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Economy of Bahrain
Economy of Bahrain
Economy of Bahrain
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Economy of Bahrain
Manama skyline
CurrencyBahraini dinar (BHD)
Calendar Year
Trade organisations
WTO and GCC
Country group
Statistics
PopulationNeutral increase 1,577,059 (2023)[3]
GDP
  • Increase $46.9 billion (nominal, 2024 est.)[4]
  • Increase $106.5 billion (PPP, 2024 est.)[4]
GDP rank
GDP growth
  • Decrease 3.9% (2023)
  • Decrease 2.8% (2024e)
  • Steady 2.8% (2025f)
  • Increase 3.0% (2026f)[4]
GDP per capita
  • Increase $30,035 (nominal, 2025 est.)[4]
  • Increase $65,888 (PPP, 2025 est.)[4]
GDP per capita rank
GDP by sector
Negative increase 0.9% (2024)[4]
Population below poverty line
N/A[6]
  • Increase 0.888 very high (2022)[7] (34th)
  • N/A IHDI (2022)
Labour force
  • Increase 928,809 (2024)[8]
  • 70.9% employment rate (2015)[9]
  • 44% of the population in the 15-64 age group is non-national[5]
Labour force by occupation
  • agriculture: 1%
  • industry: 32%
  • services: 67%
  • (2004 est.)[5]
Unemployment
Main industries
Offshore Banking and Islamic Banking, Aluminum Smelting, Petroleum processing and refining, Iron Pelletization, Fertilizers, Insurance, Ship Repairing, Tourism
External
Exports$40.344 billion (2023 est.)
Export goods
Aluminum, Petroleum and Petroleum Products, Textiles, Gold, Jewellery, Cheese
Main export partners
Imports$32.374 billion (2023 est.)
Import goods
Crude Oil, Machinery, Chemicals, Gold, Jewellery
Main import partners
Negative increase $60.58 billion (2024 est.)[4]
Public finances
Negative increase 134% of GDP (2024 est.)[4]
RevenuesDecrease $8.479 billion (2023)
ExpensesNegative increase $10.532 billion (2023)
All values, unless otherwise stated, are in US dollars.

The economy of Bahrain has significantly diversified in recent years to no longer be dependent on oil and gas — as of 2024, the extraction of oil and natural gas is the third biggest sector in the economy.[14] Bahrain advocates for a mixed economy system.[15][16] The Bahraini Dinar is the second-highest-valued currency unit in the world.[17] Since the late 20th century, Bahrain has heavily invested in the banking and tourism sectors.[18] In 2008, Bahrain was named the world's fastest-growing financial center by the City of London's Global Financial Centres Index.[19][20] Bahrain's banking and financial services sector, particularly Islamic banking, have benefited from the regional boom driven by demand for oil.[21] Petroleum is Bahrain's most exported product, accounting for 60% of export receipts, 70% of government revenues, and 11% of GDP.[22] Aluminum is the second most exported product, followed by finance and construction materials.[22]

According to the 2020 edition of the Index of Economic Freedom, Bahrain has the fourth-freest economy in the Middle East and North Africa region and is the 40th-freest economy in the world.[23] An alternative index places Bahrain at 70th place.[24] Bahrain was recognised by the World Bank as a high income economy.[25]

Economy overview

[edit]

Oil and natural gas play a dominant role in Bahrain’s economy. Despite efforts to diversify the economy, according to the CIA World Fact Book, oil still comprises 85% of Bahraini budget revenues, meaning throughout the last few years, lower world energy prices have generated sizeable budget deficits - about 10% of GDP in 2017 alone.[26] Bahrain's economy depends on oil and gas, international banking, and tourism.[18]

In 2003 and 2004, the balance of payments improved due to rising oil prices and increased receipts from the services sector. As a result, the current account balance registered a surplus of US$219 million in 2003 and a surplus of US$442 million in 2004, compared to a deficit of US$35 million in 2002. Bahrain's gross international reserves increased substantially in 2004 to US$1.6 billion, up from US$1.4 billion in the previous three years (2001-2003).

Diversification

[edit]

Though Current GDP per capita Archived 2012-05-04 at the Wayback Machine shrank by 2.4% in the 1980s, it bounced back to a growth of 36% in the 1990s as a result of successful diversification initiatives. Bahrain's urgency in embracing economic liberalisation is due to its need to diversify the economy away from its limited oil supplies. Unlike its Persian Gulf neighbours, Bahrain has little oil wealth, and the economy has expanded into banking, heavy industries, retail, and tourism. The Kingdom is the main banking hub for the Persian Gulf and a centre for Islamic finance, which has been attracted by the strong regulatory framework for the industry. According to the International Monetary Fund's Financial System Stability Assessment of Bahrain's financial regulatory environment, published on 6 March 2006, it found:

  • The financial system is enjoying strong performance under favorable circumstances and is likely to remain a major contributor to overall growth. The main risk stems from potential overheating in the economies of the region, but the system should be resilient to likely shocks.
  • Prudential regulations are modern and comprehensive, and supervision is generally effective, especially in the dominant banking sector. Supervisory capacity needs to be expanded in line with new regulations and to keep up with the growth and increasing sophistication of financial institutions.
  • The further expansion of the Islamic sector, the development of housing finance, and the deepening of securities markets are important for the future growth of the financial system. The banking and insurance sectors will eventually undergo consolidation. [1]

In 2005, Bahrain signed the US-Bahrain Free Trade Agreement, becoming the first Persian Gulf state to sign such a bilateral trade agreement with the United States. A massive privatization programme is underway to sell off key government assets: utilities, banks, financial services, and telecommunications have started to come under the control of the private sector.

As a result, the economy has been well-positioned to exploit the extra revenues generated in the region, thanks to the sustained high oil prices since 2002. In January 2006, the United Nations Economic and Social Commission for Western Asia cited Bahrain as the fastest growing economy in the Arab world.

Between 1981 and 1993, the Bahrain Government's expenditures increased by 64%. During that same time, government revenues continued to be largely dependent on the oil industry and increased by only 4%. Bahrain has at times received significant budgetary support and project grants from Saudi Arabia, Kuwait, and the United Arab Emirates.

The government has used its modest oil revenues to build an advanced infrastructure in transportation and telecommunications. Bahrain is a regional financial and business center. Tourism, especially from the region, has proved another significant source of income.

Bahrain has benefited from the oil boom since 2001, with economic growth of 5.5%. It has succeeded in attracting investment from other Persian Gulf states partly because it used the revenues of the 1970s-early 80s boom to invest in infrastructure development and other projects to improve the standard of living; health, education, housing, electricity, water, and roads all received attention.

The success of ventures such as the Bahrain Grand Prix has raised the Kingdom's international profile, and combined with the boom in Islamic banking, has encouraged major airlines to resume services to the country, with Lufthansa announcing on 14 March 2006 that it would schedule three flights a week to Muharraq from Frankfurt Archived 2007-10-11 at the Wayback Machine.

Bahrain has initiated a series of labour reforms under Minister of Labour Majeed Al Alawi to bring the labour market into line with international standards.

