Business | Analysis

Mixed performance for Bahrain’s economy

The economy is not suffering from an acute inflationary problem

  • By Dr Jasim Ali, Special to Gulf News
  • Published: 12:27 July 20, 2013
  • Gulf News

Evidence shows that Bahrain’s economy is posting mixed performance.

Positive matters include absence of inflationary pressures and rise in inflows of foreign investments. However, negative concerns entail steady rise of public debt and budget deficit plus a sizable unemployment challenge.

On a positive note, the economy is not suffering from an acute inflationary problem. It is believed that inflation rate hovers around 3 per cent, certainly a reasonable rate.

Nevertheless, fears of rise in prices thought not necessarily reminiscent to those prevailing in 2007 cannot be ruled out in the presence of steady public sector spending. Back then, the economy experienced imported inflation amidst decline in value of US dollar together with rise in import prices.

In addition, reflecting confidence of international investors in the local economy, Bahrain is showing rise in the value of enticed foreign direct investments (FDI). According to the World Investment Report 2013 released by the World Conference on Trade and Development (Unctad), inflows of FDI grew from $156 million (Dh572.5 million) in 2010 to 781 million in 2011 and still $891 million in 2012.

Issues of concern

Certainly, FDI investments are characterised of remaining in a country for being in industrial undertakings. Bahrain is noted for attracting investments in areas of setting up factories thanks to presence of qualified local human resources. Turning to issues of concern, officials must deal with a serious budgetary deficit in 2013, projected at $2.2 billion. This is a sizable amount by virtue of accounting for around 9 per cent of the country’s gross domestic product (GDP).

Clearly, this rate contradicts one condition of the Gulf Monetary Union (GMU) project, which into effect in 2010. The GMU stipulates that budget deficit should not exceed 3 per cent of the GDP.

It is suggested the breakeven point for avoiding possible shortage in fiscal year 2013 stands at $119 per barrel. More likely than otherwise, this is not attainable in current conditions in international oil markets. In fact, the new budget was prepared with an assumed oil price of $90 per barrel. Already, this is not a conservative figure by regional standards, as fellow Gulf Cooperation Council (GCC) state of Qatar prepared its budget for fiscal year 2013-14 at $65 per barrel.

To be sure, oil is significant by compromising more than three quarters of both treasury income and exports and one third of the GDP. This very fact speaks of the need of diversifying the economy away from the petroleum sector.

IMF warning

Another challenge relates to steady rise in public debt from $7.7 billion in 2010 to $9.5 billion in 2011 and yet to $11 billion in 2012 and possibly $13.2 by year-end 2013.

Worryingly, the debt could get close to around half of the GDP by end of 2013. For its part, the IMF has warned at this growth rate, the debt debacle could become not sustainable by 2018.

Still, another challenge concerns employment of locals. By one account, the jobless rate stands at 8 per cent amongst locals. However, the unemployment problem could only get worse in the years ahead on the back of some hard statistics such that of population growth of 3 per cent.

Amongst others, more than 40 per cent of locals are below 20 years of age and certainly many would be entering the job market in the years ahead looking for suitable employment opportunities.

Happily, Bahrain stands out amongst GCC countries for having locals prepared to assume jobs almost in all areas. It is normal to find nationals working in filling stations in Bahrain, though this is not necessarily true in numerous GCC states.

 

The writer is a member of parliament in Bahrain

Gulf News
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