Bahrain's Economy: Growth, Diversification, And Future Prospects

Bahrain's economy is heavily dependent on oil and gas, with petroleum and natural gas being the country's only significant natural resources. However, Bahrain has the most diversified economy in the Gulf Cooperation Council, with non-oil sectors contributing significantly to its GDP. The country has a successful finance industry, with many financial institutions benefiting from the regional boom driven by the demand for oil. Bahrain's economy is also supported by other sectors such as tourism, manufacturing, transport, and telecommunications. The country's strategic location in the Middle East, modern infrastructure, and legislative incentives have contributed to its economic success and made it an attractive destination for foreign investment.

Bahrain's oil and gas industry

Bahrain has a relatively small oil and gas sector compared to other Gulf countries, and as a result, has been working to diversify its economy. In 2018, Bahrain made a significant discovery in its offshore Khalij al-Bahrain reservoir, boosting expected reserves by 80 billion barrels. The country also announced the discovery of 10-20 trillion cubic feet of onshore "Pre-Unayzah" deep gas reserves. Bahrain is seeking to develop its petrochemical industry, with five sub-sectors growing rapidly in recent years, including construction chemicals, water treatment chemicals, and oil field chemicals.

The Bahrain Petroleum Company (BAPCO) is a key player in the country's oil and gas sector, operating a refinery with a capacity of 250,000 barrels per day. In 2021, BAPCO began a $7 billion upgrade of the refinery, leveraging $482 million in U.S. goods and services, which is expected to boost processing capacity to 400,000 barrels per day. Bahrain LNG, a joint venture between Bapco Energies and a consortium of companies, completed the construction of the country's first LNG import terminal in 2020, adding strategic assets to supplement local gas production.

The Bahraini government has recognised the importance of the Fourth Industrial Revolution in the oil and gas sector, deploying advanced technologies such as big data, Artificial Intelligence (AI), and the Internet of Things (IoT). Tatweer Petroleum, for example, has created the first cloud-based big data platform, using machine learning to predict and prevent maintenance problems. The government is also working on a National Energy Strategy, which will outline changes to state-owned enterprises in the energy sector and highlight strategic priorities.

While Bahrain continues to develop its oil and gas assets, it is also committed to achieving net-zero carbon emissions by 2060. The country aims to produce 710 MW from renewable sources by 2035, with a focus on solar, wind, and waste-to-energy facilities.

Economic diversification

Bahrain's economy is the most diversified among all the Gulf countries in the region. The country has been working to diversify its economy, especially since the late 20th century, due to its limited oil wealth compared to its neighbours. Bahrain's non-oil sectors contribute to 79.2% of its total GDP, with the financial and banking sector being one of the most important.

The country has heavily invested in the banking and tourism sectors, with its capital, Manama, being home to many large financial institutions. Bahrain's finance industry is very successful, and in 2008, it was named the world's fastest-growing financial centre by the City of London's Global Financial Centres Index. The country's banking and financial services sector, particularly Islamic banking, have benefited from the regional boom driven by the demand for oil.

Other non-oil sectors that contribute significantly to Bahrain's economy include manufacturing industries, transport and communications, construction, real estate, hotels and restaurants, and other service industries. The telecommunications sector, for example, contributes to 4% of the country's total GDP.

Bahrain has also geared itself towards economic diversification to capitalise on its strategic location within the region and address problems such as unemployment and the gradual decrease of its oil reserves. The volume of service exports has grown by over 40% in the past five years, while non-oil exports have tripled over the same period.

Bahrain's government policies and structural reforms have been crucial to its economic success and have placed the country in a prominent position as a distinguished financial and tourist hub in the Middle East.

Financial services

Bahrain's finance industry is very successful. The country's capital, Manama, is home to many large financial institutions. Bahrain's banking and financial services sector, particularly Islamic banking, have benefited from the regional boom driven by demand for oil.

Bahrain's economy is the most diversified in the GCC region, with the financial services sector leading the way as the largest contributor to the GDP, surpassing the oil sector. The financial sector is one of the most important non-oil sectors in the country's economy, accounting for over 17% of the Kingdom's GDP. The financial sector is also one of Bahrain's largest employing sectors, with Bahrainis representing over 66% of the sector's workforce.

The Central Bank of Bahrain (CBB) is the unified regulatory body for the kingdom's financial services industry. Under Article 4 of its founding law, the CBB is responsible for licensing, supervising and regulating all entities undertaking financial services in the kingdom. In addition, it regulates the capital markets, provides banking services to the government, manages reserves of gold and foreign exchange, and issues the national currency – the Bahraini dinar.

The CBB established a centralised Sharia Supervisory Board (SSB) in 2015, the first such institution in the GCC. The SSB launched a sharia governance framework in 2018 and today oversees compliance in the Islamic banking and insurance segments. Individual Islamic financial institutions also have their own dedicated sharia compliance boards.