In 2009, it was announced that the Bahraini Government would be developing land next door to the Bahrain International Circuit. The project being managed by @Bahrain is a mix of facilities including an exhibition and convention facility, a choice of hotel accommodations ranging from mid-market to luxury, a multi-purpose indoor arena, an automotive club and engineering facility, retail and leisure establishments, a tech-tainment (technology interacting with entertainment) centre, a research institute, a technology park and a focus on education and training. @Bahrain is part of the Mumtalakat group of companies and will dedicate more than 1 million square meters of business, entertainment and educational space with a value in excess of $2bn (BD 850 million), making it one of the largest investment projects to take place in Bahrain in the past five years.[27]

In July 2023, Bahrain's national origin exports decreased by 23%, valued at BD323 million, while imports fell by 6% to BD441 million, resulting in a trade deficit of BD68 million, according to the Information & eGovernment Authority (iGA) report.[28]

Overall during 2023, Bahrain's GDP grew by 2.45%, with the non-oil sector showing a robust increase of 4.48%, indicating the country's successful efforts towards economic diversification.[29] The Bahrain Economic Development Board played a crucial role in enhancing Bahrain's investment climate, actively facilitating the entry of international investors and expanding the sectors open to 100% foreign ownership, including significant initiatives in the oil and gas sectors under certain conditions.[30]

Macro-economic trend

[edit]

This is a chart of the trend of gross domestic product of Bahrain at market prices estimated by the International Monetary Fund, with figures in millions of Bahraini Dinars.

Year Gross Domestic Product US Dollar Exchange Inflation Index (2000=100)
1980 1,354 0.377 Bahraini Dinars 74
1985 1,609 0.377 Bahraini Dinars 90
1990 1,867 0.377 Bahraini Dinars 89
1995 2,552 0.377 Bahraini Dinars 98
2000 3,408 0.377 Bahraini Dinars 100
2005 6,004 0.377 Bahraini Dinars 105
2010 9,668 0.377 Bahraini Dinars 120
2015 11,675 0.377 Bahraini Dinars 133
2020 13,058 0.377 Bahraini Dinars 139

For purchasing power parity comparisons, the US Dollar is exchanged at 0.30 Bahraini Dinars only. Mean wages were $19.81 per man-hour in 2009.

The following table shows the main economic indicators from 1980–2024.[31]

Year GDP

(in bil. US$ PPP)

GDP per capita

(in US$ PPP)

GDP

(in bil. US$ nominal)

GDP growth (real) Inflation (in Percent) Government debt

(in % of GDP)

1980 7.3 20,779 3.6 7.5 % 3.8 % ...
1985 11.4 27,186 4.3 −0.9 % −2.4 % ...
1990 14.7 30,044 5.0 3.5 % 1.3 % 8 %
1995 20.5 36,705 6.8 1.9 % 3.1 % 14 %
2000 28.0 43,920 9.1 7.0 % −0.7 % 26 %
2005 40.4 45,440 16.0 6.8 % 2.6 % 24 %
2010 58.2 47,117 25.7 4.3 % 2.0 % 30 %
2011 60.6 50,673 28.8 2.0 % −0.3 % 33 %
2012 65.9 54,489 30.7 3.7 % 2.8 % 36 %
2013 67.7 54,035 32.5 5.4 % 3.3 % 44 %
2014 68.3 51,938 33.4 4.4 % 2.6 % 44 %
2015 62.5 45,627 31.1 2.5 % 1.8 % 66 %
2016 63.8 44,834 32.2 3.8 % 2.8 % 81 %
2017 71.3 47,486 35.5 4.9 % 1.4 % 88 %
2018 74.5 48,424 37.8 2.0 % 2.1 % 90 %
2019 77.5 50,118 38.7 2.0 % 1.0 % 97 %
2020 78.7 48,166 34.6 −5.9 % −2.3 % 126 %
2021 82.7 48,357 39.3 4.3 % −0.6 % 122 %
2022 93.9 49,482 44.4 6.0 % 3.6 % 111 %
2023 100.1 57,213 46.1 3.0 % 0.1 % 123 %
2024 105.6 57,503 47.8 3.0 % 1.4 % 126 %

Hydrocarbon industry

[edit]
Nodding donkey crude oil pump in Bahrain (2019)

Petroleum and natural gas are the only significant natural resources in Bahrain. Because of its limited reserves, Bahrain has worked to diversify its economy over the decade prior to 2004. Bahrain has stabilized its oil production at about 40,000 barrels (6,400 m³) per day, and reserves are expected to last 10 to 15 years. The Bahrain Petroleum Company refinery was built in 1935, has a capacity of about 250,000 barrels (40,000 m³) per day, and was the first in the Persian Gulf outside of Iran. After selling 60% of the refinery to the state-owned Bahrain National Oil Company in 1980, Caltex, a U.S. company, now owns 40%. Saudi Arabia provides most of the crude for refinery operations via pipeline. Bahrain also receives a large portion of the net output and revenues from Saudi Arabia's Abu Saafa offshore oilfield.

The Bahrain National Gas Company operates a gas liquefaction plant that utilizes gas piped directly from Bahrain's oilfields. Gas reserves should last about 50 years at present rates of consumption. The Gulf Petrochemical Industries Company (GPIC) is a joint venture of the petrochemical industries of Kuwait, the Saudi Basic Industries Corporation, and the Government of Bahrain. The plant, completed in 1985, produces ammonia, methanol and urea for export.

Bahrain's other industries include Aluminum Bahrain, which operates an aluminum smelter—the largest in the world with an annual production of about 1,500,000 metric tons—and related factories, such as the Aluminum Extrusion Company and the Gulf Aluminum Rolling Mill Company (GARMCO)[2]. Other plants include the Arab Iron and Steel Company's iron ore pelletizing plant (4 million tons annually) and a shipbuilding and repair yard.

International financial institutions operate in Bahrain, both offshore and onshore, without impediments. In 2001, Bahrain's central bank issued 15 new licenses. More than 100 offshore banking units and representative offices are located in Bahrain, as well as 65 American firms. Bahrain's international airport is one of the busiest in the Persian Gulf, serving 22 carriers. A port offers direct and frequent cargo shipping connections to the U.S., Europe, and the Far East. Notable Bahraini companies include Investcorp, a global investment firm founded in 1982 and headquartered in Manama, which has invested in various international brands such as Gucci.

Taxation

[edit]

Taxation and import laws apply equally to Bahraini and foreign-owned companies, and foreign investors must comply with the same requirements and legislation as local firms.

Oil and gas companies are taxed 46 percent on income derived from the sale of hydrocarbons and derivative products.

There is no personal income tax in Bahrain.

Employers and workers must pay social insurance contributions as follows:
(1) for old-age, disability and survivor protection: for Bahraini employees, since May 2022, employers pay 14% of salary plus constant allowances, the percentage will rise by 1% each year (up to 20% in 2028),[32] workers pay 7% plus constant allowances; for non-Bahraini employees, employers pay 3% of salary plus constant allowances (then being entitled only to employment injury benefits).
(2) for unemployment insurance: since June 1, 2007, all wages are subject to a 2% tax, paid for equally by the employer and the employee, applicable both to nationals and non-citizens, and supplemented by a government contribution of 1%. This makes Bahrain the first of the GCC countries to implement a UI scheme.

See also

[edit]

References

[edit]
[edit]
Revisions and contributorsEdit on WikipediaRead on Wikipedia

Economy of Bahrain

View on Grokipedia
from Grokipedia
The economy of Bahrain is a high-income, open-market system that has transitioned from heavy oil dependence to a diversified structure emphasizing , , and , while hydrocarbons still account for over 60% of government revenues despite contributing less than 20% to GDP. With a nominal GDP of approximately $47 billion in 2025 and real growth projected at 2.7%, driven by non-oil sectors expanding at around 3%, Bahrain positions itself as a regional financial hub supported by favorable regulations and proximity to . Key achievements include robust in banking and Islamic , alongside projects under Economic Vision 2030 aimed at reducing fiscal vulnerabilities, though challenges persist from high public debt exceeding 130% of GDP and persistent budget deficits requiring external support, including from Gulf allies.

