Bahrain, the smallest among the Gulf Cooperation Council (GCC) states is among the worst hit countries amidst low oil prices and persistent social unrest. Though the country is more diversified than its peers (with oil sector contributing to only 20% of GDP), dynamics of oil prices determine the health of the country as petroleum processing and refining contributes around 90% to its government revenue and more than 50% of its exports receipts.[i] Slump in oil prices in mid-2014 have, therefore, affected the government’s revenue adversely, thereby increasing fiscal deficit.
Increase in government spending in the aftermath of global economic crisis of 2008, and the 2011 “Arab Spring” has impaired the fiscal situation of Bahrain over the years. This is further exacerbated by the recent decline in oil prices. Consequently, large amount of borrowings to service the mounting fiscal deficit has increased the debt levels to alarming levels. Overall, the government debt has increased to above 60% of nominal GDP by 2015-end as against 12% in 2008.[ii]
Realizing the gravity of the situation, the authorities adopted a path to fiscal consolidation in order to control the debt levels from becoming unsustainable. Increase in taxes and fees and cutting down meat, energy subsidies and utility tariffs have been undertaken in recent years.[iii] Looking ahead, the introduction of VAT in 2018 and ongoing subsidies reform should yield some positive result. Nonetheless, increasing social instability and further decline in oil price will constrain government’s ability to reduce expenditure or raise taxes substantially and hinder fiscal consolidation.
As far as other macro fundamentals are concerned, performance of non-oil sector is improving owing to robust growth in social, personal services and construction and financial services, albeit with slowdown in overall economic growth. GDP growth has eased to 2.9% in 2016 and 2015 from 4.4% in 2014.[iv] With low oil price environment to continue, non-oil sector is likely to be the main driver of economic growth going forward. In this regard, investment plan of USD 32 billion in infrastructure projects will play a crucial role in the economy’s performance.[v]
Meanwhile, inflation has also softened to around 0.4% in February 2017 against the backdrop of low international food prices.[vi] Furthermore, after the increase in Fed Fund rate by the U.S. in March 2017, Bahrain along with three of its peers increased its key interest rate by 25bps.[vii] The increase in U.S. interest rate has resulted in increasing borrowing cost for the debt ridden Bahrain, thereby adding to the trouble. The country has a fixed exchange rate against the U.S. dollar and thus the domestic rate hike on their part was an essential step to maintain its fixed peg.
On the external front also, the Kingdom has suffered with the current account recording a deficit in 2015 (2.4% of GDP) after years of surplus.[viii] Even foreign direct investment registered a net outflow in 2015. This in turn has led to dwindling of accumulated foreign exchange reserves to a little more than one month of imports. Going forward, current account deficit is expected to continue in the medium term with the deficit projected to worsen to around 4.7% of GDP in 2016.[ix]
Coming to the banking sector, though the sector is reeling under the pressure from slow economic activity, it remains well capitalised and liquid. Non-performing assets are also low. Additionally, low household debt and stable funding sources including large domestic and foreign government deposits are favourable for the banking sector performance.
Besides the economic turmoil, Bahrain continues to face rising social unrest even after six years of Arab Spring. Despite the persistent protest there has been no improvement in the living conditions of the majority of Shia population there. They are being discriminated against in terms of public sector jobs, public services in Shiites occupied areas and also political participation. The unequal treatment to the majority of the population has resulted in massive protests against the monarchy. The Bahrainian government has been allegedly torturing the convicts, coercing them to confess and executing them without actually giving them an opportunity of fair trial. The UN human rights commission has taken up the issue by making up an appeal to the government of Bahrain.[x] Meanwhile, attempts of the ruling elite to crush the protests including banning the main opposition party, Wa’ad or the National Democratic Action Society, arrests of the protestors and revoking the citizenship of top Shia cleric Sheikh Isa Qassim for prompting protests by his followers, repeated harassment of Nabeel Rajab (Bahraini human rights activist and opposition leader) among others, have only worsened the political and social atmosphere of the country.[xi] In addition, the recent approval of a constitutional amendment allowing the authorities to run Bahrain under an undeclared state of martial law according to which civilians can be tried in military courts is a clear violation of human rights.[xii]
The growing democratic dissent against the Al Khalifa regime is basically a demand for human rights, freedom of expression, rule of law and a society which is free from corruption. This uprising has raised alarm among other Gulf countries as well as the West.[xiii] However, the West seems to be closing its eyes on increased atrocities on civilians in Bahrain. With the recent issue of Britain’s involvement in human rights abuses in Bahrain by providing the latter aid from its conflict, stability and security fund (CSSF)[xiv] and the plan of the Trump administration to go ahead with fighter jet sales deal with Bahrain without human rights condition imposed by the Obama administration[xv] indicate that the two big powers are not much concerned about human rights violation in Bahrain. Thus human abuse has risen to a great extent in Bahrain and the international community should come together and resolve the issue so that its citizens enjoy a normal social and economic life.
