THE BAHRAIN ECONOMY
and Economic Brief:
an archipelago of 36 islands with a size of 727 sq. km. (274 sq. mi.);
approximately four times the size of Washington, DC. located off the eastern
coast of Saudi Arabia. The four main islands are joined by causeways, and make
up about 95% of the total land area. Bahrain became
independent from the UK in 1971 and since then it is being ruled by the Al
Khalifa family. Bahrain ceased being an emirate and became a constitutional
monarchy in February 2002, as part of its present ruler King Hamad bin Isa al-Khalifa's
effort to set up a bicameral National Assembly (parliament) in 2002. The initial
response from opposition groups was negative, however, gradually they have
joined the National Assembly as elected members. Currently, there are 17 MPs
from the country's largest opposition group, the al-Wefaq National Islamic
Society. However, control over policymaking remains in the hands of the king and
the ruling Al Khalifa family, although constraints on press freedom and
political activity have been loosened since King Hamad's accession. The
Parliament can propose (but not draft) legislation and has the right to amend
and reject the budget.
Bahrain is a net exporter of oil, it is the smallest Middle East oil producer by
volume, and unlike other Gulf states, Bahrain exports refined petroleum products
rather than crude oil. Bahrain’s proven oil reserves stood at 125 million
barrels as of January 2008, all of which are located in the Awali field. In
addition to what is produced in its territory, Bahrain and Saudi Arabia share
the 300,000 barrels per day (bbl/d) of oil production from the offshore Abu
Saafa field. This figure is counted in Saudi oil production figures, but half of
the output is given to Bahrain. Separately, Bahrain also purchases Arab Light
crude oil from Saudi Arabia via a subsea pipeline, which it refines for export
at its Sitra refinery. Bahrain’s proven natural gas reserves stood at 3.25
trillion cubic feet (Tcf) as of January 2008, much of it associated gas from the
Awali oil field.
GDP at current prices increased from US$ 8.5 billion to US$ 18.2 billion in 2007
and is estimated to be around US$ 19.6 billion in 2008.
Oil constituted around 24% of total GDP in 2007 and there is a consistent
growth in non-oil sector’s contribution to GDP over the last 5-6 years.
provides the foundation for Bahrain’s two major industries: refining and
aluminum smelting. Bahrain is a major producer of
Aluminium at an estimated 869,878 metric tones for 2008.
Over the past few years, particularly since 2004, there is a significant
improvement in both non-financial services and financial services sectors’
contribution to GDP. Financial services currently make up 27.6% of Bahrain’s
GDP, and there are over 400 licensed financial institutions. This has created a
large pool of local talent. Of around 10,000 people employed in the industry,
72% are Bahraini, with very high levels of financial skills and expertise.
International banking groups based in Bahrain include BNP Paribas, Citibank,
Merrill Lynch and Standard Chartered; Middle Eastern banks like Arab Bank, the
Arab Banking Corporation, Arcapita, GIB, NCB Capital, Gulf Finance House and
Investcorp; and Asian banks such as Bank of China and India’s ICICI. Many
insurance groups are also here, including AIG, ALICO, AXA and Zurich. They enjoy
a trusted regulatory environment, effective and transparent legislation, and the
best resources and expertise the region has to offer.
has also been an innovator in Islamic finance. It has the largest concentration
of Islamic financial institutions in the Middle East, including commercial,
investment and leasing banks, insurance companies, and mutual funds. Bahrain
plays host to a number of organizations central to the development of Islamic
finance, including the Accounting and Auditing Organisation for Islamic
Financial Institutions, the General Council for Islamic Banks and Financial
Institutions, the International Islamic Financial Market and the International
Islamic Rating Agency.
banking sector in Bahrain is very highly developed. Banking sector’s deposits
and domestic credit were US$ 25.8
billion and US$ 13.5 billion as against the
Broad Money Supply (M2) of US$ 17.5 billion at the end of the first half of
the vast majority of Bahrain’s total energy consumption comes from natural
gas, with the remainder supplied by oil. With demand for energy rising and
domestic production falling, Bahrain will become increasingly dependent on oil
and gas imports unless it can increase domestic production.
government is seeking to lower unemployment by promoting private-sector growth,
setting quotas on the employment of expatriates and increasing the local skills
base. However, persuading businesses to replace cheaper expatriate workers with
more expensive local labour will prove difficult.
a current account surplus of US$ 3.2 billion and its reserves were US$ 4.4
billion as of the first half of 2008. Though the economy is sound and there is
no immediate concern, with the country's hydrocarbons
reserves limited and dwindling, the government will be unable to guarantee local
citizens employment in the public sector as the Government’s current
expenditure has reached a staggering 65.4% of total revenue in 2007.
Buoyed by strong regional demand, real GDP growth is forecast to average
6.6% a year in 2008-09. However, inflation is also expected to rise, to an
annual average of 6.9% in 2008-09 compared with 4.4% at the end of 2007. GDP
growth should remain robust, largely as a result of high oil prices and the
associated regional boom. Domestic demand will be supported by strong
public-sector spending growth and by rising employment, as banking, aluminium
output and tourism continue to expand and as new construction projects come on
stream. Real GDP growth is forecast to moderate gradually, from 7% in 2007 to a
still strong 5.3% in 2012.
Manufacturing growth may be constrained by the difficulty of sourcing
sufficient quantities of natural gas to expand aluminium output. In addition,
the financial sector which makes up a greater proportion of GDP than the oil
sector, will face intensifying competition from elsewhere in the region, notably
Dubai and Qatar, but also, increasingly, Saudi Arabia.
We expect the the price of dated Brent Blend will be very volatile but
will remain above an annual average of US$80/barrel in 2008-12, specially as low
US interest rates in the early part of the forecast period appear to be driving
speculators into the commodity market in search of higher yields.
Persistent oil price strength will support continued fiscal and
current-account surpluses, and will also finance further strong rises in
government spending. The resulting rapid expansion of the money supply, coupled
with real-economy supply bottlenecks, will contribute to inflationary pressure.