Bahrain: October 2000
trade and investment policies have helped Bahrain to
maintain stable economic growth for much of the period
since the 1980s and allowed some diversification into
non-energy related economic activities.
Continued dependence on petroleum resources, however, has resulted in a slowdown in economic growth, particularly during the period 1994-1999 as a result of lower energy prices.
Accelerated economic reform crucial to raising real economic growth in Bahrain
Lower economic growth and declining public revenue, which is mainly derived from taxes on petroleum and natural gas, prompted Bahrain to implement economic reforms aimed at further diversifying the economy and raising economic growth to accommodate a growing population. The liberalization programme has gone some way in addressing rising unemployment among Bahrainis and raising private investment. However, foreign investment, particularly in key sectors of the economy has been sluggish, suggesting that accelerated reform would better meet Bahrain's targets of economic diversification and growth. says a new WTO report on the trade policies and practices of Bahrain.
The WTO report, along with a policy statement by the Government of Bahrain, will serve as the basis for the trade policy review of Bahrain which will take place on 11 and 13 October in the Trade Policy Review Body of the WTO.
Bahrain's MFN tariff on imports is relatively low, averaging 7.7% in 2000, with tariffs on alcohol and tobacco products considerably higher than for other products. Escalation in the tariff, however, provides greater protection for finished products although in some sectors there is de-escalation in the tariff, providing greater protection to primary products and intermediate goods. The report also notes that Bahrain's bound tariff average at 35.6% is significantly higher than the simple average tariff, introducing an element of uncertainty for traders and investors by providing Bahrain with scope to raise applied tariffs within their bindings. There also appears to be some discrepancy between trade-related legislation and practice, potentially reducing transparency and predictability in Bahrain's trade regime.
The report also notes that Bahrain has few non-tariff barriers and recent tariff reductions have taken place in the context of the Gulf Cooperation Council's Unified Economic Agreement which is to be completed by 2005. Bahrain's trade and investment relations are particularly strong with other members of the Gulf Cooperation Council to which it grants preferential treatment on tariffs, investment and government procurement.
In addition to trade reform, Bahrain has also attempted to open up the economy to private investment and to reduce the size of the public sector which dominates key economic activities and is an important source of employment for Bahraini nationals. Efforts include full or partial privatization of several companies, especially in services, and contracting out of some government services to private sector providers. Given that private investment, while allowed in several activities has not taken place in sectors with a major public sector presence, however, the report stresses the need for a more systematic and stepped up privatization programme to increase private investors' confidence in the economy and to attract foreign investment. Competition policy legislation may also be needed to address issues relating to monopolies and unfair competition in the economy.
Sectoral reform appears to have been mainly concentrated in services. Bahrain has a well developed financial services sector and liberalization has been pursued to try and strengthen the sector further. Banking, especially offshore banking has grown rapidly and policies regulating offshore banking, are liberal. Foreign investment restrictions in onshore banking are up to 49% for non-GCC nationals and up to 100% for GCC nationals. Bahrain is also trying to develop its Stock Exchange which began operating in 1989. Financial services was also the only sector in which Bahrain made commitments under the General Agreement on Trade in Services (GATS). Liberalization has also been proceeding in other services, notably telecommunications, and transport, although more slowly than in financial services.
The petroleum and manufacturing sectors tend to be dominated by the public sector. As part of its diversification strategy, Bahrain has targeted investment in downstream activities related to Bahrain's existing energy intensive industries and is providing supporting infrastructure to attract investment in these activities. A number of investment incentives, including reduced infrastructure costs such as free rental for a two year period and reductions in electricity tariffs are already provided to encourage investment in manufacturing.
The report concludes that despite these efforts, important sectors such as petroleum and telecommunications appear to be essentially closed to private investment, whereas reform in services, other than financial services, has been piecemeal. An acceleration and deepening of economic reform will therefore not only be important for economic growth, but would also send a positive signal to potential investors. Predictability and transparency of the trade and investment regime would be enhanced were Bahrain to more actively notify its legislation to the WTO, and bind a greater number of services in the GATS.