Historical Context

Pre-Independence Economy

Prior to its independence from Britain in , Bahrain's economy relied heavily on non-oil activities, with pearl diving forming the cornerstone from antiquity through the early . Pearl fishing, conducted seasonally from to , involved thousands of divers and crew members from the Gulf region who gathered in Bahrain as the primary operational hub, exporting natural pearls to markets in , , and beyond. The industry's value surged sixfold between 1900 and 1912, attracting international merchants from , , and , which reinforced Bahrain's position as a mercantile center. However, by the , the sector began declining amid global economic pressures, culminating in a collapse in the 1930s due to competition from Japanese cultured pearls. Bahrain functioned as a key entrepôt in regional trade networks, facilitating the exchange of goods from , , Persia, and long before modern industrialization. Its strategic location in the enabled the import of spices, textiles, and slaves, which were re-exported alongside local pearls, fostering a culture of among resident merchants and divers. This trade orientation was bolstered by Bahrain's role as a distribution point, where pearls and other commodities were processed and shipped, contributing to economic resilience despite the absence of large-scale . Agriculture remained constrained by the archipelago's arid climate and limited freshwater, focusing primarily on cultivation for domestic use and modest exports, supplemented by for local consumption. Date production met internal needs and supported trade, while engaged much of the population before , yielding species like hammour and from surrounding waters. Britain's establishment of a through treaties starting in 1820 provided stability by curbing and securing maritime routes to , indirectly safeguarding Bahrain's trade flows without direct economic intervention.

Oil Discovery and Early Industrialization

Oil was discovered in Bahrain on June 1, 1932, at the Awali field (also known as the Bahrain Field) by drilling crews from the (BAPCO), a concessionaire established in as a between the Government of Bahrain and of California (Socal). This marked the first commercial oil find in the , shifting the economy away from declining pearl diving toward hydrocarbon extraction. The first export of crude occurred on December 1, 1934, from the Sitrah terminal, with initial shipments totaling around 1,200 barrels per day. By 1935, production had expanded to sixteen operational wells, and a commenced operations in 1936 with an initial capacity of 10,000 barrels per day. revenues, which were negligible prior to 1934, grew exponentially, rising from zero to fund essential by the 1950s, including roads, grids, desalination plants, and public buildings that supported and efforts. Leveraging oil wealth, Bahrain initiated early industrialization in the and early to reduce hydrocarbon dependency. The (Alba) smelter, the Middle East's first such facility and Bahrain's inaugural non-oil industry, began construction in 1968 and achieved first metal production in 1971 with an initial capacity of 30,000 metric tons annually, utilizing cheap byproducts from oil operations. Concurrently, ship repair facilities were developed to capitalize on Bahrain's strategic Gulf location, with government-backed yards handling drydocking and maintenance to service regional maritime traffic. These ventures laid foundational steps for , though they remained tied to upstream oil and gas resources until the .

Post-1970s Economic Shifts

Following independence from Britain on August 15, 1971, Bahrain transitioned to a characterized by significant state involvement in key industries alongside participation. The government assumed control over strategic sectors such as oil processing and , while encouraging foreign investment in non-oil areas to mitigate the risks of depleting reserves, which had begun declining since the early 1970s. This shift was necessitated by Bahrain's limited oil endowment compared to larger Gulf producers, prompting early efforts at economic diversification through state-led initiatives in downstream industries like aluminum smelting and utilities. The 1973 Arab oil embargo triggered a revenue surge, with oil prices quadrupling and enabling substantial on social welfare, housing, and expansion. In 1975, the government acquired a 60% stake in the (BAPCO), enhancing control over refining operations and channeling petrodollars into a burgeoning welfare system that included subsidized utilities, , and healthcare provisions. To capitalize on regional liquidity, Bahrain established the Bahrain Monetary Agency in 1973 and introduced offshore banking units (OBUs) in October 1975, attracting deposits from oil-rich neighbors and positioning the country as a by the late . These measures funded state investments in petrochemical facilities and power generation, laying the groundwork for non-oil growth amid volatile global energy markets. The oil price collapse of the mid-, which persisted into the , imposed fiscal constraints, reducing revenues and exposing overreliance on hydrocarbons. Bahrain responded with initial privatization efforts, including the sale of stakes in the Bahrain Aluminium Extrusion Company (Balexco) in the late and further divestitures of state enterprises during the , such as partial sales in shipping and . These reforms aimed to trim bloat, foster efficiency, and draw private capital, while aid—averaging around $147 million annually in the early —provided a buffer against . By the early 2000s, such steps had stabilized the economy, though diversification remained incomplete, with hydrocarbons still dominating fiscal inflows.

Macroeconomic Performance

Bahrain's GDP composition has increasingly emphasized non-hydrocarbon activities as a key indicator of economic diversification. In 2024, non-oil sectors constituted 86.0% of real GDP, equivalent to BHD 13,022.5 million, while the oil sector's share fell to approximately 14%. This represents a marked from 2000, when non-oil contributions stood at roughly 56%, with oil accounting for about 44% of GDP. By mid-2025, non-oil activities maintained dominance at 85.2% in the second quarter, reflecting structural shifts away from resource dependence amid volatile global energy markets and policy incentives for broader sectoral development. Real GDP growth has demonstrated steady momentum, primarily propelled by non-oil expansion. The economy recorded 3.9% growth in 2023, moderating to 2.6% in 2024, with non-oil segments advancing 3.8% over the latter period. Forecasts for full-year 2025 project 3.5% expansion, bolstered by resilient non-oil contributions that comprise over 85% of output. Quarter-on-quarter data reinforces this trend, with 2.7% year-on-year growth in the first quarter of 2025, where non-oil sectors held an 84.8% GDP share. Per capita GDP trends align with aggregate growth, averaging around 2.9% annually over the decade to 2023, despite demographic pressures from inflows. This sustained advancement, coupled with the rising non-oil GDP proportion—from under 60% in to over 85% by —empirically validates diversification progress, as non-oil resilience buffers against volatility. In early , metrics tracked overall GDP expansion at 2.7% year-on-year, highlighting continued, albeit moderate, gains in and output per person.

Inflation, Unemployment, and Fiscal Balances

Bahrain has maintained relatively low inflation rates since 2010, with annual consumer price inflation averaging approximately 1.5% from 2011 to 2023, reflecting the stability imparted by the Bahraini dinar's fixed peg to the US dollar, which aligns domestic prices closely with imported goods from the United States. Specific yearly figures include -1.8% deflation in 2020 amid the COVID-19 downturn and subdued demand, rising to 3.5% in 2022 due to global energy and supply chain pressures, before moderating to around 2% in 2023. This peg effectively imports US monetary policy, limiting inflationary volatility despite hydrocarbon price swings, though imported food and housing costs occasionally exert upward pressure. Unemployment in Bahrain stands at a low overall rate of about 4% in recent years, driven by a large in low-skilled sectors, but the rate for Bahraini nationals is higher at 6.3% as of 2023, with particular concentration among aged 15-24, where it hovered around 5-6% overall but exceeds 10% for nationals due to skill mismatches and preferences for jobs. policies emphasizing Bahrainization—requiring private firms to hire more nationals—have aimed to address this, though underemployment persists as a structural challenge influencing fiscal priorities toward vocational training and non-oil job creation. Fiscal balances in Bahrain exhibit pronounced volatility tied to global oil prices, given hydrocarbons' role in comprising over 50% of government revenues, with the fiscal oil price estimated at around $85 per barrel in recent IMF assessments. The budget swung to a deficit of 12.8% of GDP in , exacerbated by low oil prices averaging $40 per barrel and pandemic-related spending, before achieving a surplus of approximately 1-2% of GDP in 2022 amid exceeding $100 per barrel, bolstering hydrocarbon receipts. By 2023, as oil prices moderated to $80-90 per barrel, the deficit widened to about 4.5% of GDP, prompting reforms such as rationalization and non-oil enhancements to narrow gaps and reduce oil dependence in policy decisions.

