Bahrain

Growth will accelerate in 2025, led by non-oil activity

In 2025, Bahrain's economic growth is expected to accelerate due to robust private consumption (40% of GDP) and investment (30% of GDP) on back of monetary policy easing. Easing interest rates will support credit growth which, together with damped inflation, will increase household purchasing power. Recovery in housing prices and the introduction of a 15% corporate tax in 2025 will contribute to inflationary pressures, but their overall impact will be marginal. Low inflation will enable the central bank to reduce its policy rate in line with the US Fed's rate-cutting cycle due to the currency peg between Bahraini dinar and the US dollar. Moreover, the modernisation of the Bapco refinery, part of Bahrain's strategy to diversify its downstream energy sector which relies mainly on electricity generation from domestic natural gas, is also expected to contribute positively to growth. With the Bapco Modernisation Project (BMP), oil refining capacity is expected to increase by 42% to 400,000 barrels per day. The current 200,000 barrels per day of crude oil imported from Saudi Arabia for refining are consequently expected to increase to over 320,000 barrels per day on completion of the project. Investment will be supported also by Vision 2030, which aims to support non-oil sectors (finance, services, manufacturing, etc.), and by investments such as the USD 5 billion announced by the Saudi sovereign wealth fund (PIF).

Government spending (15% of GDP) is expected to gradually decline as cost-cutting measures are implemented in line with the USD 10 billion financial assistance programme provided by the United Arab Emirates and other Gulf states to Bahrain in 2018. Public spending cuts also form one of the priorities of the government’s Vision 2030 plan. Capital goods involved in infrastructure investments will increase imports, but the decline in public spending will limit the pace of their increase. On the other hand, aluminum sales (metals accounting for 40% of total exports) are set to boost export growth. However, the need to import more crude oil to sell more refined petroleum products, and the decline in oil exports, will limit exports.

Fiscal deficit still large but narrowing, widening current account surplus

The introduction of a tourism tax (three Bahraini dinars charged per room per day) and an expected non-oil corporate tax of 15% should help reduce Bahrain's budget deficit in 2025, despite falling hydrocarbon revenues (around 70% of total fiscal revenues). However, the elevated interest-rate burden (35% of total expenditures) will prevent the fiscal deficit from narrowing further. Consequently, the government is unlikely to achieve a balanced budget in 2025 as it already aimed to do so in 2022 under the Fiscal Balance Programme. However, the government is expected to continue to roll out its cost-cutting measures, such as reducing project spending, mainly through PPPs and privatisation, which are seen as key financing mechanisms for large-scale infrastructure projects in the construction, transportation and climate sectors, and for labour expenditures, etc. It is also focused on attracting foreign direct investment in the manufacturing, logistics, infrastructure, information and communications technology, financial services, tourism, health and education sectors. Despite persistently heavy public debt, fiscal risks are expected to be limited thanks to the financial support provided by Bahrain’s GCC neighbors.

Despite lower oil prices, the current account surplus will increase owing to the lower non-oil trade deficit and a higher services surplus. Higher aluminium exports and lower import growth – in line with the cut in public spending – will narrow the non-oil trade deficit. Growth in tourism revenues (estimated to reach 11% of GDP by the authorities from 2026 compared with 4% in 2015) will sustain growth in services’ revenues. Current account surpluses will help Bahrain accumulate international reserves (nearly USD 5 billion in October 2024, equivalent to 1.7 months of imports). Mumtalakat, the country’s sovereign wealth fund, which has assets worth an estimated USD 18 billion, will also serve as an important external buffer.

No major political threats, but geopolitical threats exist

Bahrain has a functioning Parliament and no major political tension is expected in the short term. The National Assembly was established by the 2002 Constitution and has two wings, the Shura Council and the House of Representatives mainly comprising independent members. The Shura has 40 members, all of whom are appointed by the King. The political scene is complicated by the feelings of political and economic marginalisation on the part of the Shia population, which represents around 60% of the total. Additionally, increasing economic dependence on Saudi Arabia, UAE and Kuwait, ineffective separation of powers and limited civil liberties will pose challenges.

Bahrain's external security may be directly affected by regional geopolitical tensions, particularly those between Iran and Israel. If they escalate further, Bahrain's close ties with the US, Israel, and other Arab states could place it under external pressure, particularly with Iran. If oil production and shipping routes are disrupted, Bahrain's reliance on oil exports and its relatively low level of international reserves could have economic consequences.

Last updated: December 2024