Notes to Editors
Trade Policy Reviews are an exercise, mandated in the WTO agreements, in which member countries trade and related policies are examined and evaluated at regular intervals. Significant developments which may have an impact on the global trading system are also monitored. For each review, two documents are prepared: a policy statement by the government of the member under review, and a detailed report written independently by the WTO Secretariat. These two documents are then discussed by the WTOs full membership in the Trade Policy Review Body (TPRB). These documents and the proceedings of the TPRBs meetings are published shortly afterwards. Since 1995, when the WTO came into force, services and trade-related aspects of intellectual property rights have also been covered.
For this review, the WTOs Secretariat report, together with the policy statement prepared by the Bahrain Government, will be discussed by the Trade Policy Review Body on 11 and 13 October 2000. The Secretariat report covers the development of all aspects of Bahrain's trade policies, including domestic laws and regulations, the institutional framework, trade policies by measure and by sector.
Attached to this press release is a summary of the observations in the Secretariat report and parts of the government's policy statement. The Secretariat report and the governments policy statement are available for the press in the newsroom of the WTO internet site (www.wto.org). These two documents and the minutes of the TPRBs discussion and the Chairmans summing up, will be published in hardback in due course and will be available from the Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.
December 1989, the following reports have been completed:
Argentina (1992 and 1999), Australia (1989, 1994 and
1998), Austria (1992), Bangladesh (1992 and 2000), Benin
(1997), Bolivia (1993 and 1999), Botswana (1998), Brazil
(1992 and 1996), Burkina Faso (1998), Cameroon (1995),
Canada (1990, 1992, 1994, 1996 and 1998), Chile (1991 and
1997), Colombia (1990 and 1996), Costa Rica (1995), C˘te
dIvoire (1995), Cyprus (1997), the Czech Republic
(1996), the Dominican Republic (1996), Egypt (1992 and
1999), El Salvador (1996), the European Communities
(1991, 1993, 1995, 1997 and 2000), Fiji (1997), Finland
(1992), Ghana (1992), Guinea (1999), Hong Kong (1990,
1994 and 1998), Hungary (1991 and 1998), Iceland (1994
and 2000), India (1993 and 1998), Indonesia (1991, 1994
and 1998), Israel (1994 and 1999), Jamaica (1998), Japan
(1990, 1992, 1995 and 1998), Kenya (1993 and 2000),
Korea, Rep. of (1992, 1996 and 2000), Lesotho (1998),
Macau (1994), Malaysia (1993 and 1997), Mali (1998),
Mauritius (1995), Mexico (1993 and 1997), Morocco (1989
and 1996), New Zealand (1990 and 1996), Namibia (1998),
Nicaragua (1999), Nigeria (1991 and 1998), Norway (1991,
1996 and 2000), Pakistan (1995), Papua New Guinea (1999),
Paraguay (1997), Peru (1994 and 2000), the Philippines
(1993), Poland (1993), Romania (1992 and 1999), Senegal
(1994), Singapore (1992, 1996 and 2000), Slovak Republic
(1995), the Solomon Islands (1998), South Africa (1993
and 1998), Sri Lanka(1995), Swaziland (1998), Sweden
(1990 and 1994), Switzerland (1991 and 1996), Tanzania
(2000), Thailand (1991, 1995 and 1999), Togo (1999),
Trinidad and Tobago (1998), Tunisia (1994), Turkey (1994
and 1998), the United States (1989, 1992, 1994, 1996 and
1999), Uganda (1995), Uruguay (1992 and 1998), Venezuela
(1996), Zambia (1996) and Zimbabwe (1994).
Secretariats report: Back
POLICY REVIEW BODY: BAHRAIN
Report by the Secretariat Summary Observations
Bahrain has a population of around 640,000 of which some 40% are expatriates, and a gross domestic product of Bahrain dinar 2.9 billion (around US$8.6 billion). Since independence, in 1971, Bahrain has essentially pursued a liberal trade and investment policy, and has integrated its economy closely with those of other countries in the region, primarily through regional agreements, such as the Unified Economic Agreement of the Gulf Cooperation Council (GCC).