The Bahrain Association of Banks, established in 1979, is the key body advocating for and promoting the banking sector.

The CBB has enforced Basel III standards for capital and liquidity for banks in the kingdom, though it has gone beyond Basel III requirements in many key areas. For example, local banks must maintain a minimum capital adequacy ratio (CAR) of 12.5% of risk-weighted assets, rather than the 8% required under Basel III.

The CBB and Bahrain’s banks are working to meet the standards outlined in Basel IV. Due to the pandemic, the original January 1, 2022, deadline for global implementation of the updated standards was postponed to January 1, 2023.

Bahrain has been particularly innovative in the open banking and digital currencies spheres. In 2020, the kingdom launched the Bahrain Open Banking Framework, the first initiative of its kind in the region. The CBB has also approved a move by Bahrain Telecommunications Company (Batelco) to become the first telecommunications firm in the region to offer an open banking service, called Batelco Financial Services.

Bahrain FinTech Bay provides a physical hub to incubate insightful, scalable, and impactful fintech initiatives through innovation labs, acceleration programs, curated activities, educational opportunities, and collaborative platforms.

The Bahrain Economic Development Board (EDB) is the first point of call for entities wanting to establish their business in Bahrain. The EDB team is ready to help each entrepreneur or company pursue local, regional, or global business opportunities from Bahrain.

Tourism

Bahrain's economy is largely dependent on oil and gas, but the country has been working to diversify its economy, including by investing in the tourism sector. In 2018, the contribution of tourism to Bahrain's GDP was around 7%, and this is expected to increase steadily to 10.9% by 2028. The number of visitors to the country is also expected to rise, with 12 million recorded in 2018, projected to reach 14 million by 2022, and 15 million by 2020.

Bahrain's tourism industry is supported by its strategic location in the Persian Gulf, making it an accessible destination for long weekends for people from other Gulf countries. The country also has a liberal culture, is known for its hospitality, and has a flexible religious milieu for visitors.

Bahrain has three UNESCO World Heritage Sites: Dilmun Burial Mounds; Pearling, Testimony of an Island Economy; and Qal'at al-Bahrain, also known as Bahrain Fort. The country also has a national tourism identity, 'Ours. Yours. Bahrain', which champions the authenticity of the visitor experience.

Bahrain's tourism authority, the Bahrain Tourism and Exhibitions Authority (BTEA), promotes, manages, and organises events, conventions, and exhibitions related to art, culture, business, entertainment, and sports, to attract both leisure and business travellers. The BTEA also works to create an eco-friendly atmosphere for visitors by implementing sustainable development principles.

The country's hospitality industry is growing, with a recorded increase in the number of hotels and resorts, and a boost in revenue. The government has also invested in tourism infrastructure, including new hotels and museums, and has provided a pro-business environment for investors.

The success of ventures such as the Bahrain Grand Prix has helped to raise the country's international profile, and major airlines have resumed services to the country.

Foreign investment

Bahrain has a liberal approach to foreign investment and actively seeks to attract foreign investors and businesses. The Bahraini government aims to foster a greater role for the private sector in economic growth, focusing on encouraging foreign direct investment (FDI) in the manufacturing, logistics, information and communications technology (ICT), financial services, and tourism sectors.

The country has a positive and stable investment climate, with the government maintaining a business-friendly environment. Bahrain's total FDI stock reached $33.8 billion in 2023, with the financial services, manufacturing, real estate, and ICT sectors attracting the majority of FDI. The government has implemented policies to address its debt burden and support economic growth, such as increasing the value-added tax and joining international frameworks to prevent base erosion and profit shifting.

Bahrain permits 100% foreign ownership of new industrial entities and the establishment of representative offices or branches of foreign companies without local sponsors or partners. The government has expanded the number of sectors in which foreigners are allowed full ownership, including tourism services, mining, real estate, and crop cultivation. Additionally, the government has loosened foreign ownership restrictions in the oil and gas sector, allowing 100% foreign ownership in extraction projects under certain conditions.

To further attract foreign investment, Bahrain has established special economic zones, such as the Bahrain International Investment Park, which offers incentives like reduced rental rates, customs duty exemptions, and recruitment restriction exemptions. The country also has a transparent, rules-based government procurement system, although US companies sometimes report operating at a disadvantage compared to other firms in certain tenders.

To strengthen its position as a regional startup hub, Bahrain has launched initiatives like Bahrain FinTech Bay and established funds to encourage startup investments. The Central Bank of Bahrain has also introduced a regulatory sandbox for startups to test new technologies like cryptocurrency and blockchain.

The US-Bahrain Bilateral Investment Treaty (BIT) and the US-Bahrain Free Trade Agreement (FTA) provide benefits and protection to US investors in Bahrain, including most-favored nation treatment, national treatment, and access to international arbitration. Bahrain's stable political and security environment, along with its liberal economic policies, make it an attractive destination for foreign investment.

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