Economy

According to the 2006 Index of Economic Freedom published by the Heritage Foundation and the Wall Street Journal, Bahrain has the most free economy in the Middle East and is twenty-fifth overall in the world.

The survey put Bahrain ahead of regional competitors, United Arab Emirates, Israel and Qatar because "The government has sought to diversify the economy to reduce dependence on Bahrain's declining oil reserves and to encourage foreign investment. Because of its relatively cosmopolitan outlook, modern economy, favorable regulatory structure, and excellent communications and transportation infrastructure, many multinational firms doing business in the Persian Gulf are based in Bahrain."

Macro-economic trend

This is a chart of trend of gross domestic product of Bahrain at market prices estimated by the International Monetary Fund with figures in millions of Bahraini Dinars.

For purchasing power parity comparisons, the US Dollar is exchanged at 0.30 Bahraini Dinars only.

Balance of Payments
Bahrain's current account balance is characterized by surpluses in merchandise trade and international services, and a large deficit in unilateral transfers, which is accounted for by the country's large expatriate workforce sending home a portion of its earnings. In 2003 and 2004, the balance of payments performance improved due to rising oil prices and increased receipts from the services sector. As a result, the current account balance registered a surplus of US$219 million in 2003 and a surplus of US$442 million in 2004, compared with a deficit of US$35 million in 2002. Bahrain's gross international reserves increased substantially in 2004 to US$1.6 billion, compared with US$1.4 billion in the previous three years (2001-2003).

Diversification

Though Current GDP per capita shrank by 2.4% in the Eighties, it bounced back to a growth of 36% in the Nineties as a result of successful diversification initiatives. Bahrain's urgency in embracing economic liberalisation is due to its need to diversify the economy away from its limited oil supplies. Unlike its Gulf neighbours, Bahrain has little oil wealth and the economy has expanded into banking, heavy industries, retail and tourism. The Kingdom is the main banking hub for the Gulf and a centre for Islamic finance, which has been attracted by the strong regulatory framework for the industry. According to the International Monetary Fund's Financial System Stability Assessment of Bahrain's financial regulartory environment, published on 6 March 2006, found:

The financial system is enjoying strong performance under favorable circumstances, and is likely to remain a major contributor to overall growth.The main risk stems from potential overheating in the economies of the region, but the system should be resilient to likely shocks.
Prudential regulations are modern and comprehensive, and supervision is generally effective, especially in the dominant banking sector. Supervisory capacity needs to be expanded in line with new regulations and to keep up with the growth and increasing sophistication of financial institutions.
The further expansion of the Islamic sector, the development of housing finance, and the deepening of securities markets are important for the future growth of the financial system. The banking and insurance sectors will eventually undergo consolidation.

In 2005, Bahrain signed the US-Bahrain Free Trade Agreement, becoming the first Gulf state to sign such a bilateral trade agreement with the United States. A massive privatisation programme is underway to sell off key government assets: utilities, banks, financial services, and telecommunications have started to come under the control of the private sector.

As a result the economy has been well positioned to exploit the extra revenues generated in the region thanks to the sustained high oil prices since 2002. In January 2006, the United Nations Economic and Social Commission for Western Asia cited Bahrain as the fastest growing economy in the Arab world.

Between 1981 and 1993, Bahrain Government expenditures increased by 64%. During that same time, government revenues continued to be largely dependent on the oil industry and increased by only 4%. Bahrain has at times received significant budgetary support and project grants from Saudi Arabia, Kuwait and the United Arab Emirates.

The government has used its modest oil revenues to build an advanced infrastructure in transportation and telecommunications. Bahrain is a regional financial and business center. Tourism, especially from the region, has proved another significant source of income.

Bahrain has benefited from the oil boom since 2001, with economic growth of 5.5%. It has succeeded in attracting investment from other Gulf states partly because it used the revenues of the 1970s-early 80s boom to invest in infrastructure development and other projects to improve the standard of living; health, education, housing, electricity, water, and roads all received attention.

The success of ventures such as the Bahrain Grand Prix has raised the Kingdom's international profile, and combined with the boom in Islamic banking, has encouraged major airlines to resume services to the country, with Lufthansa announcing on 14 March 2006 that it would schedule three flights a week to Manama from Frankfurt.

Investment

The stock market capitalisation of listed companies in Bahrain was valued at $17,364 million in 2005 by the World Bank.

