Bahrain Economy

Bahrain Economy

Subchapters:

  • Basic data
  • Public finances and the state budget
  • Banking system
  • Tax system

Basic data

Bahrain’s economy grew by 2.2% in 2021 and continued favorable oil prices point to further growth in the coming years and to offset the shortfall caused by the COVID-19 pandemic and the oil price crisis in 2020. Bahrain’s debt is a major concern, but in 2021 estimates that public debt has been reduced to 117% of GDP compared to 133% in 2020. According to the World Bank (WB), the level of GDP in current prices reached USD 3 billion in 2020. During the world crisis in 2020, the state budget deficit rose to the level of 17% of GDP. In 2020, the country had negative inflation of -2.1% and unemployment of 4.1%. However, these trends were reversed in 2021. Check ebizdir for economical facts of Bahrain.

The main branches of the Bahraini economy are oil processing and refining, aluminum smelting, iron pelletization, fertilizer production, Islamic and off-shore banking, insurance, ship repair and tourism. Bahrain’s main imports are automobiles ($848 million), iron ore ($805 million), jewelry ($724 million), gold ($445 million), and gas turbines ($384 million). On the other hand, it mainly exports refined oil ($5.51 billion), crude aluminum ($1.85 billion), crude oil ($675 million), and iron ore ($498 million).

By sector, the financial services sector (17.9%), oil industry (17.4%), manufacturing industry (13.9%), government services (13%), construction (7.5%) and transport and communication (6.8%).

Pointer 2019 2020 2021 2022 2023
GDP growth (%) 1.8 -5.3 2.2 4.1 1.6
GDP/population (USD/PPP) 50,620.00 49,310.00 51,890.00 53,450.00 54,230.0
Inflation (%) 1 -2.1 1 2.5 2.1
Unemployment (%) 1.2 4.1 3.2 ON ON
Export of goods (billion USD) 18.3 12.9 20 22.1 21.6
Import of goods (billion USD) 18.1 14.3 17.2 19.1 19.5
Trade Balance (Billion USD) 0.9 -0.1 3.4 3.7 2.8
Industrial production (% change) 1.6 -5.7 0.5 ON ON
Population (millions) 1.5 1.5 1.5 1.5 1.6
Competitiveness 45 45 50 ON ON
OECD export risk 5/7 5/7 5/7 ON ON

Source: EIU, OECD, IMD

Public finance and state budget

Public finance 2021
State budget balance (% of GDP) -3.7
Public debt (% of GDP) 120.6
Current account balance (billion USD) -1.9
Taxes 2022
AFTER 0% (46% for the oil sector)
F.O 0%
VAT 10%

Bahrain’s Ministry of Finance expects revenues of BHD 2.46 billion and expenditures of BHD 3.57 billion. As a result, the state budget for 2022 will show a deficit of BHD billion (USD billion). The state budget is based on the assumption that the price of oil will reach 60 USD/barrel. Prevailing oil prices coupled with the economic recovery program give hope for a full post-pandemic recovery. The Ministry of Finance expects the economy to grow by 3-3.3% in real terms in 2022.

The country’s fiscal situation is not ideal, but it adheres to a fiscal balance program with a plan to balance the budget, currently until 2024. Bahrain has accumulated a large amount of debt since the oil price shock of 2014-2015. In 2018, it received financial assistance in the amount of USD 10 billion from the richer countries in the GCC. The country therefore embarked on a program of economic reforms to help it achieve fiscal balance over the years. Fitch estimates public debt to fall to 117% of GDP in 2021 from 133% in 2020.

The Central Bank of Bahrain reports that the current account of the balance of payments ended in a surplus of 6.8% of GDP in 2021 (in 2020 it was in a deficit of 9.3%) ending in a deficit of BHD billion in 2020. At the same time, the foreign trade balance reached a surplus of BHD billion).

