According to Fitch Ratings, Bahrain’s gross domestic product (GDP) growth exceeded 6% in the first quarter of 2023, well above predictions made by the International Monetary Fund (IMF) because of higher oil prices and robust activity in essential industries like tourism and construction.
According to many public and commercial sector officials, this result is a turning point in the nation’s fight against the COVID disruptions. However, as the world and Bahrain recover from the recent economic lows, a new set of difficulties and chances confront the government.
One reason is that moving away from oil is becoming more urgent as Bahrain’s governmental finances deteriorate and a greener future beckons. Despite making up only 18% of the GDP, the hydrocarbons industry contributes almost 75% of all tax income.
The low proven oil reserves and high extraction costs challenge Bahrain’s government. And even though the nation has made outstanding achievements in the last 20 years to diversify its economy, there is still work to be done.
The government unveiled an economic recovery plan in 2021, intending to hasten Bahrain’s transition from oil dependence. The plan calls for strategic investments totalling USD 30 billion, new FDI targets, and objectives to boost Bahraini citizens’ employment rates.
The administration also focused on six major industries for the future, i.e., manufacturing, oil and gas, telecommunications, IT and the digital economy, tourism and logistics, and financial services.
This strategy is intended to help the nation achieve its objective of creating, in the words of the government, “a productive, globally competitive economy, guided by the government and driven by the private sector.”
In this regard, the economic outlook for 2022 may provide the government with some reason for optimism.
Data from Tamkeen, the national labour fund, show that even while government expenditure had a role, non-oil growth continued to increase at a 7.2% annualized pace over the first three quarters of 2022.
Oxford Economics senior economist John Payne said, “The success of the non-oil economy, which recovered fairly quickly, was the major standout for Bahrain in 2022. As a result of the government’s capacity to reinvest oil revenue into the economy, output has now surpassed pre-pandemic levels.”
“Bahrain’s strategy appears to increase business interest in the economy and the private sector. And that will assist the government in achieving the 2030 goal of having a more extensive budgetary base and ceasing to be dependent on oil,” the expert stated further.
Uphill Journey Ahead
However, the government’s path to achieving this goal may become more difficult shortly. Over the following 12 months, economic growth is expected to slow as the impact of decreasing oil prices on the overall economy becomes more pronounced.
There are grounds to be positive in the medium future. Bahrain presents itself as a stable, open, and pro-business destination to foster economic prospects in a globe marked by geopolitical tensions, increased macroeconomic uncertainty, and the growth of new digital industries. The nation wants to intensify FDI in its priority industries.
FDI inflows are strong, according to Khalid Humaidan, CEO of the Bahrain Economic Development Board (EDB).
“The most recent full-year FDI [inflow] numbers are for 2021 when FDI in Bahrain increased by USD 1.7 billion, a significant amount. The analyst argues that Bahrain’s FDI stock, which has a total market value of over USD 35 billion, to increase by about USD 2 billion in a single year is excellent,” the official stated further.
The financial services industry in Bahrain, which makes up the largest non-oil share of the country’s GDP, is where these inflows are most noticeable. The Bahrain EDB wants to use this natural advantage to draw in more capital and raise the sector’s overall economic output from around 17.8% to about 20%. Citi’s plan to establish a Global Technology Hub in the nation in 2021, scheduled to hire 1000 programmers by the end of 2023, is among the notable accomplishments.
According to Waheed Al Qassim, CEO of the Bahrain Association of Banks, “We expect Bahrain to maintain its position as a major financial player in the Middle East, supported by many factors, including prudent legislation and excellent supervision by the Central Bank of Bahrain that ensure financial sector stability and sustainability.”
Bahrain is also open to embracing cutting-edge new technology and business models in an environment where financial services are constantly developing. This includes digital assets.
Binance, a major cryptocurrency exchange, started its platform in Bahrain in January 2023 after getting the go-ahead from Bahrain EDB and the central bank. However, following the sector’s meltdown in 2022, there is a widespread opinion that the sector should only be supported if a robust regulatory framework accompanies it.
Khalid Humaidan said, “The crypto winter has made one thing very clear: the need for regulation. Among the many businesses we’re working with is Binance. We want to interact with new and established companies because we know the industry will continue to be disruptive.”
The non-oil sector’s growth has been a standout success, and Bahrain’s stable and pro-business environment, coupled with its efforts to intensify FDI, presents many opportunities for the nation’s future.
While there may be challenges ahead, Bahrain’s commitment to regulation and good governance in emerging industries shows its determination to continue disrupting and innovating while protecting its citizens and attracting foreign investors.