The island that celebrates the silver jubilee of its independence this year has changed beyond recognition. Over the past 25 years Bahrain has become the Gulf's financial centre, installed modern infrastructure, and established an industrial base that is broader than any to be found elsewhere in the GCC. More recently, however, Bahrain has had to come to terms with growing competition from Dubai as a regional services and financial centre. The existing infrastructure will soon be insufficient for the country's growing needs, and the economy is expanding more slowly than the population. As Bahrain looks ahead to the next 25 years the government knows that these are the issues it must tackle.

The government sees its main challenge as promoting growth and diversification in the economy. Training and Bahrainisation are high on the agenda; the budget deficit is to be brought under control; and the start of work on the development of the Hidd area is a priority.

The power and desalination plant is the first stage for the development of Hidd, combined with a possible new causeway linking the area to the mainland. The government took the decision earlier in 1996 to implement the project in the public sector, but funds will be raised internationally through export credits and commercial loans. The plant should be followed by the development of a port and free trade zone. The port project moved forward in 1996, with the appointment of a consultant in June to prepare detailed designs and tender documents.

The crucial issue for this and future projects is finance, and the government has been slow to disclose any details. Given the government's spending predictions, the project will need to attract private sector participation or money from GCC state development funds if it is to move ahead in 1997 or 1998. The expected cost of the project is about $300 million.

The government is hoping that the redevelopment of the power and water infrastructure will provide a boost to the economy and encourage private industry. Others agree. 'Once the Hidd projects start,' says one diplomat, 'there will be a knock-on effect on the economy, with work going to local contractors.' Several industrial projects are planned, which, if they go ahead, will bring greater industrial diversity. India's Ispat Group is planning to build a direct reduction iron plant at an estimated cost of $290 million. Another Indian company, Prakash Industries, is planning a steel rolling mill, which industry sources say would use the iron produced by the Ispat project. A steel pipe plant, planned by Hafeera Contracting and South Korea's Hyundai would also be able to use Ispat's products. 'All these projects are interconnected,' says one local businessman. Other projects include a pharmaceutical plant and a galvanising plant.

The government hopes that the new investment activity will trickle down and help mop up some of the island's unemployed. Opinions on the level of unemployment range from the official 1.4 per cent to as high as 18 per cent. Labour & Social Affairs Minister Abdulnabi al-Shoala supports the official figure by claiming that it is defined in accordance with the criteria laid down by the International Labour Organisation. 'No other figures have been substantiated,' he contends. 'As long as a person registers as a job seeker, they are counted as unemployed.'

Unemployment issue

Regardless of the precise figure, there is no doubt that unemployment is a problem. 'Even the government admits there is a problem by virtue of the importance it places on solving it,' says one western diplomat. The unemployment is very much focused in a certain group. 'Unemployment is concentrated amongst the young rural Shia,' says the diplomat. Al-Shoala agrees. 'The majority of job seekers are among the Shia,' he says. 'Of those registered 85-90 per cent are school-leavers and 10-15 per cent are college graduates.'

The government is taking the problem seriously with a three-pronged approach incorporating training, employment services, and Bahrainisation. The minister puts total spending on training in 1995 at BD 35 million, BD 9.5 million of which came from the public sector. Total spending is expected to reach BD 40 million this year.

The main measures adopted by the ministry have included a training levy on employers, up to 75 per cent of which can be claimed back for the cost of any recognised training; a planned training institute, which it is hoped will attract people from other Gulf countries as well as providing training for Bahrainis; and an employment services bureau which aims to assist the unemployed and employers to match skills, qualifications and opportunities.

The training is intended to prepare Bahrainis to replace expatriates as their numbers are reduced. The government has set legal Bahrainisation requirements for the private sector, obliging companies to increase the proportion of Bahrainis they employ by 5 per cent a year. The government will not renew work permits for expatriate staff at a company which fails to comply.

It is hoped that the extra emphasis on training, new industry and job creation will boost a stagnant economy. Government figures show that gross domestic product (GDP) grew at a rate of 2.2 per cent in 1995. With population growth estimated at 3.9 per cent, and inflation put officially at 2.5 per cent, the economy is still shrinking.

Activity should pick up in 1997. In addition to a buoyant oil price, Saudi Arabia has allocated Bahrain revenues from the entire production of the offshore Abu Saafa field, which the two countries had previously shared. 'The immediate outlook is that the economy will start to grow,' says one banker. 'But this is purely attributable to the extra oil allocation from Saudi Arabia and a strong oil price. It isn't a long-term trend.'

Extra money

The extra money will certainly improve the government's fiscal position, and its ability to invest in the action plan. Despite official figures showing that total revenues are expected to increase by more than 16 per cent in 1997 the government's spending plans remain modest. Expenditure in 1997 is to be increased by 7 per cent and the remaining revenue will be used to slash the deficit to BD 75 million, from BD 114 million in 1996. Spending is set to increase again slightly in 1998, maintaining the deficit at

BD 75 million.

Local bankers expect the extra expenditure to be allocated to developing the infrastructure which Bahrain National Oil Company needs if it is to supply the Hidd power and water plant, and to funding a government stake in the development of the port. More funds may be made available for capital spending on training and education.

The cost of planned capital projects means that the government is looking at ways of cutting its current expenditure to keep the budget under control. 'The government is looking at the possibility of contracting out some of its functions,' says one local banker. 'They are currently seeking outside advice on privatisation.' However, in view of the decision to keep power generation and distribution in the public sector, at least for the time being, any progress towards privatisation is likely to be slow.

Facing up to such challenges is, of course, easier in a stable setting. 'Security and stability has to come before investment and economic development,' says one government official. Al-Shoala agrees that disturbances make things more difficult. 'Instability reduces the chances of creating new jobs,' he says.

During the first half of 1996 a number of small-scale bombs exploded in Manama. These were followed in June by a government announcement that it had made 56 arrests and foiled an Iranian-backed coup attempt to overthrow the al-Khalifa regime. Since June the unrest on the island has subsided although the villages outside Manama continue to be the scenes of protests and clashes with police. The main demand of the protesters is for the restoration of an elected parliament.

Political reform is on the agenda. 'The need for political improvement has been recognised by the emir and the prime minister,' says al-Shoala. 'We are convinced that things have to move gradually.' The announcement of the alleged coup attempt was followed rapidly by confirmation that the Shura (consultative) council was to be expanded. The new council has 40 members, instead of the previous 30 and now has the power to initiate debate. 'The council members can freely discuss matters and question ministers,' says council Assistant Secretary-General Essa Ahmed al-Jowder. The government is also considering dividing its small population of just over half a million into four governorates. 'The idea is to give the appearance of more involvement in governance,' says one analyst.

The Bahraini government certainly has its share of hurdles to overcome but has taken the first steps by acknowledging that they exist. 'We are moving in the right direction,' says a senior government official. 'All these things need money, and with the economy no longer strong, that means time as well.' The government has found some breathing space in the form of boosted revenues; only time will tell whether the proposed remedies are effective.

Exchange rate: S1 = BD 0.377