Bahrain at a glance
Full name: Kingdom of Bahrain
Capital: Manama
Area: 665 sq km
Population: 738,004 (2010) 235,108 expatriates
Head of state: King Hamad bin Isa al-Khalifa
Currency: Bahraini dinar (BHD)
Religions:  Muslim 81.2%, Christian 9%, other 9.8%
Languages: Arabic (official)
International organisations: Arab League, GCC, OIC, UN, African Union, Arab Maghreb Union, OPEC, IMF, WTO (observer), IAEA

When concerns about the sustainability of oil income emerged in the late 1960s, the government in Manama began to diversify the country’s economy, stealing the crown from Lebanon as the Middle East’s financial hub in the 1970s, before moving into industrial sectors and tourism.

By the end of the boom of the late 2000’s, Bahrain found itself in a more precarious situation. Increasing competition from neighbouring states had challenged its reputation in financial services and the industrial and tourism sectors, leaving the country with the most constrained budget of the Gulf states.

Members of the ruling Al-Khalifa clan have been head of state since they invaded from Qatar in 1743. An agreement was signed with the UK shortly afterwards, effectively making the islands a British protectorate until 1971, when Bahrain became independent.

Since then it has continued to embrace political reform, with an elected parliament created in 2002. Despite the limited embrace of democratic reforms, tensions between the ruling Sunni Muslims and the majority Shia population flare up sporadically.

More recently the Crown Prince, Sheikh Salman bin Hamad al-Khalifa, established the Economic Development Board (EDB) to spearhead efforts to further diversify the economy and boost the private sector. In October 2008 the EDB launched the Vision 2030, an ambitious plan to reduce the role of the government, sell off state owned enterprises and improve household incomes.

Bahrain is an important gateway to Saudi Arabia, the largest economy in the region. The two countries are connected via a causeway meaning relations between the two, culturally and economically, are strong.

Bahrain’s good relations with the west are reflected in it being the home of the US Navy’s Fifth Fleet.

Government

Bahrain is a constitutional monarchy led by Sheikh Hamad bin Isa al-Khalifa. Members of the Sunni Muslim royal family also hold the most significant political posts, although elections to the 40 member Council of Representatives (sometimes translated as Chamber of Deputies) in 2007 put 17 Shia MPs onto the main legislative body. The last elections were October 2010 which increased the number of Shia MPs to 18.

In the 2006 election it had won 18 seats, but one was passed to an independent candidate. Another Shia party, Haq Movement for Liberty and Democracy boycotted the 2006 poll and the 2010 election, along with several other opposition parties.

The elections are part of King Hamad’s political reform programme, which included allowing women to vote and freeing political prisoners in line with the National Action Charter. The reform package was approved by a national referendum in 2002 when 98.4 per cent of the population voted in favour of plan.

The other main legislative branch is the Consultative Council, which comprises 40 members all appointed by the king and has the power to veto legislation produced by the lower house.

The introduction of democratic elections is considered to have increased the influence of religious clerics who have significant sway over the votes of their congregations.

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Economy

The global economic crisis of 2008-10 was kinder to Bahrain than many of its neighbours, but the country still experienced a significant slowdown in growth. In 2009, growth fell to 3.2 per cent, from 8 per cent in 2007.

The Economic Development Board has been created as a reform vehicle, spearheaded by the Crown Prince. Its intention is to minimise the role of the state and empower the private sector to become the main service provider and lead the diversification of the economy.

The country’s limited oil reserves, which are expected to last only another 10 to 15 years, have led Bahrain to already make significant progress on developing the non-oil sector. The financial sector contributes around 21 per cent of the kingdom’s GDP, while hydrocarbons contributes around 25 per cent. Manufacturing contributes around 13 per cent.

The oil boom of the 2000s dramatically improved the state of Bahrain’s finances, but with the country’s budget based on the highest breakeven price in the region, the decline in the oil price in mid-2008 has reversed that trend. The breakeven price is thought to be around $70 a barrel forcing Bahrain to borrow from the capital markets to fund its spending plans.

