Bahrain continues efforts to narrow its fiscal deficit

Bahrain’s efforts to narrow its fiscal deficit is taking place across a number of fronts. On the revenue side of the equation the awaited introduction of value-added tax is expected to have the single-biggest impact over the next two years. In terms of cutting costs, the ongoing reduction of energy subsidies is garnering considerable attention, as Bahrainis become accustomed to paying near-market prices for the first time.

PUBLIC WAGES: At the conclusion of its 2017 Article IV Consultation with Bahrain, the IMF highlighted another area in which the kingdom could reduce its current expenditure levels: a curtailment of the public sector wage bill. This, however, is a challenging proposition. As with other GCC states, the availability of secure, well-paid, public sector jobs has come to be regarded as part of the social contract between the state and its citizens. The centrality of this tacit understanding was demonstrated in 2011, when the unrest of the Arab Spring movement was felt in Manama. The government responded with a 44% increase in spending, which included BD388.5m ($1bn) over two years to cover wage increases for state employees. Since that time there has been a discernible tension between the state’s desire to bolster social cohesion through public sector salary raises and its aim to address the fiscal deficit through spending cuts.

In 2014 the government announced another series of public sector wage hikes. The round included a social allowance increase for 15,000 married female employees to help bridge the gender wage gap, an extra bonus of BD1500 ($3980) for staff members who assisted in an emergency or crisis in the past year, and a communication allowance that included fax and internet usage. The addition to the state budget as a result of these changes was an estimated BD6m ($15.9m) per year.

Bahrain was not alone in boosting salaries and benefits for state employees. Around the same time Kuwait received a warning from the IMF regarding its growing public wage bill, Qatar had spent a record figure on state employee wages in its FY 2012/13 budget and the government of Dubai had doubled the base salaries of nearly one-third of its workers.

The methodology was altered, however, when oil prices began declining in late 2014. With oil revenue softening, the Bahraini government was faced with a widening fiscal deficit by 2016. Long-term economic interests gained the higher ground in the ongoing debate over public sector spending, and consequently the Shura Council voted in January 2016 to delay a planned 15% public sector pay raise for at least one year.

SOCIETAL SHIFT: The conversation regarding governmental salary spend will undoubtedly continue as Bahrain juggles the competing concerns of public employee welfare and fiscal balance. Over the longer term, however, the solution is likely to come from a change in the way Bahrainis view private sector employment. As in other GCC economies, working for a private firm – whether domestic or international – has traditionally been seen as less secure, more demanding and offering fewer financial incentives than state employment. With the 2009 publication of the Bahrain Economic Vision 2030, however, the kingdom has made clear its desire to channel more citizens towards private sector occupations to drive economic growth and reduce expenditure on the public sector wage bill.

This effort began in earnest some years before the unveiling of the kingdom’s long-term strategic plan: in 2006 King Hamad bin Isa Al Khalifa ratified a Labour Reforms Law that established the Labour Market Regulatory Authority (LMRA) and the capacity-building organisation Tamkeen (see analysis). In doing so, the government adopted a multi-pronged approach that aims to develop a workforce more capable of meeting the demands of the private sector: the law imposed monthly fees on expatriate workers, the revenue from which was directed to job training for citizens, while simultaneously imposing penalties on businesses that declined to address their reliance on imported labour.

BAHRAINISATION: Bahrain has also adopted a policy common to GCC states of fixed quotas for citizens in private companies. First introduced in 1996 the Bahrainisation strategy requires companies with 10 or more expatriates to employ a certain percentage of Bahraini workers before it can apply for additional foreign visas for its workers. The government has established clear targets, defined by economic activity and business size, which establish a minimum and maximum number of foreign workers, as well as a Bahrainisation calculator that allows employers to easily see whether they meet the minimum requirements. The demands vary considerably, with areas such as offshore reclamation and demolition featuring a 0% Bahrainisation target for companies of between six and nine employees, and an 8% requirement for larger firms. In areas where Bahrainis have traditionally played a larger role, such as banking and insurance, targets run from 40% to 50%.

Implementation has not always been consistent, however. As with other countries of the region, promotion of the localisation policy has shown a strong correlation to oil prices: when revenue from hydrocarbons is high, the government’s ability to provide employment and social support to the citizenry means that efforts to increase local participation in the private sector workforce become less intense; when revenue falls, though, focus returns to the Bahrainisation programme as a means to reduce pressure on state finances. Consequently, the strategy has brought mixed results .

In early 2017 Ausamah bin Abdulla Al Absi, CEO of the LMRA, stated that around 60% of companies had achieved the required Bahrainisation rate, a figure he attributed both to the competency of Bahrainis and the responsibility of the companies’ officials. Some of the kingdom’s flagship firms have led by example in this regard. Alba, for instance, one of the largest companies in the Middle East, has achieved a Bahrainisation rate of 87%, compared to the 65% rate of the wider aluminium industry. Financial services is another area where firms have often achieved relatively high Bahrainisation rates. For example, the business process subsidiary of Bank of Bahrain and Kuwait, Invita, reported that 90% of its employees were Bahraini citizens in 2017. In other areas, though, such as construction and hospitality, expatriates continue to make up the vast majority of the workforce. While Bahrainis are unlikely to be attracted to the physically demanding and often lower paying construction industry, areas such as hospitality are seen as potential sources of employment for citizens. In 2017 Jesus Florido Banqueri, advisor and project manager to the Bahrain Tourism and Exhibitions Authority, revealed the plan to encourage Bahrainis to consider employment in the sector by bringing well-regarded hospitality schools to the kingdom.

Elsewhere, the government is taking a firmer approach to the implementation of its Bahrainisation strategy. In 2016 the LMRA announced that companies that are discovered to be deliberately avoiding the requirements would face fines or revocations of their foreign employees’ work permits. The announcement came after it was found that some firms had been side-stepping the rules by keeping Bahrainis on the payroll in order to secure work permits for expatriates before later dismissing them. Consequently, the Cabinet issued a rule that delivered a BD300 ($795) fine for every instance of a Bahraini “ghost” employee.

GOING FORWARD: Despite the benefits of public employment, more citizens are working in private business than ever before. The Bahraini private workforce grew by around 25% between 2007 and 2016, according to the LMRA, to reach 91,500 employees. Moving more citizens from public to private entities, however, is a long-term project. To many citizens, public sector employment is still more attractive than working in the private sphere: according to the LMRA, the median public sector wage was BD695 ($1840) per month in 2017, versus BD406 ($1080) for private work. This finding will add weight to the argument that state salaries must be lowered if private firms are to effectively compete in the labour market. The difficulty of achieving this, however, is likely to ensure that the issue of public pay will remain a central one over the medium term.