Economic growth in Bahrain is strongly affected by variations in international energy prices. Real GDP growth, as a result, was slower during the 1990s compared with the previous decade, averaging around 3.6% annually since 1994; growth is expected to be around 3.5% in 2000. Although petroleum's share in GDP has been declining, it still accounts for 14% of GDP and some 64% of merchandise exports. Non-oil GDP growth was also moderate in the 1990s, in part due to low rates of investment, which, after declining since 1992, have shown signs of improvement since 1997. Public investment declined due to a cutback in government spending as efforts were made to rationalize fiscal expenditures. At the same time, private investment declined, most likely due to slower economic activity as oil prices remained low for much of the period. An improvement in private sector investment since 1998 is a sign of greater confidence in the performance of the economy and in the economic reforms pursued to date.
The dependence of Bahrain's economy on its relatively small petroleum resources has prompted the Government to implement a number of reforms aimed at diversifying economic activity and raising economic growth to accommodate a population growing at around 3.5% per year. Efforts focus on fiscal reform to respond to budgetary deficits caused by low petroleum revenue; stepped up privatization and contracting out of certain government services to the private sector; an opening up of a larger number of sectors to private sector investment, both foreign and domestic; and sectoral reform, particularly in services.
More targeted efforts have also been made to address the problem of unemployment among Bahrainis, which has been rising recently and was 6% in 1998, considerably higher than the overall average of around 2% (including expatriate workers). In 1989, the Government, with assistance from international organizations, introduced a programme of Bahrainization, which, inter alia, sets quantitative targets for firms to employ Bahrainis, although, according to the authorities, these targets are flexible, and training and employment-search facilities for Bahrainis.
Trade and Investment Policy Framework
The Government of Bahrain is headed jointly by the Amir of Bahrain and the Cabinet. Bahrain's National Assembly was suspended by the Amir in 1975, and replaced in 1992 by a Consultative Council, currently with 40 members, which comments on most government policies before they become law.
The authorities see the maintenance of liberal and transparent trade and investment regimes as important for the continued economic growth and prosperity of Bahrain. Thus, even though Bahrain's international treaty obligations supersede national law once the treaty is ratified by the Amir, the Government has been actively revising Bahrain's trade and related laws to ensure that national legislation reflects Bahrain's WTO commitments. In general, all legislation, including trade legislation, is submitted to the Cabinet, and once commented upon by the Consultative Council, must be assented to by the Amir before becoming law. The Amir and the Cabinet may also promulgate legislation through Amiri, prime ministerial and ministerial decrees, which carry the force of law. Trade policy implementation is generally carried out by the Ministry of Commerce in cooperation with other ministries if relevant.
Bahrain was a founding member of the WTO and provides at least most-favoured-nation (MFN) treatment to all WTO Members. Bahrain has notified its intention to make use of the transitional period granted to developing countries under various WTO agreements, including Customs Valuation and Trade-Related Aspects of Intellectual Property Rights (TRIPS). Notifications in a number of areas, including preferential rules of origin, legislation on technical barriers to trade, sanitary and phytosanitary measures, and state trading, have, not however, been made. Under the General Agreement on Trade in Services (GATS), commitments were made in financial services, and Bahrain signed the Fifth Protocol on financial services.
