JEDDAH, 29 December 2004 — Bahrain’s economy will continue to show robust performance in 2005, provided the government pushes ahead with its various economic and social reforms after its economy continued its forward momentum in 2003 and is on course for another year of stupendous growth this year, according to a report prepared by the Kuwait-based Global Investment House (GIH).
In June, the International Monetary Fund (IMF) painted a rosy picture of Bahrain’s economy praising the overall performance of the country. IMF described the management of the economy as prudent and stated that it had resulted in consistently high GDP growth, low inflation and manageable debt situation. The fund also appreciated Bahrain’s drive toward trade liberalization.
The GIB report said Bahrain recorded highest GDP growth rate of 13.7 percent in 2003. The year 2004 may not be different as Bahrain is on course to record over 6 percent GDP growth. The high oil prices, in most part of 2004, will play a much bigger role in pushing the economy to a high growth trajectory, the report added.
Bahrain’s economy is supported by prudent fiscal discipline characterized by restraint on current expenditure and improved budget balances along with an effective system of resource allocation for health, education and infrastructure projects. However, despite relatively strong economic base, government’s revenue remains highly dependent on oil. The outlook of the economy in 2005 remains strong as higher oil prices and continuing tight budgetary controls would exert favorable influence on the national economy. The continuation of the policy of diversification away from dependence on oil and the implementation of the privatization program will further strengthen the economy in the years ahead. The GIB report said that robust government spending, prompted by exceptionally strong oil revenue, will stimulate private consumption and will help to bolster business confidence. Work on several large-scale industrial and infrastructural projects will gather pace, in particular on the expansion of the capacity of Alba and the construction of Bahrain Financial Harbor. A major upgrade and expansion of the Bahrain Petroleum Company is also likely to take place. In addition, the government is expected to press ahead with the liberalization of power sector and water services. The country has well-developed finance and tourism sectors, but is pushing for the development of other service industries such as information technology, healthcare and education.
In terms of economic growth, GDP at current prices increased by an impressive 13.7 percent and by 6.8 percent at constant prices in 2003. Share of crude petroleum and natural gas in GDP rose to BD899.53 million in 2003 as compared to BD774 million in 2002, thereby registering a jump of 16.2 percent. In percentage terms, the contribution of oil and gas to the GDP has been gradually declining since the past few years. However, in 2003 its contribution increased marginally to 24.9 percent from 24.3 percent recorded in 2002. The total government revenue increased from BD1.03 billion in 2002 to BD1.15 billion in 2003, an increase of 11.5 percent. Oil and gas revenues registered a growth of 20.9 percent, from BD691.4 million in 2002 to BD836.1 million in 2003. Despite the diversification efforts by the government contribution by the oil and gas sector to the total government revenue increased substantially from 67.3 percent in 2002 to 73 percent in 2003. At the same time, non-oil revenues actually declined from BD335.5 million in 2002 to BD309.4 million in 2003, or by 7.8 percent, the report said. Crude oil production is rising marginally and the country produced 43.5 million barrels of oil in the first half of 2004. Unemployment continued to be the major area of worry for the government.
The Consumer Price Index (CPI) rose by 1.6 percent y-o-y in 2003, the first annual increase after declining consecutively for the previous six years. The interbank deposit rate in Bahrain inched up to 2.2 percent (3-6 month offered rate) in the third quarter of 2004 as compared to 1.2 percent at the beginning of the year. The deposit rates for 3-12 month period also increased from 0.64 percent at the beginning of the year to 1.4 percent at the end of the third quarter of 2004. The monetary policy remains expansionary as the broad money supply as measured by M2 showed consistent positive trend during the first three quarters of 2004 as it grew by 3.3 percent over 2003-end to BD2.85 billion, the report said.
In recent years, the government has started depending on Islamic bonds instead of conventional instruments to fund its requirements. The total borrowing from the Islamic instruments stood at BD455.5 million while the total borrowing from the conventional instruments stood at BD130 million in the third quarter of 2004, the GIH report added.
The banking system in Bahrain continued to show robust growth during the first nine months of 2004, with the entry of a number of foreign banks. The total asset size of the consolidated balance sheet of the banking system in Bahrain surged by 10.4 percent to $111.4 billion at the end of September 2004 from its 2003 level.
In the first nine months of 2004, Bahrain stock market lagged behind its regional peers and was unable to emulate the impressive performance as it was up only 24.3 percent. However, services and hotel & tourism sector recorded robust growth during the period as their respective indices rose by 48.2 percent and 34.8 percent respectively. Going forward, the BSE is expected to show strong performance in 2005 as its valuation looks cheap as compared to its regional counterparts such as Kuwait and Saudi Arabia.
However, the report said that the government’s main challenge includes pushing ahead with diversification into more labor-intensive activities, and easing the oil dependency. Bahrain will also have to widen its export base and improve its price competitiveness. Several challenges remain to be faced but Bahrain seems to be in a good position to overcome them, provided that economic and political reforms remain on course.