Monetary Policy and Exchange Rate Regime

The has been pegged to the at a fixed rate of 1 USD = 0.376 BHD since 1980, establishing a board-like arrangement that anchors . This regime was formalized in 2001 when the peg shifted officially from IMF to the USD while retaining the same effective rate. The Central Bank of Bahrain (CBB), operational since 1973, implements this policy through interventions, reserve management, and alignment of domestic interest rates with actions to defend the peg. The fixed peg prioritizes stability over independent targeting, limiting monetary autonomy but delivering benefits such as subdued —typically mirroring U.S. levels—and reduced risk for investors. In an oil-dependent economy prone to price swings, this approach avoids pressures by drawing on substantial international reserves, with the CBB committing to the peg's defense even amid fiscal strains from revenue fluctuations. Such credibility fosters Bahrain's appeal as a financial center, where the absence of capital controls and predictability supports banking sector depth and inflows exceeding $1.8 billion in 2024. Monetary operations emphasize liquidity provision via standing facilities, reserve requirements, and tools, with policy rates adjusted in tandem with U.S. benchmarks; for instance, the CBB cut its one-week deposit facility rate to 5.25% in December 2024 following easing. The (M0) grew 19.2% year-on-year to BHD 6.1 billion in Q1 2025, up from BHD 5.1 billion in Q1 2024, signaling expansionary conditions to underpin non-oil growth while safeguarding the peg. Relative to floating exchange rates, which could amplify volatility in Bahrain's import-reliant and trade-open , the fixed regime enhances long-term investor confidence by prioritizing nominal stability over countercyclical flexibility.

Primary Sectors

Hydrocarbon Extraction and Exports

Bahrain's sector centers on modest , with estimated at 124.6 million barrels and at approximately 3 trillion cubic feet as of recent assessments. These resources underpin the country's production, though domestic output relies heavily on shared offshore assets to supplement onshore fields like the Bahrain Field, which has seen declining yields over decades. Crude oil production totals around 200,000 barrels per day, with roughly 75% sourced from Bahrain's 50% stake in the Abu Saafa offshore field, jointly operated with under a capacity of 300,000 barrels per day. production has remained stable at about 18 billion cubic meters annually, supporting domestic needs and contributing to overall output equivalent of roughly 200,000 barrels of oil per day when converted. This combined extraction forms the backbone of export revenues, though Bahrain imports additional crude to meet refinery demands exceeding local yields. Hydrocarbon exports primarily consist of crude oil from the Abu Saafa field, marketed through arrangements with , which handles sales of Bahrain's share until at least year-end agreements. Revenues from these sales are subject to a 46% corporate levied on entities engaged in , production, or of hydrocarbons, a rate applied without general exemptions to ensure fiscal capture from the sector. To bolster amid volatile prices, Bahrain enacted contributions to the Reserve Fund starting January 2023, allocating USD 1 per barrel of exported oil whenever exceeds USD 40 per barrel. This mechanism, derived directly from export proceeds, aims to insulate future budgets from , with total production from shared fields providing the primary funding base.

Manufacturing and Petrochemicals

Bahrain's sector, which encompasses value-added processing in aluminum and , contributed approximately 20.1% to GDP in 2023, reflecting its role in economic diversification beyond raw extraction. This sector benefits from access to low-cost feedstock, enabling competitive production of downstream products for export. Key activities include aluminum smelting and refining of petroleum derivatives, which together form a substantial portion of non-oil exports and help mitigate volatility from crude oil prices. Aluminium Bahrain (Alba), established in 1971, operates the world's largest single-site aluminum smelter outside , with an annual production capacity exceeding 1.622 million metric tons following the commissioning of Line 6 in 2022. In 2023, Alba achieved a record output of 1,620,665 metric tons of primary aluminum, primarily using imported alumina processed via the method and powered by dedicated gas-fired plants. Unwrought aluminum alloys and primary aluminum constituted about 28% of Bahrain's non-oil exports of national origin in Q4 2024, with major markets in , , and the , thereby enhancing value addition over raw material exports. The segment leverages Bahrain's reserves for feedstock in complexes operated by entities like Bapco Energies, producing polymers, plastics, and specialty chemicals such as construction and water treatment materials. (Bapco) refines around 267,000 barrels per day of crude, yielding exportable refined products including low-sulfur diesel, , and intermediates, which support downstream industries. These activities contributed to non-oil exports of reaching BHD 1,002 million (approximately USD 2.66 billion) in Q4 2024, with products and basic metals forming over 57% of the total in 2023, reducing reliance on unprocessed hydrocarbons through higher-margin refined outputs directed to regional and global markets.

Non-Hydrocarbon Sectors

Financial and Banking Services

serves as a prominent regional financial hub in the , hosting a diverse array of banking and under the unified regulation of the of (CBB). As of April 2024, the country licensed 367 financial institutions, including retail and wholesale banks, firms, and entities, with ongoing approvals for additional licenses—16 new firms in recent periods and 52 applications in progress—underscoring its appeal to international players. The banking sector's total assets reached USD 247.8 billion by December 2024, equivalent to approximately 5.2 times 's nominal GDP of USD 47.1 billion for that year, reflecting the dominance of activities that channel regional liquidity. A cornerstone of Bahrain's financial sector is its leadership in , where it pioneered key innovations. The Bahrain Islamic Bank, established in 1979, marked the kingdom's entry as the first dedicated Islamic lender in the region, fostering subsequent growth in sharia-compliant products. Islamic banking assets expanded from USD 1.9 billion in 2000 to USD 61.7 billion by June 2024, comprising a substantial portion of the sector's operations. The CBB issued the world's first sovereign in 2001, advancing Islamic capital markets, while Bahrain maintains a competitive edge in sukuk issuance, with 23 such instruments and bonds totaling BHD 1.5 billion in Q4 2024 alone. Regulatory reforms since the early 2000s, aligned with broader including the 2004 -Bahrain , have enhanced foreign ownership flexibility and operational efficiencies, drawing investment into specialized areas like and . These measures, combined with a stable pegged to the dollar, have positioned Bahrain to manage over USD 80 billion in Islamic finance assets as of early 2025, though its global share remains modest at around 2-3 percent of total Islamic banking assets. The sector employs over 14,000 workers as of Q2 2025, contributing significantly to non-oil GDP amid efforts to sustain resilience against global volatility.