In addition to expanding trade, Bahrain has increasingly sought private, in particular foreign direct, investment in order to increase economic growth and diversification. In general, foreign investment has been permitted in offshore units, export oriented industries or in sectors that the Government wishes to develop. This includes new industrial companies, in which up to 100% foreign investment may take place with the permission of the relevant authority, as well as in services associated with these companies or where the company is established as the regional centre for the distribution of its own services. Since 1999, additional reform has taken place; foreign equity ownership limits in firms listed on the Bahrain Stock Exchange has been raised from 24% to 49% (from 49% to 100% for GCC nationals). In addition, efforts are being made to streamline the approval of foreign investment projects, an often cumbersome process requiring permission from a number of ministries and agencies before commercial registration is approved. However, data show that foreign direct investment (FDI) has not increased substantially in recent years, suggesting perhaps that further reform is required. Moreover, Bahrain's approach to approving private investment in sectors with a strong public sector presence may be dissuasive to foreign investment.
and Trade-Related Reforms
Although committed to the multilateral process, Bahrain's trade liberalization has a strong regional focus. While remaining unchanged for much of the 1990s, the tariff was amended recently in the context of the GCC's Unified Economic Agreement which aims to complete a customs union by 2005. On 1 July 1998, duty on tobacco products was raised from 70% to 100%. On 1 January 2000, customs duties were removed on essential goods and fruit, previously at rates of 5% and 7%, respectively.
Bahrain's average applied MFN tariff is 7.7%. With the exception of alcohol and tobacco products, and some paper products related to tobacco, tariffs generally range from 0% to 20%; alcohol and tobacco products carry rates of 125% and at least 100%, respectively. Approximately 99.6% of Bahrain's tariff carries ad valorem rates of duty; specific rates are applied to 20 tariff lines at the HS 8-digit level, covering tobacco products. Imports under 11 tariff lines, including live pigs, oilseeds, poppy seeds and cultured pearls, are prohibited according to the tariff and carry no rates. Tariff protection of up to 20% is provided for products covered by the Local Industries Protection and Support programme (Legislative Decree No. 11 of 1985), which is available to industries that meet a minimum local (and GCC) content requirement. The items presently covered under the Law include medical products, aluminium products, and edible oils.
Although the average tariff is relatively low it is subject to considerable escalation, in general providing greater protection for finished products. Escalation is probably even more pronounced due to tariff exemptions provided to certain imports, including from GCC countries, and for raw material, machinery, and equipment, which are not included in the tariff analysis. In some sectors, notably non-metallic products (except petroleum), textiles and clothing, wood and wood products, and other manufactures, there is de-escalation in the tariff, with finished products receiving less effective protection than primary products and intermediate goods, thus providing an unclear picture of overall effective protection provided by the tariff to Bahraini industry.
As a result of the Uruguay Round, Bahrain bound 77.1% of its tariff at an average rate of 35.6%. Most tariffs are bound at 35% with the exception of alcohol and most tobacco products, for which bindings are at rates of 200% and 100%, respectively. The average bound rate of 35.6% significantly exceeds the overall applied average rate of 7.7%, providing considerable leeway for the Government to raise tariffs within the bindings, introducing an element of uncertainty for traders and investors. Although the majority of the applied tariff is below the bound rate, applied rates on 18 lines, relating mainly to tobacco, alcohol and edible oils, appear to exceed their corresponding rates in Bahrain's schedule of tariff bindings.
Bahrain maintains non-tariff measures in the form of import and export prohibitions and licences for a limited number of products, mainly for health and security reasons. There does, however, appear to be a certain degree of divergence between legislation on these restrictions and in the application of the legislation. This includes information in the Customs Handbook, according to which trade with South Africa is embargoed although de facto such an embargo no longer exists; import prohibitions on certain products are included in the current applied tariff but these are not included in the list of import prohibitions provided by the authorities to the Secretariat; and the list of restricted imports and exports according to the Customs Handbook provided to the Secretariat is different from the list of restricted products provided by the authorities. Other measures, such as labelling requirements for imported eggs, appear not to be applied equally to imported and domestically produced goods, although there seems to be no explicit mention of this in the SPS legislation provided. The apparent discrepancy between legislation and practice potentially reduces transparency and predictability in Bahrain's trade regime and may increase the scope for administrative discretion, particularly at the border.
