Bahrain

major macro economic indicators

(e): Estimate (f): Forecast

Risk assessment

Steady growth despite economic slowdown

Bahraini economic growth is expected to slow in 2023 from the year-earlier level, mainly on back of lower energy prices, tighter monetary policy (as a consequence of the peg to the dollar), and weaker export growth (notwithstanding, net exports are estimated to stand at around 10% of GDP in 2023). Despite growing output, lower steel and aluminium average prices will weigh on growth, Bahrain being one of the world’s largest producers and exporters of the aluminium, which accounts for around 20% of total exports. Moreover, slower economic growth in Bahrain’s key export markets such as Saudi Arabia and the United Arab Emirates (UAE) will also crimp the contribution of net goods and services exports to growth performance. Last, softer growth in tourism arrivals in 2023 compared with 2022 (total tourist arrivals estimated to rise 20% YoY in 2023 vs. a jump of 171% YoY in 2022) will put a brake on services exports. Private consumption will continue to be the key growth driver – it accounts for around 40% of GDP – thanks to the deceleration in inflation. But tighter monetary policy will prevent a large increase as higher interest rates will lower demand for consumer loans. Second, Bahrain will continue to attract strong foreign direct investments (in 2022, FDI rose nearly 6% to USD 34.5 billion from a year earlier) helped by the authorities’ efforts to improve the country’s business environment as part of the Vision 2030 programme which focuses on reducing Bahrain’s reliance on oil and gas. The USD 7.5 billion provided by the GCC Development Fund, as part of its 2018-2024 USD 10.2 billion credit line, has been the key driver of large scale investments. However, the contribution from government consumption will gradually ease in line with the Fiscal Balance Programme and the government’s commitment to implement expenditure-cutting measures in return for financial assistance from its Gulf neighbours.

Narrower current account surplus, fiscal consolidation affected by lower energy prices

Lower hydrocarbon prices and an estimated 1% decline in oil production will narrow the current account surplus of Bahrain in 2023 (nearly half of merchandise exports revenue comes from hydrocarbon exports). Softer revenues related to aluminium and steel exports will also cause a downturn in the goods trade surplus. Remittance outflows will continue to add to the secondary income deficit as foreign workers continue to return to Bahrain. That said, the current account surplus will remain above its historical level. This will be mainly due to service exports and overall resilient tourism. On the other hand, current oil prices on the spot market stand well below the fiscal breakeven oil prices for Bahrain, estimated at USD 126 per barrel. This will widen the fiscal deficit (hydrocarbon revenues account for nearly 70% of total fiscal revenue), pushing the need to introduce revenue-increasing reforms such as a corporate tax. In May 2023, the Minister for the Economy announced the introduction of a corporate tax once an international agreement is reached on the OECD-G20 framework. Based on an initial report, the tax rate is expected to be 15% for large multinational companies. However, this will not be enough to offset the lost revenue from declining hydrocarbon revenues. On the expenditure side, the authorities’ efforts to cut further both current and capital spending as part of the Fiscal Balance Programme will help to limit further deficit widening, but it will not be enough to prevent the high public debt from deepening. Transfers (around 20% of total expenditures) are not a serious target as they help to maintain social stability. Consequently, Bahrain’s fiscal position will remain weak.

No major political and social instability, but long-term threats exist

Bahrain has a functioning parliament and no major political tension is expected in the short term. However, opposition parties boycotted the 2022 November elections and the elected chamber has limited legislative powers. In the longer term, the political scene seems complicated due to the feeling of the Shia population (around 60% of the population) being marginalised in political and economic terms. Additionally, increasing economic dependence on Saudi Arabia, weak separation of powers and limited civil liberties will represent challenges. The normalisation of diplomatic relations with Israel in 2020 will continue to improve their trade ties through an anticipated signature of a free trade agreement. Recent Saudi-Iranian rapprochement may induce Bahrain to follow suit despite the latter’s accusing the former of supporting subversive elements among its Shia population. For now, both countries are keeping a low profile with regard to their exchanges. One final consideration is that Bahrain is host to the US fifth fleet.

Last updated: September 2023