Tourism, Logistics, and Retail

Bahrain's sector has expanded significantly since the early 2000s, driven by targeted investments in events and infrastructure, with contributing approximately 7% to GDP through promotion and high-quality investments. In 2024, revenue increased by 13%, reflecting recovery and growth in visitor arrivals, supported by the national strategy emphasizing international promotion and investment attraction. A key driver has been the hosting the Formula 1 Grand Prix annually since 2004, which generates millions in annual revenue and broader economic benefits through hospitality and events, positioning Bahrain as a hub in the Gulf. The sector leverages Bahrain's strategic location as a hub between —via the King Fahd Causeway—and global trade routes, facilitating flows in the Northern Arabian Gulf. Bahrain International Airport handled 392,811 tonnes of in 2024, marking substantial growth from prior years amid expansions in freight facilities like the Bahrain Express Cargo Village, which exceeded 350,000 tonnes in 2023. Complementing this, Khalifa Bin Salman Port, operational since April 2009, supports , general , and roll-on/roll-off operations, with notable volume increases in the first half of 2025 including 22,226 vehicles and growth in containers amid 428 ship calls. These assets contribute to non-oil transport and activities, enhancing Bahrain's role in regional supply chains. Retail and hospitality have experienced a boom since the 2000s, fueled by mall developments and rising consumer spending, with the sector valued at USD 5.80 billion in 2022 and projected to grow at a 15.62% CAGR through the forecast period. Major expansions, such as the Avenues mall and Marassi Galleria—Bahrain's largest at over 110,000 square meters—have integrated shopping with entertainment, attracting both locals and tourists from neighboring countries. This growth aligns with broader non-oil service diversification, where wholesale and retail trade has demonstrated resilience, supporting hospitality tied to tourism events and positioning retail as a complement to logistics-driven trade.

Construction and Real Estate

The sector in plays a pivotal role in development and , historically financed through revenues, while supports diversification by attracting in residential and commercial properties. In 2022, and combined contributed 12.5% to GDP, with at approximately 7.1% in Q3 2023 and activities at 3.4% as of mid-2024. Major infrastructure initiatives have enhanced regional connectivity and economic integration, exemplified by the King Fahd Causeway, operational since November 1986, which spans 25 km between Bahrain and and has facilitated substantial trade growth, including a 43% increase in bilateral exchanges during Q3 2020 amid pandemic constraints. Mega-projects like Bahrain Bay, a waterfront master-planned in 2006 with a site area of 432,000 square meters, have sustained momentum through luxury residential towers, hotels such as the Four Seasons (90% complete as of 2024), and new launches like Bayview in 2025, redefining Manama's northern coastline. Regulatory reforms have bolstered appeal, particularly through 2006 amendments to Legislative Decree No. 43 of 2003, which permit non-Bahrainis to own freehold properties in specified zones, enabling direct foreign participation without prior restrictions on high-rise or designated developments. Post-2020, the sector rebounded from pandemic-induced stagnation, with output contracting 0.2% in 2020 but projected to expand at a compound annual rate of 4.18% from $3.04 billion in 2024 to $3.73 billion by 2029, driven by pipelines aligned with non-oil growth objectives. Nonetheless, residential segments encounter oversupply pressures, as rising unit deliveries outpace demand, resulting in stagnant prices and heightened developer risks in 2024.

Economic Diversification Efforts

Government Strategies and Vision 2030

The Bahrain Economic Vision 2030, launched in October 2008, outlines a framework for transitioning to a -led economy that prioritizes sustainable growth, competitiveness, and reduced reliance on public sector employment and revenues. It emphasizes market-oriented reforms, including fostering , enhancing regulatory efficiency, and promoting to enable the private sector to independently drive economic expansion by 2030, while aiming to double household incomes through diversified, knowledge-based activities rather than expansive subsidization. A key implementation mechanism is the Labour Market Regulatory Authority's Tamkeen agency, established to bolster small and medium-sized enterprises (SMEs) through targeted financial assistance, vocational training, and employment programs that align workforce skills with private sector needs. Tamkeen's initiatives, such as the Enterprise Training Support Program and Train and Place, subsidize upskilling for Bahraini nationals and support SME expansion, contributing to higher private sector job absorption and reduced dependency on government roles. These strategies have yielded measurable progress, with non-oil sectors accounting for approximately 84% of GDP in 2023, reflecting successful diversification efforts. inflows, as reported by the Bahrain Economic Development Board, rose to $1.8 billion in 2024 from $1.7 billion in 2023, signaling growing investor confidence in the reform agenda.

Foreign Direct Investment Incentives

Bahrain promotes (FDI) through the Bahrain Economic Development Board (EDB), which facilitates 100% foreign ownership in most sectors without requiring a local partner, a policy extended to areas like residency services, food, health, and via legislative amendments. This ownership structure, combined with streamlined licensing and minimal restrictions on capital and profit repatriation, positions Bahrain as a regional hub for investors seeking operational autonomy. Key fiscal incentives include the absence of corporate income tax on most activities, no withholding taxes on dividends, interest, or royalties paid to non-residents, and exemptions from tax, , and . Free zones such as the Bahrain Logistics Zone (BLZ) and Bahrain International Investment Park (BIIP) enhance these benefits with zero corporate and taxes, no or duties, and full exemptions from duties on raw materials and equipment, targeting , , and trading firms. The EDB further supports investors with access to subsidized utilities, training programs, and waivers in these zones, driving diversification away from hydrocarbons. These policies have spurred FDI inflows into non-oil sectors, particularly and , with total inflows reaching BHD 1.0 billion (approximately $2.65 billion) in 2024, led by a BHD 752.9 million increase in financial and insurance services. Earlier data show inflows rising from $1.75 billion in 2021 to $1.9 billion in 2022, and $1.7 billion in 2023, outpacing global averages and countering oil dependency through investments in , ICT, and . This growth reflects the incentives' causal role in attracting capital to high-value services, bolstering economic resilience amid fluctuating energy prices.

Sovereign Wealth Fund and Future Fund

Bahrain's sovereign wealth fund, Mumtalakat Holding Company, was established in 2006 by royal decree to manage non-oil and gas commercial assets transferred from the Ministry of Finance, with a mandate to diversify investments and foster economic growth. As of 2025, Mumtalakat oversees approximately $19 billion in assets under management, spanning sectors including aviation, telecommunications, financial services, industrials, real estate, tourism, and education. Key holdings include stakes in Bahrain's national carrier Gulf Air and telecom provider Batelco, alongside diversified global investments to generate sustainable returns. Mumtalakat functions as an active investment manager rather than a passive fund, actively overseeing state-owned enterprises (SOEs) to enhance performance and facilitate partial privatizations, such as stake sales in strategic assets to attract private capital and alleviate pressures. This approach supports Bahrain's broader diversification goals by commercializing SOEs while retaining strategic control, with recent efforts prioritizing local investments to bolster domestic economic resilience. Complementing Mumtalakat, the Reserve Fund (FGR), originally proposed as a reserve for oil revenue deductions, began systematic capitalization in January 2023 with contributions of $1 per barrel from exported oil priced above $40 per barrel, aimed at building long-term wealth to buffer against fiscal volatility from hydrocarbon price fluctuations. By late 2024, legislative amendments scaled contributions progressively—$1 per barrel for prices between $40 and $60, rising to $2, $3, $4, or $5 for higher brackets—culminating in Shura Council approval in December 2024 for up to $5 per barrel under the new framework ratified in January 2025. The FGR invests primarily overseas in diversified assets, with domestic holdings comprising a smaller portion, to ensure intergenerational fiscal amid Bahrain's reliance on depleting oil reserves. Together, these funds enable prudent by channeling windfalls into productive investments and proceeds, reducing exposure to cycles while funding and non-oil sectors without direct fiscal strain. As of recent estimates, the FGR holds around $769 million in assets, underscoring its emerging role in Bahrain's strategy to transition toward a post-oil .