Other Measures Affecting Trade
An important factor affecting trade and investment is the size of the public sector. The public sector is an important source of employment for Bahraini nationals, and dominates key activities of the economy, including petroleum, aluminium, and telecommunications, but consolidated data on the sector is not available. Efforts are being made to reduce the size of the public sector: during the 1990s the Government partially or fully privatized a number of state-owned companies, especially in the services industry. In addition, some government services are being contracted out to the private sector, mainly, it appears, for fiscal reasons. However, a more systematic and stepped up privatization programme would help to increase private investors' confidence in the economy and attract foreign investment. Given the size of the public sector and the number of key industries in which monopolies exist, Bahrain may be well served by specific legislation on competition policy addressing issues relating to monopolies and unfair competition.
The Government of Bahrain provides a number of incentives, particularly in manufacturing, in order to attract investment to the sector. At present, this includes direct subsidies for electricity and rent, as well as the provision of other utilities, including water and sewerage services, at below economic cost. There appear to be few distribution controls although distribution monopolies exist in some sectors, notably petroleum, gas, and primary aluminium. Administered prices are applied to a small number of products, such as petroleum, gas, flour, and meat.
Agriculture and fisheries
The agriculture and fisheries sector is small, accounting for some 1% of GDP in 1998. Environmental constraints have limited production to fruit and vegetables, fodder, poultry, eggs, and fish. Bahrain imports most of its consumption requirements, including fruit and nuts, livestock, vegetables, dairy products, and cereals. The sector is heavily subsidized with the Government providing most inputs such as electricity, water, feed, and pesticides, and credit at low cost or free of charge. In line with efforts to reduce government spending, however, there has been a recent shift in favour of subsidies that encourage water conservation and intensified farming. Fisheries subsidies have also been reduced and shifted from the provision of equipment, storage facilities, as well as technical extension services, to infrastructural and technical assistance.
Petroleum and natural gas
Despite its relatively diversified economy, Bahrain depends to a large extent on sales of petroleum and petroleum products for economic growth. The majority of its petroleum (almost 79%) comes from the offshore Abu Saafa oilfield in Saudi Arabia; at present, Bahrain receives all of the oil produced by this field, which is exported as crude. Bahrain also imports a significant amount of petroleum, mainly from Saudi Arabia; along with locally produced petroleum, this is refined locally and exported. In 1998, petroleum and mining accounted for around 14% of GDP. The importance of the sector has been declining, however, prompting efforts to increase exploration in addition to diversification of the economic base.
Policy issues relating to petroleum and natural gas are overseen by the Supreme Council of Petroleum, headed by the Prime Minister. Until January 2000, the production and distribution of petroleum was carried out by the state-owned company, the Bahrain National Oil Company (BANOCO). In January 2000, BANOCO was merged with the Bahrain Petroleum Company (BAPCO), also state owned, which previously managed Bahrain's oil refinery. The new company BAPCO will henceforth be responsible for exploration, crude and refined oil production as well as distribution and marketing, both in Bahrain and abroad. Private investment is allowed in petroleum refining, and in petroleum extraction, through production- sharing agreements with the Government of Bahrain; with the exception of Chevron Corporation, however, which is involved in exploration activities, there is no private investment in the sector. In an effort to further develop Bahrain's petroleum resources, the Ministry of Oil and Industry has signed agreements with foreign companies to conduct exploration activities for oil and gas.
Natural gas is used mainly for local industry and for reinjection. As for petroleum, BANOCO (now part of BAPCO) has a monopoly over the production of gas, whereas the Bahrain National Gas Company (BANAGAS), owned by the Government of Bahrain, Caltex and the Arab Petroleum Investment Corporation (APIC), operates Bahrain's gas liquefaction plant.
Domestic prices of petroleum and gas are controlled; gas prices remain below international rates despite an 80% increase in the price to consumers in 1998. Domestic distribution of petroleum and natural gas products may be carried out only by BANOCO (now part of BAPCO) and BANAGAS, respectively.
