ALTHOUGH it is a relatively small oil producer, Bahrain still relies on the sticky black substance first found on the islands in 1931. As the most recent figures from the Bahrain Monetary Agency (BMA - central bank) show, higher oil earnings lifted the economy out of the doldrums in 1996, delivering moderate growth and a budget surplus. There was another bonus from oil last year as the government began to receive extra revenue from the offshore Abu Saafa oil field, which had previously been shared with Saudi Arabia.

The economy has shown similar trends this year, analysts say. Although the oil price has weakened slightly, Bahrain will benefit from the first full year of the extra revenues from Abu Saafa.

The main trends in the economy are:

Gross domestic product (GDP): Growth in GDP in 1996 was 6.1 per cent at current prices or 3.1 per cent at constant prices. Oil was the most important sector - accounting for nearly 20 per cent of GDP and most of the growth in the economy - through a 24 per cent expansion in activity last year. Reserves are dwindling and average oil production in Bahrain was only 38,695 barrels a day (b/d) in 1996, with no prospect of a significant increase this year or next.

Bahrain's oil sector is boosted by refining activity. Crude oil is imported from neighbouring Saudi Arabia at concessionary rates, enabling Bahrain to export just over 250,000 b/d of refined products. Revenues from an additional 100,000 b/d of oil from the Abu Saafa field began to flow in mid-1996. The government had previously received revenues from 40,000 b/d of Abu Saafa oil. Analysts argue that the deal suits both sides: Bahrain benefits from the extra revenues, while the allocation to Bahrain gives Saudi Arabia more scope in managing its own production under the OPEC quota system.

Government finance: The government achieved a budget surplus in 1996 for the first time in 11 years. Figures recently published by the BMA show a surplus of BD 6 million ($15.9 million), compared with a deficit of BD 65.3 million ($173.2 million) in 1995. The surplus was mostly generated by the oil sector - it accounts for about 60 per cent of total revenues, and oil revenues grew by 23.4 per cent to BD 393.3 million ($1,043 million) last year.

Attempts to impose a tight fiscal regime through cuts in expenditure have been less fruitful and are contradicted by the government's use of higher capital spending to stimulate the economy. Capital spending from the budget was BD 103.3 million ($274 million) in 1996 and the 1997 figure is likely to be higher, although many new projects are being funded by regional development funds and through commercial debt. Cuts in current expenditure are seen as too costly in political terms. With a young and expanding population and unemployment estimated at about 15 per cent, a reduction in the number of public sector jobs is not considered an option.

Balance of payments: For the second year running, Bahrain enjoyed a trade surplus in 1996. The 28 per cent growth in the surplus to BD 192 million ($508 million) was due to a sharp rise in exports, coupled with a modest increase in imports. Once again, oil made most of the difference - exports of oil went up by 28 per cent to BD 1,187.1 million ($3,148.8 million). A surge in construction activity, due mainly to the new power and water plant at Hidd, is expected to reduce the trade surplus in 1997 and 1998 as imports associated with the project are delivered.

Despite a deficit in the balance of services, transfers and the capital account, Bahrain recorded an overall balance of payments surplus in 1996 of BD 128.8 million ($341.6 million), up from a surplus of just BD 35.6 million ($94.4 million) in 1995.

Overall, Bahrain's economy is in better shape than it has been for most of the 1990s. 'Things are only just beginning,' says one western diplomat. 'We are expecting more of an upswing in 1998.'

Oil is of prime importance, but Bahrain should also benefit from the diversity and scale of its industries. Aluminium Bahrain ranks among the world's largest aluminium smelters and there is now a substantial downstream aluminium industry. There is also a long-established petrochemicals capacity. On the services side, Bahrain is the only alternative to Dubai and it is the only financial centre worthy of the name in the GCC.

There are vulnerabilities, nevertheless. Recent improvements in the economy are almost exclusively the result of Saudi Arabia's generosity in allocating more oil and the coincidental recovery in oil prices. Yes, the budget and the balance of payments are back in surplus and the economy is at last showing signs of real growth. But the oil dependency remains and the government now has another chance to engineer an economy able to sustain itself without repeated injections of outside assistance. Momentum has returned to the Bahraini economy, but analysts are agreed that it will still be a challenge to sustain it.