On 17 May, Bahraini security forces raided the home of Ali Salman, a leading Shia cleric and head of the country’s biggest opposition group, Al-Wefaq. In response, Al-Wefaq and other opposition groups said they would temporarily boycott talks with the government aimed at bringing an end to the two-year-old uprising.

Sour relations

The situation was eerily familiar. Al-Wefaq says government forces have raided Salman’s home several times since February 2011, when demonstrations calling for more democratic reform began. Each time, it has soured relations between the mainstream opposition and the Sunni-led government.

This time, Al-Wefaq does not want to be seen as responsible for the dialogue collapsing, and is only staying away from the talks for two weeks. However, even now negotiations have resumed, it will be difficult to resolve the current sense that neither side is truly committed to finding a solution that will restore political stability to the island.

The government says any outcome of the negotiations cannot just be a set of concessions to one sect

Diplomatic pressure from Bahrain’s most strategic allies, including the UK, the US and, crucially, Saudi Arabia, has forced the government to negotiate with opposition groups. After several attempts at a national dialogue failed to quell the uprising, external pressure has left both sides trying to avoid being blamed for the talks collapsing. The lack of commitment shows.

The government says any outcome of the talks must be broadly supported by the population, and cannot just be a set of concessions to one sect, which they maintain is what Shia groups want.

Progress stalls

The Shia opposition wants to see a member of the ruling Al-Khalifa family present at the talks, and any recommendations for reform that come out of the dialogue put to a national referendum. The government has indicated neither of these will happen. As a result, the talks have continued since being convened in January, but no significant progress has been made.

Bahrain’s fiscal breakeven price has reached critical levels, leaving it vulnerable to a sustained decline in oil prices

The stalemate has strengthened the position of hardliners on both sides. Shia youths, under the umbrella of the 14 February coalition, named after the date protests began in 2011, are becoming increasingly radicalised. Many have lost respect for the mainstream opposition groups who they say “sit at the same table as those who kill children”.

On the Sunni side, a branch of the Al-Khalifa family known as the Khawalid, which controls the security and intelligence agencies, the king’s royal court and the Justice Ministry, is seen as a block to any reconciliation efforts and loath to grant concessions to the Shia. It is supported by hardline Sunni groups.

Resilient economy

Surprisingly, the economy has held up better than expected. Growth in 2012 was put at about 3.4 per cent, according to the Economic Development Board (EDB), a government body set up to promote foreign investment in Bahrain. In 2013, growth should be higher, in part because production at the Abu Saafa oil field will increase this year, after it underwent maintenance work in the second half of 2012.

The EDB predicts growth will be 5.6 per cent in 2013 and 4 per cent in 2014. The Washington-based IMF is less optimistic, expecting growth to be 4.2 per cent this year and 3.3 per cent in 2014, but supports the view that the economy has quickly bounced back from the disruption of 2011. It is not an entirely optimistic picture.

There are several clouds on the horizon, including relatively weak private sector investment and increasing susceptibility to the oil price. “Bahrain’s fiscal breakeven price has reached critical levels – $115 a barrel in 2012 – rendering the country vulnerable to a sustained decline in oil prices,” the IMF warned in a May 2013 report.

In the longer term, Manama’s rising debt levels pose an additional risk. The IMF says on current trends, public debt will hit 61 per cent of gross domestic product by 2018. So far, Bahrain has been able to fund deficits through the capital markets, where it continues to enjoy relatively robust support from investors, and the disbursement of GCC aid.

That does not negate the need for action on subsidies, public sector wages, capital spending and increasing non-oil revenues. Already, the country has started to make some moves on subsidies, but more will need to be done.

Resolving crisis

Solving the political crisis will be key to improving sentiment towards the state. The appointment in March of reformist Crown Prince Sheikh Salman bin Hamad al-Khalifa as first deputy prime minister should help bolster the moderate wing of the ruling family, but as Al-Wefaq’s walkout from talks shows, a short-term political settlement is not on the horizon. Without one, Bahrain will continue to grow, but on a much less stable footing than it needs to be sustainable.

Oil sales make up 86 per cent of government revenue. Boosting the non-oil sector will require confidence to return to the private sector. That will not happen until the political situation is resolved.