The manufacturing sector is mainly based on energy-intensive products, including aluminium, metal industries, and chemicals. The largest industry, aluminium, accounted for around 5% of GDP and almost 60% of manufactured exports in 1998. Production of primary aluminium, until June, 1999 was carried out by the state-owned company Aluminium Bahrain (ALBA). The majority state-owned Bahrain Saudi Aluminium Marketing Company (BALCO) was responsible for marketing the output of ALBA. In June 1999, the companies were merged; production and sales of primary aluminium is currently carried out by the new company. A number of small, private companies also operate in the sector, producing mainly aluminium products from primary and recycled material.
The manufacturing sector is considered to be strategic for Bahrain's development, and policy is therefore aimed at diversifying the industrial base. Thus, a recent shift in policy has been to encourage investment in downstream activities related to Bahrain's existing energy intensive industries. The Government has also invested in the development of infrastructure to support the development of these new industries. In addition, efforts are being made to attract foreign investment in these industries with technical assistance from international organizations. Investment incentives for the manufacturing sector include reduced infrastructure costs, such as free rental for a two-year period of land in the industrial zones and reductions in electricity tariffs, as well as tariff exemptions for the import of raw material inputs for exports and of equipment and machinery.
Contributing around 77% of GDP and 50% of employment in 1998, services is by far the largest economic sector in Bahrain. The main activities include financial services, government services, real estate, trade, and transport and communication services. Along with manufacturing, the development of the services sector forms an important part of Bahrain's diversification strategy. Financial services, especially offshore banking, is well developed and the Government has continued to pursue reforms to strengthen the financial services sector further. This was also the only sector in which Bahrain made commitments under the GATS and under the Fifth Protocol.
Bahrain's banking sector is regulated by the Bahrain Monetary Agency (BMA), and investors must be licensed by the BMA to open banking units in Bahrain or offshore. There are no foreign ownership restrictions for offshore banks, whereas up to 49% of the total equity of a local bank may be held by foreign nationals (up to 100% is permitted for GCC nationals). The insurance sector, which is regulated and supervised by the Ministry of Commerce is subject to similar restrictions with regard to foreign investment. Bahrain has also been developing its stock market, which began operating in 1989, and recent reforms allow non-Bahrainis to own between a 49% (maximum for non-GCC nationals) and 100% (GCC nationals and companies) of the shares of listed companies.
Liberalization is also proceeding, albeit more gradually, in other services sectors, including telecommunications, maritime and air transport, and tourism. All basic telecommunications services are provided by the majority state-owned provider Bahrain Telecommunications Company (BATELCO). Some value-added services have been recently opened to competition although there appear to be no plans to allow competition into basic telecommunications. While Bahrain did not participate in negotiations on Basic Telecommunications Services, the authorities are considering making commitments under the GATS. In air transport services, gradual liberalization in a controlled manner has been favoured by the authorities. Gulf Air, which is jointly owned with the Governments of Qatar, Abu Dhabi and Oman, according to the authorities, no longer has exclusive access to some routes under the terms of its charter, although government employees are directed to use Gulf Air's services whenever possible. In maritime transport, the authorities wish to develop Bahrain into a competitive regional distribution centre. In this regard, a new port is being developed to add to existing capacity at port facilities at Mina Salman. Some private activities in the port are currently allowed, notably stevedoring; the authorities believe however, that efficiency of port services would be best maintained through joint public-private ownership of port services. Tourism is an important source of revenue, and employment and has grown steadily since the completion of the King Fahd Causeway connecting Bahrain to Saudi Arabia; this is the main route used by tourists to Bahrain. The Government has also intensified efforts to attract specialized tourism, including sports, conferences, and business meetings, in addition to encouraging visitors to Bahrain's historical sites.