Going forward, weak fiscal and external balances along with the prevailing socio-political tensions limits the external financial support. The deterioration in the credit profile of the government amidst incessant political suppression in turn has already led to sovereign credit rating downgrade by the three rating agencies (Moody’s, Standard &Poor’s and Fitch).[xvi] Bahrain has been getting support from its neighbours, in particular Saudi Arabia. However, with Saudi Arabia itself undergoing an economic slowdown the situation for Bahrain is only getting worrisome.[xvii] The dependence on oil coupled with its currency peg against the U.S. dollar limits the country’s macroeconomic policy flexibility. Additionally, limited reserves put constrain on the authorities’ ability to provide countercyclical support to economic activity. Combined with higher debt levels amidst low commodity and oil prices, growth prospects are likely to remain muted. Furthermore, geo-political risks and socio-economic unrest continue to weigh on economic growth.
(The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any organisation the author might be affiliated to).
[i] Central Bank of Bahrain: “Economic Indicators”, September, 2015
[ii] IMF: “World Economic Outlook”, October, 2016
[iii] Arabian Business: “Where is Bahrain headed?”, March 19, 2017
[v] Arabian Business: “32bn projects said to drive Bahrain economic growth in 2017”, December 25, 2016
[vi]Bahrain data portal: “Consumer Price Index”, op. cit.
[vii] Central Bank of Bahrain: “Press Release”, March 15, 2017
[viii]Central Bank of Bahrain: “Economic Indicators”, November ,2016 http://www.cbb.gov.bh/assets/statistics/Nov_2016.pdf
[ix] IMF: “World Economic Outlook”, op. cit.
[x] United Nations Human Rights – Office of the High Commissioner: “Urgent appeal to the Government of Bahrain to stop new executions – UN rights experts”, January 25, 2017 http://www.ohchr.org/en/NewsEvents/Pages/DisplayNews.aspx?NewsID=21118&LangID=E#sthash.HFxfl50I.dpuf
[xi] Amnesty International: “Bahrain: Postponement of Nabeel Rajab’s trial for sixth time is blatant harassment”, January 23, 2017
[xii] Amnesty International: “Bahrain: Disastrous move towards patently unfair military trials of civilians”, April 3, 2017
[xiii] Daily Pioneer: “Bahrain crackdown and US tutelage”, march 11, 2017 http://www.dailypioneer.com/columnists/oped/bahrains-crackdown-and-us-tutelage.html
[xiv] The Guardian: “Human rights abuses in Bahrain cast shadow over £2m UK aid support”, January 13, 2017
[xv] The Guardian: “Trump administration drops human rights conditions to sell fighter jets to Bahrain”, March 30, 2017
[xvi] Forbes: “Bahrain Downgraded To Junk, As Political Crackdown Continues Unabated”, June 28, 2016
[xvii] Bloomberg: “Saudi Arabia Rating Cut by Fitch as Public Finances Worsen”, March 22, 2017 https://www.bloomberg.com/news/articles/2017-03-22/saudi-arabia-rating-cut-by-fitch-on-worsening-public-finances
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