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KINGDOM OF BAHRAIN

Economic Overview

The Kingdom of Bahrain has 125 million barrels of proven crude oil reserves (0.03% of the GCC reserves and 0.01% of the world crude oil reserves). Bahrain possesses the lowest reserves among the GCC countries, which is presently producing 49,000 barrels of oil per day. Oil accounts for 11% of GDP (exclusive of allied industries), 60% of export earnings and 70% of government revenue. Bahrain is one of the most diversified economies in the GCC region. The government is making strenuous efforts to attract foreign investors and pursue limited privatization to achieve an ultimate goal of economic diversification to reduce the country's dependence on oil. Aluminum is Bahrain's second major export after oil. Other major segments of Bahrain's economy include financial and construction sectors. Bahrain is focused on Islamic banking and is competing on an international scale with Malaysia as a world-wide banking sector. With its highly developed communication and transport facilities, Bahrain is home to numerous multi-national firms with business in the Gulf. As part of this effort, Bahrain and the US implemented a Free Trade Agreement (FTA) in August 2006 (the first FTA between the US and a Gulf State). The government’s economic strategy will focus on consolidating Bahrain’s position as the free services hub of the Gulf region. Bahrain’s future prosperity rests heavily on its capacity to develop the tertiary sector, for example: finance and tourism. Its excellent regulatory structure is encouraging foreign financial and commercial firms to base their operations in the country. The strong reputation of the Bahrain Monetary Agency (BMA) as a regulator of the industry has played a primary role in the evolution of Bahrain as the Gulf’s most important financial center. Major long-term economic challenges include: the depletion of both oil and underground water resources; job creation for Bahraini nationals; and liberalization of the business environment to help attract domestic, regional and foreign investments. The global financial and economic crisis resulted in a slower economic growth for Bahrain in 2009 as tight international credit and a slowing global economy caused funding for many non-oil projects to dry up. In 2009, to help reduce unemployment among Bahraini nationals, Bahrain reduced sponsorship for expatriates, increasing the costs of employing foreign labor. However, the global economic recovery will have a strong positive impact on the economy.

Macroeconomic Overview

Growth

Bahrain’s economic activity is dominated by oil (processing), and the economy is developing downstream aluminum industries as well. A continuing upturn in oil prices during the past five years and a rise in property development and construction have resulted in a strong economic growth of the economy. Nominal GDP grew by a 15.2% to $21.2 billion in 2008 compared to a growth rate of 16.3% to $18.5 billion in 2007. However, nominal GDP shrank by (-4.8%) in 2009 due to the global financial and economic crisis and the slump in the world oil market. Nominal GDP is expected to rebound and grow by 10.6% and 5.3% to US$22.4 billion and $23.5 billion in 2010 and 2011, respectively. Real GDP grew by a 6.1% in 2008 compared to an 8.1% in 2007; while the growth rate declined to 2.9% in 2009. Real growth rates are likely to rise to 3.5% and 4% in 2010 and 2011, respectively, on the back of expected global economic recovery.

Inflation

Bahrain has displayed a high degree of price and currency stability. It has been least affected by the current inflationary environment compared to its counterparts in the region. The country has particularly enjoyed a very low inflation rate for a long period of time. The rate of inflation has ranged from -1.2% to 3.5% during 2001 to 2008. Strong oil prices resulted in increased spending in Bahrain by both Bahrainis and visitors especially from Saudi Arabia. This factor has recorded slight increases in inflation in 2007 and 2008. The consumer price index registered an increase of 3.5% in 2008 compared to 3.3% in 2007; while the yearly CPI inflation rate decreased to 2.8% in 2009. Relatively higher rate of inflation in 2008 was attributable mainly to currency (BD) vis-à-vis US Dollar fluctuations against the world major currencies, Japanese Yen, the Euro and the British Pound Sterling, and increased domestic demand pressures. The prices of imported goods were also increased. Inflation is expected to remain manageable at 2.4% and 2% in 2010 and 2011, respectively. With the Bahraini Monetary Authority maintaining a tight monetary stance, inflation is expected to remain subdued in the medium-term.

Fiscal Position

Traditionally, the government finances have been heavily dependent on oil price movements as oil revenue roughly account for 70% of total revenues. Current expenditures, of which public sector salaries make up two-thirds, account for 82.5% of the total expenditure. The Kingdom of Bahrain achieved a high fiscal surplus of 7% of GDP in 2008 compared to a 3.2% of GDP in 2007. Surplus turned into a deficit of (-4%) of GDP in 2009 due to the global financial and economic crisis, and the world oil market slump. Fiscal deficits are likely to be reduced to (-1%) and 0% of GDP in 2010 and 2011, respectively, due to the expected global economic recovery.

Currency

Officially Bahrain operates a fixed exchange rate regime, where Bahraini Dinar (BD) is pegged to the Special Drawing Rights (SDR) at a rate of SDR: BD 0.46, with fluctuations of up to 7.25% permitted. In practice BD is solely pegged to the US$ at a rate of BD 0.376: US$ 1.00 (since 1981). The monetary authorities feel that the peg provides confidence for investors, and such a policy is not likely to change in the medium-term. Total reserves minus gold stood at US$3.80 billion at the end of 2008 compared to US$4.20 billion at the end of 2007, which decreased to US$3.5 billion in 2009. Total reserves minus gold are expected at $3.6 billion at the end of 2010 and 2011, respectively.

External Accounts

Bahrain also achieved huge trade and current account surpluses on the back of strong global energy demand during 2005 to 2008. The economy displayed current account surplus of US$2.26 billion (10.6% of GDP) in 2008, compared to $2.91 billion (15.8% of GDP) in 2007. Surplus on current account shrank to $0.83 billion (4.1% of GDP) in 2009 due to the global financial and economic crisis. The current account surpluses are expected to increase to US$1.23 billion (5.5% of GDP) and $1.34 billion (5.7% of GDP) in 2010 and 2011, respectively.
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