Trade Policies and Trading Partners
While committed to the WTO, Bahrain maintains close trade and investment ties with other member countries of the Gulf Cooperation Council (GCC). In addition to not paying customs duties, investors from GCC countries have preferential investment access in Bahrain; they are allowed equity ownership of up to 100% in certain sectors compared with 49% for other foreign investors. Ties between the GCC countries were strengthened and formalized through the Unified Economic Agreement, signed in 1981, forming a customs union between the member countries by 2005. In preparation for the union, Bahrain raised its tariff on tobacco products, to a minimum rate of 100% in 1998, and removed tariffs on essential goods and fruit in 2000. Imports from GCC countries are exempt from customs duties; preferential treatment is also provided for goods produced in other GCC countries under the GCC's preferential rules of origin, and for government procurement, and GCC content is included under local-content programmes.
Members of the GCC also signed an agreement with 12 other countries in the region in 1997 to form the Greater Arab Free-trade area (GAFTA), to be completed by 2008. The agreement, which came into effect on 1 January 1998, aims to reduce tariffs on products included in the agreement by 10% per year until end 2007.
The GCC is currently negotiating a free-trade agreement with the European Union), which would build on the Cooperation Agreement signed between the GCC and the EU in 1998. Bahrain receives preferential access to certain markets under the Generalized System of Preferences.
Although Bahrain has a relatively diversified economic base, real economic growth must rise to sustain a growing labour force. The Government's structural reforms to open up the economy and reduce the size of the public sector have borne some fruit as private investment has shown a tendency to increase recently. However, the economy is still dependent on Bahrain's small petroleum resources as has been evident from a slow-down in economic activity since the mid 1990s. The Government's privatization programme has been slow to start and private domestic and foreign investment, while allowed in several activities, has not taken place in sectors with a major public sector presence. Important sectors such as petroleum and telecommunications are essentially closed to private investment, whereas reform in services, other than financial services, has been piecemeal. An acceleration and deepening of economic reform will therefore not only be important for economic growth, but would also send a positive signal to potential investors. Predictability and transparency of the trade and investment regime would be enhanced were Bahrain to more actively notify its legislation to the WTO, and bind a greater number of services in the GATS.Back to top
POLICY REVIEW BODY: BAHRAIN
Report by the Government - Part II
I. KEY ISSUES AND POLICIES
1. Indications are that the Bahraini economy will continue its strong performance in 2000 thanks to such factors as the return to normal of crude oil production at the Abu Saafa field, higher world oil prices and strict financial policies. Notwithstanding the uninterrupted implementation of prudent policies involving the establishment of an open and private sector oriented economy, Bahrain still faces the challenges of enhancing economic growth and diversification as well as generating increased employment opportunities for its citizens.
2. Economic objectives in the medium-term involve continued diversification of the economic base, with emphasis on downstream oil and aluminium activities, financial services, tourism, knowledge-based industries, and encouraging small and medium size enterprises. Generation of more employment opportunities represents another important goal. In order to achieve these objectives, several measures have been adopted, notably promoting the private sector, mainly by maintaining an open economic system attractive to foreign direct investment, ensuring a well-supervised financial sector, streamlining the regulatory environment, upgrading infrastructure and redefining the role of the government.
3. The reform strategy has so far proved a success. It has manifested itself, among other things, in government services and public enterprises being privatized, simplifying administrative business licensing procedures, and promotional activities for attracting foreign direct investment.
4. Aimed at creating more jobs, the employment strategy rests on four pillars. These are increasing productivity by investing in human skills through the education system and training programmes; helping nationals find suitable jobs through employment placement centers; encouraging the private sector to employ national employees; and improving conditions in the work place.
(1) FINANCIAL SECTOR
5. Bahrain's small economy notwithstanding, the financial system is well diversified. As of end-1999, the financial system in Bahrain comprised some 176 financial institutions. This included 19 full commercial banks (FCBs), 48 offshore banking units (OBUs), 33 investment banks (IBs), 2 specialized banks, 19 money changers, 36 representative offices, 6 foreign exchange and money brokers, and 13 investment advisory and other financial services. The sector's contribution to the GDP is around 23%, more or less the same share as the oil sector. Banks are profitable, adequately capitalized, and hold high quality assets. The sound management of Bahrain's banks together with the BMA's prudent regulatory and supervision policies have enabled the sector to withstand the recent volatility of world financial and oil markets.