Hydrocarbon industry

Petroleum and natural gas, the only significant natural resources in Bahrain, dominate the economy and provide about 60% of budget revenues. Bahrain was the first Persian Gulf state to discover crude oil. Because of limited reserves, Bahrain has worked to diversify its economy over the past decade. Bahrain has stabilized its oil production at about 40,000 barrels (6,400 m³) per day, and reserves are expected to last 10 to 15 years. The Bahrain Oil Company refinery was built in 1935, has a capacity of about 250,000 barrels (40,000 m³) per day, and was the first in the Persian Gulf. After selling 60% of the refinery to the state-owned Bahrain National Oil Company in 1980, Caltex, a U.S. company, now owns 40%. Saudi Arabia provides most of the crude for refinery operation via pipeline. Bahrain also receives a large portion of the net output and revenues from Saudi Arabia's Abu Saafa offshore oilfield.

The Bahrain National Gas Company operates a gas liquefaction plant that utilizes gas piped directly from Bahrain's oilfields. Gas reserves should last about 50 years at present rates of consumption.

The Persian Gulf Petrochemical Industries Company is a joint venture of the petrochemical industries of Kuwait, the Saudi Basic Industries Corporation, and the Government of Bahrain. The plant, completed in 1985, produces ammonia and methanol for export.

Bahrain's other industries include Aluminum Bahrain, which operates an aluminum smelter--the largest in the world with an annual production of about 525,000 metric tons --and related factories, such as the Aluminum Extrusion Company and the Persian Gulf Aluminum Rolling Mill. Other plants include the Arab Iron and Steel Company's iron ore pelletizing plant (4 million tons annually) and a shipbuilding and repair yard.

Bahrain's development as a major financial center has been the most widely heralded aspect of its diversification effort. International financial institutions operate in Bahrain, both offshore and onshore, without impediments. In 2001, Bahrain's central bank issued 15 new licenses. More than 100 offshore banking units and representative offices are located in Bahrain, as well as 65 American firms. Bahrain's international airport is one of busiest in the Persian Gulf, serving 22 carriers. A modern, busy port offers direct and frequent cargo shipping connections to the U.S., Europe, and the Far East. Internationally recognised Bahraini companies include Investcorp, the venture capital firm credited with turning around the fortunes of Gucci.

Economy - overview

In Bahrain, petroleum production and processing account for about 60% of export receipts, 60% of government revenues, and 30% of GDP. Economic conditions have fluctuated with the changing fortunes of oil since 1985, for example, during and following the Persian Gulf crisis of 1990-91. With its highly developed communication and transport facilities, Bahrain is home to numerous multinational firms with business in the Persian Gulf. A large share of exports consists of petroleum products made from imported crude. Construction proceeds on several major industrial projects. Unemployment, especially among the young, and the depletion of both oil and underground water resources are major long-term economic problems.

GDP - composition by sector:
agriculture: 1%
industry: 46%
services: 53% (1996 est.)

Household income or consumption by percentage share:
lowest 10%: NA%
highest 10%: NA%

Labor force: 295,000 (1998 est.)
note: 44% of the population in the 15-64 age group is non-national (July 1998 est.)

Labor force - by occupation: industry, commerce, and service 79%, government 20%, agriculture 1% (1997 est.)

Budget:
revenues: $1.5 billion
expenditures: $1.9 billion, including capital expenditures of $NA (1998)

Industries: petroleum processing and refining, aluminium smelting, offshore banking, ship repairing; tourism

Electricity - production by source:
fossil fuel: 100%
hydro: 0%
nuclear: 0%
other: 0% (1998)

Agriculture - products: fruit, vegetables; poultry, dairy products; shrimp, fish

Exports - partners: India 18%, Japan 11%, Saudi Arabia 8%, South Korea 7%, UAE 5% (1997)

Imports - partners: Saudi Arabia 45%, United States 10%, United Kingdom 6%, Japan 5%, Germany 4% (1997)

Taxation

Taxation and import laws apply equally to Bahraini and foreign-owned companies, and foreign investors comply with the same requirements and legislation as do local firms.

Oil and gas companies are taxed 46 percent on income derived from the sale of hydrocarbons and derivative products. All other enterprises are not subject to taxation.

References

This article contains material from the CIA World Factbook which, as a U.S. government publication, is in the public domain.
2006
This article contains material from the US Department of State's Background Notes which, as a US government publication, is in the public domain.
2003

External links