Labor Market Dynamics

Workforce Demographics and Participation

Bahrain's labor force totals approximately 800,000 individuals, with expatriates comprising roughly 65% of the workforce, primarily in the , while Bahraini nationals make up the remaining 35%. This composition reflects heavy reliance on foreign labor for manual, technical, and service roles, as evidenced by active foreign work permits exceeding 631,000 as of the second quarter of 2024. Nationals, in contrast, dominate employment, accounting for 85.4% of jobs, where participation rates for Bahrainis hover around 40-50% of the working-age native , underscoring a preference for stable, subsidized positions over opportunities. The workforce benefits from a relatively young , with the national median age at 33.4 years as of 2025, indicative of a youth bulge that supports long-term labor supply potential despite current dominance. participation has risen steadily, reaching 43% of the working-age (ages 15+) in 2024, up from lower levels in prior decades, driven by educational gains and policy encouragements, though still below rates exceeding 85%. Overall employment remains high, with total labor force participation at about 72% in recent estimates, bolstered by inflows, yet structural mismatches persist: nationals' aversion to roles—often viewed as less secure or lower-status—results in underutilization of native talent in growth sectors like and , perpetuating dependency on foreign workers. This dynamic contributes to elevated native despite aggregate job availability, highlighting the need for alignment between workforce preferences and economic diversification goals.

Migrant Labor System and Kafala

The kafala sponsorship system in Bahrain binds migrant workers to a specific employer or sponsor, who holds legal responsibility for the worker's , residency, and compliance with labor laws, facilitating the importation of labor for key economic sectors such as oil extraction, , and services. This framework, inherited from British colonial administration and formalized in the amid oil-driven growth, enables rapid workforce expansion without relying on the small native Bahraini , which constitutes about 48% of residents but shows low labor participation rates among citizens due to preferences for jobs and subsidies. Expatriates comprised 79% of Bahrain's employed in 2018, accounting for 83% of workers and driving productivity in labor-intensive industries that underpin non-hydrocarbon diversification. Economically, kafala supports Bahrain's growth by providing low-cost labor that keeps operational expenses competitive, particularly in booms tied to projects and , where migrant inflows correlate with GDP expansions—a 1% rise in GDP has been associated with a 0.46% increase in expatriate employment. The system's efficiency in scaling labor for cyclical demands, such as post-2011 recovery projects, has contributed to sustained in and , while remittances outflow—equivalent to roughly 8.5% of GDP—reflects high migrant earnings relative to home countries but underscores the system's role in channeling without long-term fiscal burdens on Bahrain's . Criticisms from organizations highlight vulnerabilities, including passport confiscation, wage delays, excessive hours exceeding 48 weekly limits, and dependency that discourages reporting abuses, with reports documenting cases of recruitment and substandard housing in sectors like domestic work. Empirical data on violations remains limited, but groups attribute higher exploitation risks to kafala's power imbalance, though Bahrain's context shows fewer extreme heat-related deaths compared to neighbors due to regulatory . Remittances, while sustaining origin economies, do not fully offset documented wage theft incidents, estimated to affect thousands annually pre-reforms. Bahrain has pursued reforms to mitigate these issues, introducing in 2009 legislation allowing migrants to change sponsors without no-objection certificates after or contract end, and claiming partial kafala abolition in 2017 by removing exit permit requirements for most workers. The Wage Protection System, mandated since 2018 and upgraded in 2025, requires salary payments via authorized banks to curb theft, with compliance enforced by the Labour Market Regulatory Authority through real-time monitoring. These measures, while retaining sponsorship ties, aim to enhance mobility and transparency, though full of ILO conventions on domestic workers remains pending, and critics argue core dependencies persist. From a causal perspective, kafala's persistence reflects pragmatic adaptation to Bahrain's demographics—where nationals number under 1 million amid a total exceeding 1.5 million—averting wage suppression for citizens via open labor markets that could flood low-skill sectors. Alternatives like points-based risk slower scaling for volatile industries, potentially hindering diversification goals under Vision 2030, though ongoing reforms signal incremental shifts toward balancing efficiency with accountability amid global scrutiny.

Skill Development and Unemployment Challenges

Bahrain's Bahrainization policy aims to elevate the of Bahraini nationals in the through targeted hiring requirements, particularly for companies employing more than 10 workers, where minimum quotas for local hires are enforced to curb reliance on labor. These measures, implemented via the , include compliance obligations for firms bidding on government contracts and sector-specific targets to foster local workforce integration. The policy addresses structural imbalances where expatriates dominate private roles, but enforcement varies, with incentives like subsidies for national hires supplementing quotas. The Labour Fund (Tamkeen) plays a central role in skill development by funding vocational and upskilling programs tailored to high-demand sectors such as and . Initiatives under Tamkeen, including partnerships with entities like , provide fully subsidized training in digital skills, competencies, and to enhance . The Skills Bahrain program, for instance, identifies gaps in financial sector expertise and supports career advancement for , aiming to align local talent with needs through measurable boosts. These efforts have contributed to incremental private sector hiring, with Bahraini female rising 2.2% year-over-year in 2023 via wage support and training. Despite these interventions, Bahraini nationals face persistent challenges, with the overall rate at 6.3% in 2023, though (ages 15-24) stands lower at approximately 5.2% based on modeled estimates, reflecting entry barriers rather than absolute . Primary causes include a strong preference among nationals for positions, which offer superior , shorter hours, and benefits, deterring entry into more demanding private roles. mismatches exacerbate this, as educational outputs often fail to meet requirements for technical proficiency, with 67% of workers deemed under-skilled per labor force surveys. Non-oil sector expansion has aided graduate absorption, with 2.5% overall GDP growth in Q2 2025 driven by diversified activities creating opportunities beyond hydrocarbons. Tamkeen's programs have facilitated over 27,000 Bahraini placements in 2024, surpassing targets and bolstering participation. Nonetheless, public sector subsidies distort incentives, sustaining reluctance toward private employment and limiting the policy's causal effectiveness in fully resolving native underutilization.

Fiscal and Taxation Framework

Revenue Sources and Tax Policies

Bahrain's government revenues rely heavily on the sector, with and gas contributing approximately 70% of total fiscal income through production shares, royalties, and taxes on upstream activities. Hydrocarbon-related receipts account for about 75% of overall government revenues, underscoring the 's dependence on exports despite diversification efforts. The kingdom maintains a territorial tax system with no tax levied on individuals, regardless of residency or . Corporate income is generally exempt from taxation, except for oil and gas and production entities, which face a 46% on profits. This zero-rate policy on non-hydrocarbon corporate profits, combined with the absence of withholding taxes on most dividends, interest, and royalties, fosters a business-friendly environment that draws foreign to sectors like , , and . Customs duties provide a supplementary revenue stream, governed by the Gulf Cooperation Council's (GCC) of 5% applied to most non-GCC imports, while intra-GCC trade enjoys duty-free access under the common market framework. Exemptions cover essentials like and , limiting duties' overall fiscal weight compared to revenues. In December 2024, Bahrain enacted Decree-Law No. (11) implementing a domestic minimum top-up aligned with Pillar Two rules, effective for fiscal years starting on or after January 1, 2025. This 15% minimum effective targets multinational enterprises with global consolidated revenues exceeding €750 million, applying a top-up mechanism if Bahrain's jurisdictional effective dips below the threshold. The measure, administered by the National Bureau for Revenue, aims to prevent base erosion while preserving Bahrain's competitiveness for smaller entities outside the scope.

