and service sector base. Bahrain’s fiscal prudence has led to Standard & Poor’s (S&P) upgrade of Bahrain’s foreign currency debt rating to “A” from the lower level of “A-”, according to Bahrain Tribune.
The Arab Press Digest also reported that Bahrain has no plans to revalue their currencies relative to the dollar, even though other GCC economies are citing the need to form a common currency union among themselves. Bahrain’s neighbors cite two main harms of a dollar peg, including the loss of sovereignty over monetary policies as Gulf central banks follow the lead of the US in setting interest rates in addition to inflation, which is partially attributed to the peg and the increasingly feeble dollar.
According to Global Investment House, foreign companies are attracted to Bahrain for its “geographic environment, well-regulated authorities and low cost factor in setting up operations.” The group’s report maintains a positive outlook and notes Bahrain’s main challenges as continued diversification efforts into more labor intensive activities and further easing of the economy’s dependence on oil.
Partially-soiled by a report from Transparency International suggesting a rise in Bahrain’s corruption, the Sultanate responded quickly to allegations of corruption, according to the OBG, which reported that “Crown Prince Sheikh al-Khalifa declared at the beginning of October that the fight against corruption had to be made a priority and that no one, not even government ministers, would be spared if implicated in malpractice.”
Continued adherence to transparency, and a will to improve industries and attract foreign investors will support Bahrain’s efforts to maintain strong economic performance.
