Economic Policy

Boom or Bust for Bahrain

The Arabian Gulf States are mired in an era of global oil price volatility and an ongoing socio-political stalemate between some of its neighbours, making it is easy to overlook the socio-economic woes of one of the GCC’s smallest economies. With the Kingdom of Bahrain having to face its greatest fight for economic survival in an already precarious era for the region, Dr. Sophie Olver-Ellis questions whether Bahrain’s economy is going to boom or go bust.

BY: SOPHIE OLVER-ELLIS

With the Arabian Gulf States in the throes of constant global oil price volatility, a war in Yemen that has no end in sight and the Saudi led blockade against Qatar well into its second year, it is easy to overlook the socio-economic and political woes of one of the Gulf Cooperation Council’s (GCC) smallest economies. The Kingdom of Bahrain was one of the hardest hit during the 2011 Arab Spring and since 2014, has experienced one of its most serious episodes of economic stanation in history.  As the debt balloons and its economy remains in a constant slump, the country is looking for help from its GCC counterparts to help ease their financial crisis through aid packages and bolstering their currency. But unless Bahrain is prepared to address and reform its economic and geo-political shortcomings, the country has been warned that they are on the path to ruin. Indeed, with the small GCC state having to face its greatest fight for economic survival in an already precarious era for the region, this begs the question; can Bahrain save itself by restructuring their economy?

The small Kingdom of Bahrain has often been branded as the financial black sheep of the Arabian Gulf, because they have a relatively low oil and natural gas output compared to their GCC counterparts. Indeed, despite their comparatively low hydrocarbon production, oil revenues have still accounted for approximately 75 per cent of the state’s income. This has often placed the country in a precarious financial position, because as they are not able to respond to a decline in oil prices by increasing their oil output, they have simply not had the economic resources to bankroll the rapid development agenda and largesse social contract that they and their neighbouring rentier states have adopted over the last five decades. The fall in global oil prices since 2014 further exposed the Kingdom’s economic vulnerabilities, whereby it has led to a budget deficit of 13.5 per cent in 2016 and 4.6 per cent of GDP by the end of 2017. On top of everything, their national debt is also reaching an estimated 89 per cent of its $33 billion GDP and has been predicted by the International Monetary Fund to increase and reach 100 percent of GDP by 2019. This dire economic situation has been further exacerbated by the country’s low foreign currency reserves and sheer weight of public subsidies the government offers its citizenry.

In response to their severe financial strain, the Bahraini government has sought the assistance of its GCC counterparts, most notably Saudi Arabia, Kuwait and the UAE. These states, along with the Arab Monetary Fund, have designed an aid package and fiscal stability programme, which seeks to stabilise Bahrain’s economy and help meet the country’s financial needs. A prominent strategy within this programme has been for these select GCC states to support the small Kingdom’s currency and avoid it being de-pegged from the dollar. If the Bahraini Dinar were to be de-pegged, this would lead to a significant depreciation of the currency, fuel inflation, increase social pressure and the likelihood of a sovereign default. These risks are what the GCC states are attempting to avoid because if Bahrain falls into complete stagnation, it brings up the uneasy question for the region’s rulers of whose country is next. Indeed, despite financial assistance from the GCC, giving Bahrain a temporary reprieve, unless they initiate long-overdue reforms and diversify their socio-economic structures, will continue to land the country in perilous waters.

Conversely, there are signs that the government is attempting to turn their ship around. For example, like their GCC counterparts, they have sought to diversify their economy away from hydrocarbons through the adoption of Vision 2030. As expected, strategies include diversifying towards sectors that are unrelated to oil, whereby there is an emphasis on business services, manufacturing, logistics and the tourism sector. The plan also seeks to complete more than $32 billion worth of infrastructure projects and attract Foreign Direct Investment by implementing cost-saving initiatives, which will help avoid losing their borrowing accreditation such as cutting electric, fuel and energy subsidies that could save the government $1.6 billion by 2019. All of these factors should create employment opportunities for the national citizenry and help lower the burgeoning deficit the government has to contend with in their budget. Another lifeline to their fiscal outlook has been through the discovery of nearly 80 billion barrels of offshore shale oil in the Khaleej Al Bahrain Basin, which could potentially add $560 billion to the state coffers. Despite this being a boost for the country’s fortunes, it is expected that oil production at the Khaleej Al Bahrain basin will take five to ten years to begin making any real material change to the country’s finances. Therefore, Bahrain will continue to look to its neighbours to help bolster its flagging economy and will need to implement hard hitting, yet necessary, economic reforms to save itself from complete financial collapse. It still remains to be seen, however, whether Bahrain will be willing to proceed with such necessary economic adjustments until they find another source of revenue, they have no other option but to reform.


Dr. Sophie Olver-Ellis is a political economist and works as a Research Officer for the Kuwait Programme at the London School of Economics Middle East Centre. Her research focuses on the transforming political economies of the Arabian Gulf with particular emphasis on the changing social, political and economic structures and emerging dynamics of the Gulf Cooperation Council States in the post-oil dependent era.

Please note that opinions expressed in this article are solely those of our contributors, not of Political Insights, which takes no institutional positions.

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