6. Bahrain's transparent legal framework supports the sector's growing role as a major financial center in the region. The financial sector is open to foreign investors with virtually no restrictions on capital ownership. The BMA has successfully introduced and enforced international standards and best practices in accounting, auditing, prudential regulation, and banking supervision. The BMA's recent efforts to develop a comprehensive regulatory and operational framework for Islamic banking will further help to reinforce Bahrains position as a leading Islamic financial center.
7. The BMA applies a comprehensive and effective off- and on-site monitoring system of financial institutions, complying in general with the standards set out in the Basle Core Principles for Effective Banking Supervision. Following an IMF report on compliance with the Basle Core Principles of Effective Banking Supervision, further improvements are still being pursued in the following areas: (i) greater legal independence of supervisory authorities, (ii) the provision of additional resources for financial supervision, and (iii) the legal definition of permissible banking activities and banks.
8. The IMF noted in its report that the BMA had achieved full compliance with 24 of the 30 Core (and sub-core) Principles and is largely compliant with another five (4 core and 1 sub-core) Principles. These 29 Principles cover virtually all of the supervisory factors that broadly encompass the fundamentals of a sound supervisory system.
9. The Bahrain Stock Exchange is adequately supported by modern computer equipment and information system. The average number of trades per day is about 70, and shares traded in each transaction stand at 400 on the average. Overall, there are 41 listed companies, with market capitalization amounting to around BD 2.7 billion, or approximately 115% of GDP at the end of 1999. Efforts are under way to strengthen the role of the stock exchange in the economy by increasing the number of listed companies, introducing new investment instruments, cross-listing shares at the regional level, and developing automated depository, clearing and settlement procedures. The Government is currently studying the possibility of opening the Stock market still further to foreign participation, both in terms of 100% ownership of listed companies, as well as services rendered to the Stock Exchange.
B. FINANCIAL POLICIES
10. Efforts are being made within the framework of a medium-term expenditure strategy to promote fiscal consolidation by increasing non-oil revenues and restructuring expenditures. The ultimate objective is to balance the budget by 2006.
11. The combination of expenditure and revenue measures currently under consideration will allow the government to accommodate prospective pressures. Such pressures include retrenchment costs in the context of privatizing public sector activities, the upfront cost of the proposed Early Retirement Scheme and the cost of growing healthcare and education needs. In addition, expenditure restraint is being exercised through the existing freeze on the size of the civil service and the relative wage structure. However, at the same time the Government is aware of the need to maintain the attractiveness of civil service employment in order to attract highly qualified and skilled employees so as not to erode the capacity of the government to play an effective role in the economy.
12. Similar favourable trends are projected for the balance of payments in 2000 and beyond. However, the authorities remain mindful of the vulnerability of the external position to developments in world prices of oil and aluminium. On the basis of the IMF's WEO price projections, Bahrain's oil export prices are expected to initially rebound to US$23 per barrel before settling at around US$17.5 per barrel. Based on the assumption that the existing agreement on the Abu Saafa oil field is maintained and production from the Awali field declines by 1% a year, revenues from oil and oil-related exports are expected to reach about US$3 billion. With the continued implementation of diversification policies non-oil exports are projected to increase by about 4% a year. Efforts aimed at consolidating the fiscal position and promoting export-oriented private sector investment would largely improve the external position.
13. The conduct of monetary policy continues to be geared towards maintaining the de facto link between the national currency and the U.S. dollar. Together with prudent and effective supervision of the financial system, this policy has contributed to low inflation and interest rates in line with those prevailing in the USA.
14. Attracting foreign direct investment and promoting the private sector are essential for maintaining sustainable growth. In this context transparency proves a sine qua non for creating the enabling environment for private sector investment.
15. In order to improve transparency, efforts are being made to ensure timeliness and coverage quality of economic and labour statistics.