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Bahrain’s economic growth momentum falters

7 November 2024

 

Bahrain’s economy grew by just 1.3% year-on-year in the second quarter of this year, representing its worst quarterly performance since early 2021 and marking a significant slowdown from the 3.3% growth seen in Q1.

Overall, it meant the economy grew by 2.3% between the start of January and the end of June, compared to the same period in 2023.

However, at a time of subdued regional oil activity as a result of the Opec+ production limits, the figures from Bahrain’s Ministry of Finance & National Economy still mean the country’s performance has been better than that of many of its neighbours.

Dubai-based bank Emirates NBD said in a report issued in early October that it was sticking to its forecasts of 2.4% growth for Bahraini GDP for the whole of 2024 and 3.3% in 2025.

That growth rate, said the bank’s Middle East and North Africa economist Daniel Richards, “would make Bahrain’s the second-strongest growth in the GCC in 2024, after the UAE”.

Some other observers, such as the Washington-based IMF, predict slightly faster growth for Bahrain.

Oil and non-oil activity

The country’s relatively strong performance is in part due to the modest role that oil and gas plays in its economy. The oil sector accounted for a little less than 15% of total GDP in Q2 2024 and the IMF thinks that will shrink to 10% by 2030.

The oil sector grew by 3.4% in Q1, but contracted by 6.7% in Q2, resulting in an overall contraction of 2.1% for H1.

Production at the Abu Safah field was down 4.2% year-on-year in the first half, while output from the onshore Bahrain field stayed almost flat.

According to the finance ministry, Bahrain produced an average of 184,000 barrels a day (b/d) in Q2 across its two main fields, some 6% below its Opec+ quota of 196,000 b/d.

Emirates NBD is forecasting a 2% contraction in oil GDP this year, with a return to growth next year of 2.0% – a figure which is dependent on the Opec+ restrictions falling away.

The latter cannot be guaranteed, however. In early November, the group’s leading members announced a further month-long extension of their voluntary production curbs, pushing back the deadline to the turn of the year.

In contrast, there has been a more consistent positive momentum in Bahrain’s dominant non-oil activity, which grew by 3.2% in Q1 and 2.8% in Q2, leaving overall H1 growth at 3.1%.

Emirates NBD forecasts that non-oil growth will rise further in the second half of the year to reach 3.5% for the year as a whole – the same as in 2023 – and should stage a further modest increase to 3.7% next year.

Lower interest rates and low inflation should provide a supportive environment for non-oil activity.

The largest element of the non-oil economy remains financial and insurance services, which made up 17% of GDP in Q2 and grew by a modest 2.1% in Q2.

This followed a 7.4% expansion in the first quarter, meaning the sector’s H1 figure was a robust 4.7%.

Attracting more investment and talent to the country is critical to ensuring that non-oil momentum continues in the future.

Government initiatives and outlook

With this in mind, the authorities have launched a number of enhanced services in an effort to compete more effectively against regional economic powers such as the UAE and Saudi Arabia – including a ‘golden licence’ introduced in April 2023 for businesses and a ‘platinum residency permit’ introduced for individuals in June that year.

Since then, the Nationality, Passports and Residence Affairs office has issued more than 10,000 enhanced residency permits to citizens of 99 countries.

Such efforts will have contributed to the 9% increase in the total stock of foreign direct investment in Bahrain in Q2 2024, reaching a total of BD16.6bn, up from BD15.2bn in the same period last year, according to data from the Ministry of Finance & National Economy.

However, there are some clouds on the horizon. An IMF report issued in mid-October noted that Bahrain’s budget deficit grew in 2023, after two years of reducing under the government’s fiscal balance programme.

The IMF has urged the government to rediscover its commitment to economic reforms, with John Bluedorn – who led the IMF team in its latest Article IV review of the economy – saying “a multi-year and pre-committed fiscal consolidation and reform package is the policy priority” in order to put the government’s debt-to-GDP ratio on a durable downward path.

While praising the recent introduction of a ‘top-up’ tax to meet international minimum standards on corporate taxation, Bluedorn added that “additional steady fiscal efforts over multiple years … remain necessary”.

The government’s policy options include introducing more taxation on the non-oil sector and cutting energy subsidies and other spending. However, all of these options are politically unpalatable.

“Economic diversification has progressed well, but additional reforms would foster higher, greener and more inclusive medium-term growth,” added Bluedorn.

More recent economic data has highlighted the fragile position of the country. GDP data for the third quarter has yet to be released, but there have been some other indicators.

On 29 October, the Information & eGovernment Authority released its Q3 trade report, which showed that the value of non-oil imports had risen by 3% year-on-year to reach BD1,443m, up from BD1,402m for the same period in 2023.

The value of non-oil exports rose by just 1% to BD949m, while the value of non-oil re-exports did better, increasing by 3% to BD190m. All this meant the country’s non-oil trade balance widened further, reaching BD304m in Q3 2024, compared to BD275m in the same period of 2023.

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Dominic Dudley

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