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Bahrain - Economy

Unlike its neighbors, Bahrain is not blessed with abundant oil and gas, and so has diversified its economy, establishing itself as the world's leading center for Islamic banking and finance. This sector generates just over one quarter of domestic GDP. Bahrain also boasts a strong regional tourism sector that accounts for a significant portion of GDP. The country produces approximately 35,000 barrels/day of oil, which is all refined locally, and 1.2 billion standard cubic feet/day of gas, which is all consumed domestically. In order to maintain economic growth, Bahrain must find additional sources of energy. The government has sought cheap gas from both Saudi Arabia and Qatar to no avail, and is currently engaged in slow-rolling talks with Iran. Contacts have asserted that discussions with Iran are aimed at getting the Saudis and Qataris off the dime.

Bahrain has also expressed long-term interest in nuclear power, and in March, 2008 signed a memorandum of understanding with the U.S. on civilian nuclear cooperation. It has joined the IAEA and has deposited its Safeguards Agreement with that organization. The Government of Bahrain has formed an inter-ministerial committee to study the use of nuclear energy for power generation, and although the GOB recognizes that they do not have the resources to develop or operate a nuclear reactor on their own, they need the power and are interested in moving forward, ideally with an American commercial partner.

The first Gulf state to discover oil, Bahrain's reserves are expected to run out in 10-15 years. Accordingly, Bahrain has worked to diversify its economy over the past decade and has stabilized its oil production at about 40,000 barrels per day (b/d). Revenues from oil and natural gas currently account for approximately 10% of GDP yet currently provide about 75% of government income. The state-owned Bahrain Petroleum Company refinery built in 1935, the first in the Gulf, has a capacity of about 260,000 b/d. Saudi Arabia provides most of the crude for refinery operation via pipeline. Through an agreement with Saudi Arabia, Bahrain also receives half of the net output and revenues from Saudi Arabia's Abu Saafa offshore oilfield.

The Bahrain National Gas Company operates a gas liquefaction plant that utilizes gas piped directly from Bahrain's oilfields. Gas reserves should last about 50 years at present rates of consumption. However, rising domestic demand spurred by a recent development boom has highlighted the need to increase gas supplies. The Gulf Petrochemical Industries Company is a joint venture of the petrochemical industries of Kuwait, the Saudi Basic Industries Corporation, and the Government of Bahrain. The plant, completed in 1985, produces ammonia and methanol for export. Growth in the hydrocarbons sector will be contingent upon new discoveries--Bahrain awarded exploration rights to Malaysia's Petronas and the U.S.'s Chevron Texaco after the resolution of Bahrain's long-standing territorial dispute with Qatar, but no meaningful finds have been announced to date. Bahrain's other industries include the majority state-owned Aluminum Bahrain (Alba)--which operates the largest aluminum smelter in the world outside Eastern Europe with an annual production of about 843,000 metric tons (mt) in 2005 after the completion of an expansion program--and related factories, such as the Aluminum Extrusion Company and the Gulf Aluminum Rolling Mill. Other plants include the Arab Iron and Steel Company's iron ore pelletizing plant (4 million tons annually) and a shipbuilding and repair yard.

Bahrain's development as a major financial center has been the most widely heralded aspect of its diversification effort. Bahrain is a regional financial and business center; international financial institutions operate in Bahrain, both offshore and onshore, without impediments, and the financial sector is currently the largest contributor to GDP at 30%. Over 370 offshore banking units and representative offices are located in Bahrain, as well as 65 American firms. Bahrain has also made a concerted effort to become the leading Islamic finance center in the Arab world, standardizing regulations of the Islamic banking industry. It currently has 32 Islamic commercial, investment and leasing banks as well as Islamic insurance (takaful) companies--the largest concentration of Islamic financial institutions in the Middle East.

Bahrain is working to develop other service industries such as information technology, healthcare and education. The government has used its oil revenues to build an advanced infrastructure in transportation and telecommunications. The state monopoly--Batelco--was broken in April 2003 following the establishment of the Telecommunications Regulatory Authority (TRA). Since that time, the TRA has granted some 63 licenses in the interest of promoting healthy industry competition.

Bahrain plans to expand its airport, one of the busiest in the Gulf. More than 4.8 million passengers transited Bahrain International Airport in 2005. A modern, busy port offers direct and frequent cargo shipping connections to the U.S., Europe, and the Far East. To boost its competitiveness as a regional center, Bahrain is building a new port and has privatized port operations.

The government of Bahrain moved toward privatizing the production of electricity and water by licensing Al Ezzal to construct an independent power plant at a cost of $500 million. The company commenced operations in May 2006. In January 2006, the government announced the sale of the Al Hidd Power Plant for $738 million to Hidd Power Company, a consortium of British, Japanese, and Belgian companies.

Regional tourism is also a significant source of income. The government continues to favor large-scale tourism projects. It opened the only Formula One race track in the Middle East in 2004, and has awarded tenders for several tourist complexes. New hotel and spa projects are progressing within the context of broader real estate development, much of which is geared toward attracting increased tourism.

Government revenues continue to be largely dependent on the oil industry. Bahrain has received significant budgetary support and project grants from Saudi Arabia, Kuwait, and the United Arab Emirates. Buoyed by rising oil revenues, the 2007-2008 budget approved by the parliament in July 2006 provided for sizable increases in urban development, education, and social spending. Ministry of Defense spending was expected to account for 13% of current spending in 2007 and 2008 based on the new budget. The Ministry of Education and Ministry of the Interior also received substantial budget allocations. Significant capital outlays were allocated to improving housing and infrastructure in line with government efforts to raise the standard of living of the Shi'a population and to attract foreign investment.

The government has also started to extend protections to workers. Private sector employees won permission to form unions in late 2002; King Hamad has given his tentative approval for the formation of unions in government departments. In June 2006, Bahrain passed laws legalizing the existence of multiple trade federations and codifying several protections for workers engaged in union activity. As part of the government's labor reform program, it has formed a Labor Market Regulatory Authority and established a fund to support the training of Bahraini workers.

In August 2006, the U.S.-Bahrain Free Trade Agreement entered into force -- the culmination of a multiyear effort to open and reform Bahrain's economy. In 2009, the Heritage Foundation and Wall Street Journal ranked Bahrain as the freest economy in the Middle East, and the 16th freest in the world. Since the FTA went into effect, total bilateral trade has increased more than 25%. Bahrain recently rolled out its "Economic Vision 2030" plan, a statement of the Government's aspirations for Bahrain's economy, government and society. The plan establishes broad goals of economic diversification and the construction of a strong middle-class as the basis for Bahrain's future.

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