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Bahrain’s cautious economic evolution

5 November 2025

 

Bahrain’s economic outlook is currently defined by a steady but cautious sense of forward motion. The country has succeeded in maintaining growth driven almost entirely by the non-oil economy, while its reliance on hydrocarbons, though diminished, still shapes the fiscal landscape.

Public debt remains high and continues to constrain government spending, yet the state has avoided severe austerity and instead adopted a gradual approach to balancing economic reform with social stability.

Real GDP is expected to expand by 2.9% in 2025 in a slight improvement on the 2.6% growth rate in 2024, according to the IMF, and in an indication that non-oil sectors are gaining traction and that domestic demand and investment are holding up.

In 2026, growth is projected to rise further to 3.3%, suggesting that the economy is picking up momentum.

There have also been positive signs in foreign direct investment (FDI). In the second quarter of 2025, FDI inflows rose by 5.4%, according to the Ministry of Finance, led by the financial and insurance services sectors.

At the same time, the kingdom’s national debt – as a consequence of its persisting fiscal deficit – now stands at around 140% of GDP and weighs heavily on public finances.

Efforts at fiscal consolidation, such as subsidy reforms and spending controls, have been gradual, reflecting the government’s cautious approach to balancing fiscal responsibility with investment. Still, the underlying pressures are significant, and the cracks in Bahrain’s fiscal sustainability will remain a key risk factor for the foreseeable future.

Non-oil expansion

Looking closer at recent growth, the economy expanded by 2.5% year-on-year in the second quarter of 2025, driven largely by a 3.5% surge in non-oil activity.

The non-oil sector is now responsible for over 80% of GDP and has become the main engine of growth, led by the finance, trade, real estate and hospitality sectors. Pro-business reforms and foreign investment incentives have supported this.

Financial services remain at the centre of Bahrain’s non-oil transition, with the country having long positioned itself as a regional banking and finance hub. In recent years, its regulatory openness and fintech-friendly environment, including in emerging spaces such as crypto, have become increasingly defining competitive advantages.

Flexible licensing, direct regulatory engagement and support from initiatives such as Bahrain FinTech Bay and the Central Bank of Bahrain's regulatory sandbox framework have all bolstered the country’s competitiveness – and the result has been an uptick in fintech, investment management and digital banking activity.

Tourism, too, has evolved into a structural contributor to national growth. Rather than attempting to compete with the scale and spectacle of Dubai or Doha, Manama has focused on cultivating a hospitality sector geared towards short-stay travel, weekend tourism within the Gulf, business events and cultural programming.

The opening of new hotels and entertainment venues, combined with the resumption of Gulf Air’s direct route to the US, has reinforced Bahrain’s strategic push to widen its global connectivity.

Manufacturing and logistics continue to play an important role, anchored by its Alba-led aluminium production and supported by Bahrain’s advantageous trade relationships, particularly its free trade agreement with the US.

While not the flashiest component of the economy, this industrial base provides resilience and employment diversity that helps counterbalance the more volatile elements of its service-sector expansion.

Real estate and regulation

The real estate and construction sector has grown in response to these economic shifts, but in a measured and demand-driven way. Unlike the rapid speculative development cycles observed elsewhere in the Gulf, Bahrain’s residential market has expanded moderately, with consistent demand coming primarily from middle-income Bahraini nationals and supported by subsidised housing and mortgage assistance programmes.

High-end residential developments exist but are not oversaturated, and the market overall has avoided the sharp imbalances seen in larger regional economies.

Large waterfront and mixed-use developments, such as Bahrain Bay and Marassi Al-Bahrain, outline the government’s focus on sustainable urban liveability and integrated community design – a key theme of the government’s 2023-26 national plan – rather than architectural statements.

Public infrastructure spending and hospitality expansion continue to sustain construction activity, though rising material and labour costs remain a concern. Commercial real estate is also stabilising after a period of oversupply, with new demand emerging from expanding financial and professional services firms.

From a regulatory perspective, the real estate sector has also been undergoing gradual liberalisation, especially in relation to foreign property ownership. While Bahrain has long allowed foreign nationals to own property in designated freehold zones, recent reforms have focused on expanding these zones as well as simplifying regulatory procedures and linking property ownership more directly to residency and long-term investment incentives.

The regulatory adjustments have also made it easier for foreign investors to own commercial office and retail space.

Taken together, these trends show a country reshaping its economic identity through deliberate adaptation rather than dramatic reinvention. Bahrain is not pursuing the hyper-scaled transformation seen in Saudi Arabia or the branding-driven global city strategy of Dubai.

Instead, it is cultivating a model grounded in regulatory agility, human capital development, manageable growth and incremental diversification.

At the same time, high debt levels and a narrowing fiscal space continue to pose risks to long-term stability and weigh on the kingdom’s economic trajectory.

Yet for now, the kingdom’s recent progress is something to be celebrated, even as its vulnerabilities are equally real.

Sustaining momentum will require continued investor confidence, tighter fiscal management and progress toward addressing longstanding social and political pressures, particularly those affecting youth employment and public trust.

The question is whether its governance, fiscal policy and social framework can continue to evolve at a pace that matches the economic transformation already under way.

MEED's December special report on Bahrain also includes:

> BANKING: Mergers loom over Bahrain’s banking system
> OIL & GAS: Bahrain remains in pursuit of hydrocarbon resources
> CONSTRUCTION: Bahrain construction faces major slowdown

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John Bambridge

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