Subsidies, Expenditures, and Public Debt

Bahrain maintains extensive subsidies on energy, utilities, and food staples, which have imposed a fiscal burden equivalent to roughly 5-7% of GDP in recent years, crowding out productive investments and perpetuating inefficiencies in resource allocation. These measures, rooted in the rentier state's social contract, artificially lower consumer prices but reduce incentives for private sector innovation in energy conservation and supply chain optimization, contributing to higher overall consumption and vulnerability to global commodity shocks. Public expenditures are further strained by a bloated wage bill for government employees, accounting for approximately 45% of current spending, which sustains employment preferences among citizens and exacerbates labor market distortions by offering premiums over private sector pay. Public debt has escalated to 134% of GDP as of 2024, driven by chronic deficits from subsidy outlays and expenditure rigidity, with financing reliant on sovereign issuances and concessional aid from GCC partners. Bahrain issued multiple tranches in 2025, raising billions to service obligations, while a 2018 GCC package of $10 billion in zero-interest loans from , the UAE, and provided critical bridge funding amid oil price volatility. This debt trajectory underscores fiscal unsustainability, as interest payments and rollover risks amplify exposure to external financing conditions without corresponding revenue diversification. In response to mounting pressures post-2010, Bahrain enacted phased subsidy reductions, including tariff hikes on electricity and water in 2016-2018 and fuel price adjustments tied to international benchmarks, aiming to trim the fiscal drag and redirect resources toward capital projects. However, implementation has been uneven, hampered by domestic unrest and political sensitivities, limiting the reforms' impact on curbing expenditure growth. Empirically, prolonged subsidies have fostered welfare dependency among Bahrainis, deterring private sector engagement and inflating public employment rolls, which in turn impedes structural shifts needed for non-oil growth. This dynamic perpetuates a cycle of fiscal strain, where subsidy-induced inefficiencies hinder diversification and heighten reliance on hydrocarbon rents or external bailouts.

Recent Fiscal Reforms

In response to the economic pressures from the and subdued oil prices, Bahrain enacted austerity measures in April 2020, slashing state spending by nearly one-third to mitigate fiscal strain. These cuts formed part of the updated Fiscal Balance Program (FBP), initially targeting a zero fiscal deficit by 2024 through expenditure controls and revenue enhancement, though timelines were extended amid persistent challenges. The program emphasized reducing off-budgetary spending and pursuing diversification to lessen oil dependency. Subsidy rationalization efforts targeted energy sectors to curb subsidies, which had ballooned amid low revenues, as recommended by international assessments. Bahrain also doubled its (VAT) rate from 5% to 10% effective April 2022, building on the GCC-wide VAT introduction in 2019, to expand non-oil revenue streams. Stabilization was supported by a $10 billion GCC bailout package in 2018 from , the UAE, and , with analysts noting potential needs for further disbursements as early as 2020 to address liquidity gaps. These reforms aim for fiscal balance by 2025, prioritizing non-oil revenue growth to offset deficits, with projections estimating a narrowing to around 7% of GDP in 2024 from higher post-pandemic levels. International observers, including the , have commended the structural agenda for fostering economic diversification, though sustained implementation is required to reduce debt vulnerabilities.

Trade and International Integration

Major Trade Partners and Balances

Bahrain recorded an overall surplus of $7.97 billion in 2023, equivalent to approximately 17.25% of GDP, primarily driven by hydrocarbon exports and aluminum products, though monthly data in 2025 showed occasional deficits amid fluctuating oil prices. Excluding hydrocarbons and re-exports, Bahrain maintains a structural non-oil deficit, reflecting its limited domestic production capacity and reliance on imported intermediates for and consumption in a small with a of about 1.5 million. This deficit necessitates openness to global , enabling Bahrain to function as a regional re-export hub via ports like Khalifa Bin Salman Port, which handled significant volumes of transshipped goods in 2023. The was Bahrain's largest export destination in 2023, accounting for 16% of total exports, followed by and , with key non-hydrocarbon shipments including aluminum and . Refined ($6.65 billion), raw aluminum ($3.24 billion), and aluminum wire ($663 million) dominated overall exports, while non-oil exports of national origin reached approximately $12.4 billion (BHD 4,665 million), showing modest growth of 0.3% into 2024 amid efforts to diversify beyond commodities. Imports, totaling around $11.7 billion in 2023, were led by (13-14% share), the , and , with essential inflows of machinery, vehicles, and iron ores to support aluminum production and . Non-oil imports emphasized capital goods like nuclear reactors, boilers, and mechanical appliances (11.7% of total), underscoring Bahrain's dependence on foreign technology for its downstream industries.
CategoryTop Partners (2023 Shares)Key Commodities
ExportsUAE (16%), , Aluminum products, (non-oil); refined (oil)
Imports (13-14%), UAE, Machinery/vehicles, iron ores, chemicals
This trade pattern highlights Bahrain's role as a processor and node rather than a primary , with surpluses vulnerable to global cycles and costs amplified by the kingdom's lack of scale in upstream sectors.

GCC Economic Cooperation

Bahrain, as a founding member of the (GCC) established in 1981, participates in the bloc's efforts aimed at fostering intra-regional trade and policy harmonization among Bahrain, , , , , and the . The GCC , launched on January 1, 2003, eliminated internal tariffs and imposed a unified of 5% on most imports from non-GCC countries, facilitating the free movement of goods across member states. This framework has enabled Bahrain to benefit from streamlined trade flows, with intra-GCC exports and imports supporting its non-oil sector diversification. Despite these advancements, deeper monetary integration has faltered. Plans for a single GCC currency, known as the "Khaleeji," targeted launch by 2010 but collapsed due to divergences in fiscal policies, preferences, and withdrawals by in 2007 and the UAE in 2009, leaving and others reliant on national currencies pegged to the US dollar. Coordination persists in select areas, such as joint responses to global shocks; during the 2020 crisis, GCC states aligned on stimulus measures, with deploying fiscal packages equivalent to 6.6% of GDP for economic relief, complemented by regional efforts to stabilize oil markets through OPEC+ production cuts. Shared energy policies, particularly 's reliance on Saudi-supplied crude for its refineries, underscore operational ties within the union. The King Fahd Causeway, operational since 1986 and linking Bahrain directly to , amplifies these benefits by enabling seamless access to the bloc's largest market, driving non-oil trade volumes—such as an 18% rise to $781 million in Q2 2021—and supporting Bahrain's and retail sectors. However, this integration exposes Bahrain to risks of over-dependency, given its smaller relative to and the UAE, potentially amplifying vulnerabilities to regional policy shifts or disruptions in cross-border flows. While tariff reductions have boosted competitiveness, uneven implementation and revenue-sharing disputes have occasionally hindered full efficacy, as seen in delayed agreements in 2009.

