Although distribution of wealth is uneven, Bahrain is classified as a high-income country by the World Bank.

The depletion of the kingdom’s hydrocarbons resources in the last century forced the government to liberalise and diversify ahead of its oil-rich neighbours. Petroleum and natural gas continue to provide about 60 per cent of government revenues, although much of the country’s crude is provided by Saudi Arabia to refine for export. The early development of heavy industry, including aluminium and steel production, has since been constrained by the limited availability of gas and water supplies.

The outbreak of the Lebanese civil war in the mid-1970s persuaded many regional finance houses to relocate from Beirut to Manama, which had gained a reputation for sure but light-touch regulation. The total deposits of the financial sector were equivalent to 124 per cent of gross domestic product (GDP) as of mid-2013, according to the central bank. While the rise of Dubai as a banking hub has challenged Bahrain’s supremacy, many local and offshore institutions in Manama have responded by diversifying into niche areas such as insurance and Islamic finance.

Bahrain’s GDP was $27bn in 2012, putting it high up among Arab countries in terms of GDP per capita. Annual real GDP growth averaged 5 per cent between 2000 and 2012, with a substantial increase in the contribution of non-oil industry to the economy, particularly in the areas of services, transport, construction and communications. Despite the drain on the current account from international transfers due to the country’s large expatriate population, Bahrain tends to register a modest surplus thanks to merchandise trade and international services.

The country is heavily dependent on expatriate labour, with Bahrainis making up only 17 per cent of employees in the private sector, which employs 92 per cent of the total workforce. In response to pressure on its public institutions, the government set up the Economic Development Board and Tamkeen, a labour fund that derives its income from an expatriate tax, to train locals for skilled jobs and encourage investment in growth areas such as finance, transport and logistics. While Bahrainis working for private institutions tend to earn less than those in the public sector, they can still command salaries on average three times more than foreign workers.

The government has been working to increase transparency and cut red tape over the past decade in order to encourage foreign investment, with the establishment of a tender board and national audit court and the liberalisation of the telecommunications sector. In 2006, Mumtalakat was set up as an independent holding company to manage the kingdom’s non-oil assets. The sovereign wealth fund holds stakes in more than 35 commercial ventures, ranging from metals production to the food industry, with a combined portfolio value of about $6.8bn.

Once key drivers of the economy, the construction and real estate industries have been undermined by a regional slowdown in the property market in the past six years, although rising demand for low-income housing is expected to provide a lifeline for the industry. Manufacturing and financial services have continued to buoy growth in the meantime, contributing 18 per cent and 27 per cent to GDP respectively.

Transport and telecommunications are among the most promising sectors of the economy, particularly as the government pushes ahead with plans to liberalise the industries. A major logistics hub is currently under development at Sakhir, in the desert to the south of Manama and close to Bahrain’s Formula 1 Grand Prix circuit. The project is expected to benefit from an increase in traffic from neighbouring states on the completion of a proposed causeway from Qatar, which would create a corridor through Bahrain from the rapidly expanding city of Doha and the oil-rich Eastern Province of Saudi Arabia.

Despite the ongoing diversification of the economy, the government’s continuing dependence on oil and gas for revenues makes it vulnerable to future price shocks. The US’ Moody’s Investors Service also highlighted the potential impact on investor confidence of continuing social unrest in its decision in September 2013 to lower Bahrain’s sovereign rating by one notch to Baa2, putting it two levels above junk territory.