Bahrain to leverage investment projects to fuel economic recovery

In October 2021 the government launched a reform and investment programme in line with Bahrain Economic Vision 2030, the country’s long-term development and diversification framework. The package had five pillars: the revised Fiscal Balance Programme (FBP), labour market reforms, regulatory reforms, a strategic projects plan aiming to attract $30bn in investment and a priority sector plan.

Under the auspices of the reform programme, the updated FBP aims to eliminate the fiscal deficit by 2024. At the same time, the plan launched an ambitious effort to facilitate economic activity through a wide range of new projects and investment opportunities. The government faces a balancing act: it is both working towards fiscal austerity and expanding the project pipeline – an effort that traditionally would require public investment.

Officials hope to achieve both aims through a series of fiscal reforms under the revised FBP, while at the same time pushing through labour and regulatory reforms, establishing a new land bank, launching online portals and spurring further digitisation.

The two-pronged approach comes after the country’s deficit-reduction programme was delayed during the Covid-19 pandemic. Similar to other countries, Bahrain introduced two major fiscal stimulus packages during the health crisis to cushion businesses and individuals against the economic effects of the pandemic. While these measures were key to supporting business continuity and activity, the additional spending weighed on government coffers.

Long-term Vision

The new programme aims to refocus efforts on advancing long-standing objectives outlined in Bahrain Economic Vision 2030. Launched in 2008, the development framework included wide-ranging economic, governmental and societal strategies. In the economic sphere, Bahrain Economic Vision 2030 called for a shift from hydrocarbons towards high-potential sectors; the enhancement of productivity and skills; and the creation of an entrepreneurship ecosystem that fosters innovation, and provides assistance for small and medium-sized enterprises.

In terms of governance, the framework targeted a better quality of public services; enhanced transparency, predictability and uniformity in the application of regulations; and an assurance that reforms are backed by sustainable sources of government finance. It also outlined plans to create more advanced infrastructure, and foster a more productive and accountable public sector. Targets under the third pillar, society, included enhanced access to quality health care, education and social services, as well as an emphasis on sustainability.

Budget

After more than two years of disruptions related to the pandemic and a lengthy period of volatile oil prices, Bahrain Economic Vision 2030’s goals seem more relevant than ever. Global oil and gas prices witnessed protracted lows in 2014, weighing on Bahrain’s fiscal revenue. At the same time, non-oil sector revenue did not sufficiently expand to make up the difference. This produced a growing budget deficit, which rose from BD455m ($1.2bn) in 2014 to BD1.3bn ($3.5bn) in 2017. Public debt also grew, from 13% of GDP in 2008 to 87% in 2018.

Determined to reverse these trends, that year the government launched the first FBP, assisted by a $10bn support package from Saudi Arabia, the UAE and Kuwait. The first iteration of the FBP set the goal of reducing the deficit by BD800m ($2.1bn) per year, with a balanced budget targeted for 2022. The programme aimed to do this by reducing government operational expenditure; introducing a voluntary retirement scheme for public employees; balancing the books of the Electricity and Water Authority; creating a more targeted and streamlined social benefits system; boosting efficiencies in remaining public expenditure; and increasing non-oil revenue.

The FBP achieved some success in these objectives in the years leading up to the onset of the pandemic. The overall fiscal deficit, equivalent to 14% of GDP in 2017, improved to 11.7% in 2018 and 9% at the end of 2019. However, the start of the pandemic and the two subsequent stimulus packages saw the fiscal deficit grow to an estimated 17.6% of GDP in 2020. The revised balance programme was a response to these changing economic conditions.

Among the changes made was extending the zero-deficit deadline from 2022 to 2024, while also renewing emphasis on some of the original FBP’s objectives. In particular, these included reducing recurrent public sector expenditure on wages, salaries and projects, and further streamlining social assistance programmes. It also aimed to increase government revenue by boosting the contribution of government-owned entities and doubling the value-added tax from 5% to 10%. A new pricing strategy for government services is also in the works, along with other revenue-raising activities.

Bahrain has already made strides towards meeting these goals. In a February 2022 report, HSBC noted the country had made “remarkable improvement” in addressing the budget deficit. The bank said it expected to see the overall fiscal deficit fall to approximately 2% of GDP in 2022, putting a balanced budget by 2024 well within reach. The improved performance was attributed to both higher energy earnings, and a recovery in non-oil exports and services as cross-border activity resumed.

Labour & Regulatory Reforms

In addition to addressing the deficit and rationalising government spending, the programme introduced a series of labour market and regulatory reforms. Among the workforce-oriented reforms were the introduction of a long-term national labour market strategy, a review of payment schemes and redoubled efforts to upskill the Bahraini workforce. These measures hope to create 20,000 jobs for Bahrainis and provide training to 10,000 nationals a year through to 2024.

The regulatory reforms, meanwhile, included a simplification of business licence approval procedures and the launch of a government land bank. The plan also called for the creation of two online portals, one showcasing investment opportunities and the other digitalising urban planning-related services.

Priority Projects & Sectors

The strategic project plan included in the package aims to attract $30bn in investment, including in emerging, highvalue-added industries and five new offshore cities located in Fasht Al Jarim, Suhaila Island, Fasht Al Adhm, the Gulf of Bahrain and the Hawar Islands.

Developing both the oil and non-oil economies will be critical to attracting investment, and to that end the plan prioritises six sectors: oil and gas, tourism, logistics, financial services, telecommunications, ICT and the digital economy, and manufacturing. Through these sectors, the government aims to facilitate 5% annual growth in the non-oil sector in 2022.