Banking system

Banking is one of the three pillars of Bahrain’s economy (after oil and tourism). The financial sector accounts for more than 27% of the country’s GDP and is also the largest employer in Bahrain. Bahrain is considered the leading financial center in the region (which, however, is boldly competing with the UAE and Dubai respectively). Bahrain’s banking system relies on both conventional and Islamic banks. Islamic banking relies on several institutions that are based in Bahrain: Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), International Islamic Finance Market (IIFM), General Council for Islamic Banking and Financial Institutions (CIBAFI), Islamic International Rating Agency ( IIRA). By the end of 2021, there were a total of 376 financial institutions in the country – 31 retail banks, 62 wholesale banks, 17 branches of foreign banks, 8 other banks, 34 insurance companies, 53 investment trading companies and 86 holders of special licenses. Before the end of 2021, banking sector assets totaled more than $212 billion, more than five times Bahrain’s annual GDP.

The main regulator of the country’s financial market is the Central Bank of Bahrain (CBB). Legal, regulatory and accounting systems in the financial sector (onshore and offshore) are transparent and in line with international standards. The CBB is also the country’s capital market regulator. In 2019, the market capitalization of the Bahrain Stock Exchange (BHB) was $26.88 billion. BHB’s listed securities include 44 stocks, 14 bonds (conventional and Islamic), 34 treasury bills and 10 funds. Trading is done through 12 licensed members and daily trading is done through the Automated Trading System.

Article 40 of the Central Bank of Bahrain and Financial Institutions Act 2006 stipulates that regulated services can only be carried out with a license from the Central Bank. This also applies to persons who wish to operate as an insurer or actuary, etc. CBB offers a “one-off” licensing service where applicants can also obtain their business registration from the Ministry of Industry, Trade and Tourism through CBB.

The largest banks in the country are: Ahli United Bank, Arab Banking Corporation, Albaraka Bank Group, Gulf International Bank and Bank of Bahrain Kuwait.

Interest rates were cut from 2.25% to 1% in 2020, but in March 2022 the key weekly deposit rate was increased from 1.00% to 1.25%.

Tax system

The tax system is clear and long-term stable. Looking ahead, it is possible to expect changes (increase in rates or expansion of the tax base).

The income of POs doing business in Bahrain is not taxed, except for companies in the oil industry, which are taxed at a rate of 46%. The state does not provide tax breaks. Capital gains, FO income, salary, inheritance, or real estate are not taxed. A flat-rate property transfer tax is payable (2% or 1.7% if payment is made within 60 days of the transfer). Excise duty is applied to tobacco and energy drinks – 100% and to soft drinks 50%. Hotels and first class restaurants pay 10% of gross turnover, this tax is usually passed on to the guest when paying their bill. A local tax of 10% is paid by everyone who rents real estate (for business or residence) to registered foreigners. Social security contributions are derived from the employee’s monthly income, 12% of the income is paid by the employer on behalf of the Bahraini employee, and another 7% is paid by the employee himself. Social insurance covers pension, death and job loss. For employed foreigners, the employer pays 3% of his salary to social security. security and employee 1% and covers employee injuries.

The basic VAT rate was increased from 5% to 10% from 2022, reduced to 0%. The reduced rate applies to e.g. exports, health services, medicines, construction, school supplies and financial services. VAT registration is mandatory for turnover from BHD 37.5 thousand (approx. CZK 2 million) and voluntary for turnover from BHD 18.75 thousand (approx. CZK 1 million). An importer providing goods to a non-VAT registered Bahraini client must register within 30 days of the first supply of goods, and there is no minimum value of the goods supplied (so each import may require VAT registration). Persons (FO, PO) with a turnover of over 3 million BHD must submit a monthly VAT report, with a turnover of over 0.1 million BHD quarterly and other residents of Bahrain then annually.

Tax returns are provided to the financial administration through an online portal. Payments via the national portal, by card, bank transfer, etc.

Bahrain Economy