The biggest challenge the economy faces is continuing to reduce its dependence on oil and high unemployment, officially around 5 per cent. The government has created the Labour Market Regulatory Authority (LRMA) as part of a series of initiatives to collect money from businesses which employ expatriates and use the proceeds to fund training programmes for nationals.

Oil & Gas

Dwindling oil reserves have forced Bahrain to look at enhanced oil recovery techniques and production has been stabilised at around 40,000 barrels a day, but this has resulted in increases in the price of production. Oil production is led by Bahrain Petroleum Company (Bapco), a government-owned company. Bahrain is not a member of the Organisation of Petroleum Exporting Countries (Opec).

The countries gas reserves are expected last around 50 years at current rates of production and gas production is managed by Bahrain National Gas Company.

Banking

The Central Bank of Bahrain (CBB) has a reputation as one of the best financial regulators in the region. Overall the country’s financial system has weathered the financial crisis well and has largely avoided big write-downs or having to turn to the government for bailouts.

The investment banking sector has been less fortunate. Several high-profile Bahrain institutions have faced huge write-offs for bad investments and been forced to approach shareholders for extra cash.

International firms are still attracted to the country due to its low start-up costs and lack of any limitations on foreign ownership. Financial services also plays a key role in the government’s Vision 2030 plan to diversify the economy and improve the employability of the Bahraini workforce.

Insurance

Bahrain has ambitions to become the regional centre for Islamic insurance (Takaful) and is working hard to create regulations and issue licences to attract international businesses to establish their regional hubs in the country. Bahrain already has 168 insurance companies who are capitalising on a drive around the region to formalise regulations concerning motor and health and insurance.

With insurance penetration in the region low, the opportunities for personal insurance and project insurance look promising.

The introduction of proper regulations of the insurance market in Saudi Arabia is expected to impact the large number of Bahraini insurance firms that offer cover in Saudi Arabia.

Manufacturing

Aluminium Bahrain (Alba) was the first aluminium smelter to open in the region in the 1970s and has played a key role in developing the country’s economy outside the hydrocarbons and financial services. The opening of the Bahrain logistics zone, near the expanded Khalifa bin Salman Port and the Bahrain International Investment Park aim to continue attracting manufacturing businesses to the country.

Alba continues to plan an expansion despite growing competition from aluminium smelters around the region. Several projects in other industries, including steel production and cement factories, are also being planned.

Construction and Real Estate

The government has one of the region’s most liberal attitudes towards foreign property ownership, this coupled with increasing foreign investment, excess liquidity and demand for housing has been a boon to the sector over the last few years.

The development of luxury resorts and offshore islands has exacerbated tensions with the Bahraini population about a shortage of affordable housing. In response, the government has launched an ambitious public private partnership program to deliver 20,000 social houses. A pilot programme was launched in early 2010.

At the same time, development of high-end properties and projects on reclaimed land have slowed as developers struggle with financing issues.

Transport

Bahrain International airport is the hub for Gulf Air, which was formally owned by a regional governmental consortium including Abu Dhabi, Oman, and Qatar. Over the past decade all these owners have gradually withdrawn from the airline leaving the government of Bahrain 100 per cent owners. Since then it has struggled with management problems and competing with the emergence of other state-backed regional carriers including Emirates, Qatar Airway, and Etihad.

Plans to build a causeway linking Bahrain to Qatar were put on hold in 2010.

Infrastructure

Bahrain is increasingly using public private partnerships (PPP) to develop infrastructure. It is currently planning to develop two wastewater treatment plants through this route and is also looking at road and housing projects funded and managed by the private sector.

Nearly $700m has been allocated for investment in other road projects, including the reconstruction of the Sitra crossing and the Sheikh Khalifa bin Salman Highway.

Telecoms

Bahrain was the first country in the Middle East to install a computer, in 1978. More recently it was the first to deregulate the telecoms market and sell off government-owned assets. In 2009, the country awarded its third mobile operations licence to Saudi Telecom Company.