Bahrain pursues reform amid strain
25 November 2025
Commentary
John Bambridge
Analysis editor
Cautious optimism defines Bahrain’s current economic moment as the country presses ahead with a broad agenda of diversification, reform and targeted investment. Yet the more assertively Manama moves to reshape its future, the more the tension between its ambition and its fiscal constraints becomes evident as the defining feature of its policymaking.
Bahrain’s projects sector, which has now been shrinking for the past seven years, is emblematic of the country’s constricted spending. This year, contract awards have fallen to their lowest value in a decade. This signals a decisive shift to a more disciplined investment strategy aligned with fiscal realities and a more selective approach to forward-looking capital spending.
The diminished projects market is in turn a challenge for the financial sector, which now faces a receding pool of project financing and other contracting loans. This is giving further impetus to the potential consolidation of local lenders in the overbanked market, which is also beset by thinning margins, rising compliance costs and pressure to scale amid financial system modernisation. While it could create short-term pain, consolidation should boost the financial health of legacy lenders and provide stability in a sector increasingly being defined by new digital banking models and innovation.
Yet even as some sectors change, Bahrain’s government remains deeply reliant on hydrocarbons, which continues to drive exploration, including in the technically complex Khaleej Al-Bahrain basin. These activities reflect the practical need to maintain oil revenues in the medium term and, should additional recoverable reserves be discovered, a potent source of optimism.
Manana is meanwhile looking to overhaul the utilities sector by creating a dedicated regulator and new national operator. The reforms should make space for greater private participation, drawing more capital into power and water projects while improving efficiency and reducing state expenditure in an aspirationally positive step towards greater long-term sustainability.
Even as fiscal concerns narrow Manama’s policy options, it continues to secure strategic wins. A new aviation agreement with Air Asia establishes Bahrain as a regional hub for one of Asia’s largest low-cost carriers. This move opens new connectivity corridors and, alongside the renewal of direct Gulf Air routes to the US, reinforces Bahrain’s position as a gateway between regions, promising benefits for tourism, logistics and services.
Overall, Bahrain’s economic trajectory remains delicately balanced – marked by reform-driven progress yet tempered by fiscal constraint. But in threading this needle, Manama shows that cautious optimism can still be a powerful catalyst for change.
MEED’s December 2025 report on Bahrain includes:
> GVT & ECONOMY: Bahrain’s cautious economic evolution
> BANKING: Mergers loom over Bahrain’s banking system
> OIL & GAS: Bahrain remains in pursuit of hydrocarbon resources
> POWER & WATER: Bahrain advances utility reform
> CONSTRUCTION: Bahrain construction faces major slowdown
> AVIATION: Bahrain signs game-changer aviation deal with Air Asia
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