BAHRAIN
Phase of expansion

2007 saw the economy open up further to the private sector even as growth continued to be strong

If there is one key word to sum up Bahrain’s economic trajectory in 2007, it would surely have to be ‘openness’. With the move towards further privatisation of the country’s state services, along with a major drive to heighten transparency, ‘openness’ has become the major trend driver in the country. Accompanying this has also been a drive to boost an awareness of what is still out there in the oil and gas sectors, along with more open arms to the country’s neighbours, such as Qatar and Iran, via some significant infrastructure projects.

The long-standing aim of tackling the challenge of unemployment by diversifying the economy into industry and financial services, while also helping more nationals get employment, has also been a theme throughout the 12 months. Meanwhile, the island state has also been taking its place in the Gulf-wide debates over the future of the dollar peg and further Gulf Cooperation Council (GCC) integration.

Bahrain has long been an open economy, one that welcomes foreign investment. The Heritage Foundation made it the world’s 39th freest economy in 2007, or 2nd out of the 17 countries of the Middle East region. Almost zero tax is major a feature of the kingdom, although 2007 did see the introduction in June of a 1 per cent contribution by nationals to the state unemployment insurance scheme, with this also matched by employers.

Economic growth has been strong in recent years too. Real GDP expansion was 7.8 per cent in 2005, although this has slowed since. Forecasts at the start of 2006 were of around 6 per cent and again for 2007 as well, although these have generally been revised upwards since. The IMF forecast higher growth for 2007, of around 6.9 per cent, to a GDP of US$17.5 billion.

Energy sector
Of course, much of what is driving this is high oil and gas prices, with petroleum making up 79.7 per cent of all revenue from exports in 2006, a figure likely to have remained similar in 2007, as oil prices crept towards US$100 a barrel. For the last few years, oil has contributed around a quarter of the country’s GDP. At the same time though, Bahrain itself is a major consumer of energy, with its oil imports amounting to around half the total import bill. Bahrain receives oil from Saudi Arabia too, which is refined in Bahrain before being re-exported.

Gas too has become an increasingly key commodity, with 2007 being an important year for the commodity. Bahrain needs plenty of gas to both help in its enhanced oil recovery (EOR) projects and as a feedstock for power plants. While many GCC states have turned to Qatar in recent times to boost their gas inputs, and Bahrain is no exception. In fact, it first entered into a deal for Qatari gas in 2005, a deal that subsequently hit some choppier waters, with objections on routing of the gas from Saudi Arabia. While Bahraini officials express hope that a pipeline will one day be built, the kingdom has also been looking for other sources. In late 2007, they began discussions with Iran on an alternative gas pipeline that would come on stream in 2012, despite discomfort at the idea from the US.

Meanwhile, Bahrain has been aggressively expanding its exploration and production activities, as well as pushing for greater use of EOR techniques for its existing fields. A number of new exploration agreements were signed during the year, with blocks going to international players. The first three quarters of 2007 saw total production hit 50.4 million barrels, though it continued to reflect the historic downward trend. Yet, with the new investment, the expectation is that production will begin to rise again in the years ahead, with a 70,000 barrels per day target set.

At the same time, the country has also been investing in the downstream sectors in an effort to boost the quality of its output. Bahraini crude has a high sulphur content at present, and so 2007 also saw the announcement of a new US$1.1 billion project to modernise its refinery assets.

High oil prices have, of course, offset some of the loss in output by continuing to boost the hydrocarbon sector’s contribution to the economy. This has enabled a robust programme of public spending too. The year also saw a memorandum of understanding being signed on the Qatar-Bahrain causeway, one of the more high profile infrastructure schemes to arise out of the current oil price boom. The hope is that the causeway will also see a pipeline laid alongside, integrating the project with the stalled gas programme.

New concerns
The government has also been trying to tackle the problem of unemployment, with an energetic scheme to boost the education system. The campaign of Bahrainisation, which set quotas of nationals to be employed by different sectors, also saw some developments, with a December announcement that from mid-2008 there would be a reduction in quotas for certain industries. This was probably in response to difficulties in areas such as construction, where hiring locals had proved highly problematic. Addressing the high wage and conditions expectations of Bahrainis is likely to go on being tricky, however, in the face of pressure on business margins, as competition increases.

This competitive level did increase dramatically during the year in another major area, the financial sector, which faced growing challenges from other Gulf states. With almost every member of the GCC now setting up or running its own financial centre, Bahrain’s traditional position as the Gulf’s banker is being challenged. One response has been the continuing development of Islamic finance in the kingdom, with a series of consolidatory moves taking place in this field – which Bahrain champions – during the year.

Meanwhile, the economy as a whole continued to open up, with September seeing an announcement from Sheikh Mohammad bin Issa Al Khalifa, the chief executive of the Economic Development Board, that the sell-off programme will be stepped up. The post office and petrol stations are likely to be the first targets for this heightened campaign.

Another key area of government policy in 2007 was of course the dollar peg, which has come under increasing pressure as the dollar depreciated and the US Federal Reserve moved to cut interest rates. This has left GCC countries, whose currencies are tied to the dollar, in a difficult position, as the economic boom in the region has caused quite contrary economic pressures to the ones the Fed is trying to tackle in the US.

Bahrain, however, remains in favour of maintaining the peg, with the government announcing in December that it would stick with the dollar for the foreseeable future.

Looking back then, 2007 has been a year in which some sound foundations have been laid down. Opening up more economic activity to the private sector should see some interesting bids next year, while the progress of the oil and gas sector will be keenly watched. With high oil prices set to continue too, a strong public spending element is likely to continue, although exacerbation of inflationary pressures by the declining dollar may cause some furrowed brows. Nonetheless, Bahrain looks set to continue to expand its economic base in 2008 – and on an increasingly competitive footing.

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