Bilateral Agreements and Aid

Bahrain maintains several bilateral economic agreements that facilitate and investment, with the United States-Bahrain Free Trade Agreement (FTA), effective since August 1, 2006, serving as a cornerstone. This agreement has eliminated tariffs on nearly all consumer and industrial products, substantially increasing U.S. agricultural exports to Bahrain by providing preferential access over competitors from non-FTA countries, and has broadened market opportunities in services such as financial and sectors. Bilateral goods reached approximately $1.9 billion in recent years, with U.S. services exports to Bahrain growing amid a trade deficit in services of $465 million in 2024. The hosting of the U.S. Navy's Fifth Fleet in since under bilateral defense agreements contributes to economic activity through local , support, and for Bahraini nationals in naval facilities. This presence has underpinned broader economic ties, including recent memoranda worth $17 billion signed in July 2025 between Bahraini and U.S. firms in , , and sectors, enhancing Bahrain's role as a regional hub for defense-related and . Bahrain has received significant financial aid from (GCC) partners, particularly , to bolster fiscal stability and manage debt pressures. In March 2011, GCC states pledged $20 billion in support for Bahrain and Oman combined, with providing a $10 billion deposit to Bahrain's to address post-Arab Spring economic strains. A further $10 billion package was agreed in October 2018 by , the , and , structured as grants and deposits to fund Bahrain's fiscal balance program and avert a credit squeeze amid oil price volatility. More recently, Bahrain has pursued agreements emphasizing investment protection and prosperity integration. The acceded in July 2025 to the U.S.-Bahrain Comprehensive Security, Integration, and Prosperity Agreement (C-SIPA), originally signed in 2023, which promotes economic cooperation in , , and alongside security pillars. Complementing this, a June 2025 UK-Bahrain investment partnership commits £2 billion to sectors like and clean , aiming to deepen flows.

Challenges and Criticisms

Vulnerability to Oil Price Volatility

Bahrain's economy has repeatedly experienced contractions linked to sharp declines in global prices, underscoring its structural dependence on hydrocarbons despite ongoing diversification efforts. In , following the oil price collapse from over $25 per barrel in 1985 to under $10 by mid-1986, Bahrain's GDP growth turned negative, with fiscal revenues plummeting as accounted for approximately 80% of export earnings at the time. Similarly, the 1998 Asian financial crisis coincided with prices dipping below $10 per barrel, triggering a in Bahrain characterized by a 5.7% GDP contraction and widened deficits. The 2014-2016 oil price slump, where fell from $115 in mid-2014 to around $30 by early , led to a 3.8% GDP decline in 2016, with revenues dropping from $7.1 billion in 2014 to $4.2 billion in 2015, exacerbating fiscal pressures and reserve drawdowns. The 2020 COVID-19-induced crash, pushing prices negative briefly in , contributed to a 4.9% overall GDP contraction, though compounded by lockdowns. To mitigate these shocks, Bahrain maintains fiscal buffers including and the Reserve Fund (FGR), established to invest portions of oil revenues for and volatility cushioning. As of 2023, reserves stood at around $4.5 billion, providing short-term , while the FGR, funded by mandatory allocations from hydrocarbon surpluses, has grown to support expenditures during downturns without immediate borrowing spikes. These mechanisms helped stabilize finances post-2016, allowing deficit financing without default risks, though high breakeven oil prices—estimated at $90-100 per barrel for fiscal balance—remain a vulnerability threshold. Recent data illustrates partial resilience from non-oil sectors amid oil volatility. In 2023, overall GDP grew 2.4% year-on-year, driven by a 3.4% expansion in non-oil activities such as and , which offset a 1.6% contraction in the hydrocarbon sector due to field maintenance at Abu Sa'afa. This pattern echoes broader GCC trends where non-oil GDP has decoupled from oil cycles, growing 3-4% annually since 2017, reducing the oil sector's GDP share from 20% in 2010 to about 15% by 2023. Causally, Bahrain's fixed peg to the since 1980 amplifies imported shocks by constraining flexibility, transmitting hikes and strength directly to local costs, which intensifies fiscal strain during low periods when revenues in fall. However, the peg's stability fosters investor confidence and trade ties, while diversification—evidenced by non-oil exports rising 10% annually post-2016—mitigates long-term exposure, though empirical risks persist as still funds 50-60% of .

Labor Rights and Exploitation Allegations

Bahrain's economy heavily depends on expatriate labor, with migrants comprising approximately 80% of the workforce as of 2024, primarily from in sectors like and domestic services. This reliance stems from the small native of around 1.5 million Bahrainis, necessitating foreign workers to sustain projects and services that drive non-oil GDP growth. The kafala sponsorship system, which links migrants' residency to employers, has enabled rapid economic expansion but drawn criticism for facilitating exploitation. Human Rights Watch and Amnesty International have documented allegations of forced labor, passport confiscation, excessive recruitment fees, and substandard living conditions, particularly in construction camps where workers face heat-related illnesses and from high upfront costs averaging $2,000 per migrant. A 2012 HRW report highlighted cases of wage withholding and , noting that despite legal protections, remains weak with few prosecutions; for instance, between 2009 and 2012, authorities investigated hundreds of complaints but convicted employers in under 10% of cases. These NGOs attribute persistent issues to the kafala framework's power imbalance, though their reports often emphasize systemic abuses without quantifying prevalence relative to the 600,000+ migrant workforce. In response, Bahrain enacted reforms including the 2009 amendments allowing migrants to change sponsors without employer consent after a one-month notice period and ratifying ILO Convention No. 81 on labor inspections. The 2019 Wage Protection System mandates electronic salary transfers via authorized banks, reducing cash payment abuses, while a 2002 trade union law permits private-sector organizing but excludes public employees and industries. These measures, praised by HRW as a "major advance" in 2009, aim to balance worker mobility with needs, though critics argue gaps persist for domestic workers excluded from overtime and rest day provisions. Empirical indicators suggest the system's functionality despite critiques: strike incidence remains low outside political unrest, with no major labor stoppages reported annually post- compared to frequent complaints in less regulated peers. Remittance outflows exceeded 1.2 billion Bahraini dinars ($3.2 billion USD) in recent years, reflecting sustained and earnings transfer home, which indirectly subsidizes Bahrain's growth by keeping labor costs competitive. Without kafala-enabled inflows, Bahrain's 3-5% average annual GDP growth since 2010—fueled by and diversification—would be constrained by local labor shortages, as small Gulf states prioritize efficiency over full Western-style protections to maintain fiscal viability.

Political Instability Impacts on Investment

The 2011 Bahraini protests, part of the broader Arab Spring, led to a temporary decline in (FDI) inflows, as political unrest eroded investor confidence and heightened perceptions of risk. Net FDI inflows dropped sharply in 2011 and remained subdued through 2012, reflecting broader regional trends where violence and uncertainty deterred greenfield projects. Intermittent violence persisted until 2014, further contributing to investor wariness amid concerns over stability. Bahrain's recovery was bolstered by the Economic Vision 2030 framework, launched in 2008 but accelerated post-2011 to diversify the economy and restore investor appeal through structural reforms, including fiscal consolidation and incentives. FDI inflows rebounded significantly, reaching $6.84 billion in 2023 and stabilizing at $1.8 billion in 2024, driven by sectors like and . The kingdom's hosting of the U.S. Navy's Fifth Fleet headquarters since 1948 has provided a deterrent against external threats, particularly from , enhancing perceived security and supporting a stable environment conducive to investment. Criticisms persist regarding in state-owned enterprises (SOEs), which dominate key sectors and are accused of favoring ruling family-linked entities, potentially stifling . However, ongoing efforts under Vision 2030, including partial divestitures in utilities and , aim to mitigate these issues by increasing transparency and private participation. The monarchy's centralized authority has enabled consistent pro-business policies, such as tax exemptions and regulatory streamlining, avoiding the policy volatility often associated with populist or fragmented governance alternatives. This institutional stability under King Hamad bin Isa Al Khalifa has underpinned Bahrain's relatively positive investment climate despite episodic tensions.

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  228. https://bti-project.org/en/reports/country-report/BHR
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