Economic Trends

Capitalizing on Bahrain's long history as a trading nation, the Government of Bahrain has worked hard to build the transportation and communication infrastructure necessary to attract and foster international business. Diversifying its economy away from decades of reliance on oil, the government has built a financial center with a regulatory infrastructure of high international standards. To overcome its small size, Bahrain has further sought to position itself as a regional services hub. Its early successes in the financial, telecommunications, and transportation services have more recently met with stiff competition from Dubai and elsewhere. In its quest to increase foreign investment, the Government of Bahrain targeted five "economic clusters" for further expansion: tourism, information technology, telecommunication, health care, business and financial services.

Oil revenues generate more than half of government revenues, and cheap gas fuels aluminum, iron, and petrochemical production facilities. The Bahraini Government hopes that exploration in newly opened offshore concessions will yield commercially important finds. Islamic banking is growing steadily amidst a healthy financial sector. The Government seeks to establish a new Islamic financial market in Bahrain.

In addition to boosting private investment in services, the government is forging ahead with a number of industrial and infrastructure development projects. Economic and social imperatives (services provision, such as electricity and water, job creation, as well as export expansion), coupled with two to three years of healthy oil revenues, are driving the movement. Major projects such as the modernization of the BAPCO (Bahrain Petroleum Company) refinery, the expansion of the ALBA (Aluminum Bahrain) smelter, the Hidd Phase II power project, and the new Khalifa port are underway. Other projects in power generation, water desalination, waste treatment, hospital construction and supply, road construction, and large housing complex design and construction are all in the offing. On top of these government initiatives, large-scale private construction projects are multiplying -- including large tourist resort initiatives. Tourism is fueling new retail centers, with increase of visitors coming to Bahrain.

Principal Growth Sectors

Financial Services:
For the past twenty years, Bahrain has served as the principal financial center for the Gulf region and much of the Arab world. Bahrain's financial institutions attract funds from the Gulf and beyond. Financial services now account for upwards of 20 percent of Bahrain's Gross National Product. As of March 2002 Bahrain's financial institutions included 22 full commercial banks (FCBs), two specialized banks, 48 offshore banking units (OBUs), 34 investment banks (IBs), 34 representative offices, 11 investment advisory and other financial services, 17 money changers and 4 money brokers.

Bahrain is seeking to exploit the rapidly growing market for Islamic finance to augment its substantial traditional banking and finance operations. The Islamic banking system conducts normal banking operations according to the interpretation of the Islamic Shari'a law's primary principle of avoidance of interest. The Bahrain Monetary agency is concentrating its efforts to provide Islamic banking in Bahrain with the most effective rules, regulations, and accounting practices that suit the sector. The global Islamic banking industry has been estimated to be worth USD 100 billion, and is growing by 10-15 percent a year and demand for new instruments is rising. Assets of Bahrain based Islamic banks reached USD 2.2 billion as of December 2001. Bahrain is already one of the main global Islamic banking centers, currently hosting 26 Islamic banks, five insurance companies, and eight mutual funds, the largest concentration in the Middle East. Additional institutions are in the planning phase, including a number focusing on investment as opposed to commercial banking. These new institutions and investment funds are seeking to attract capital, particularly from neighboring Saudi Arabia, which remains sensitive to the role of interest in banking operations.

Important new steps have been taken to accelerate the growth of the Bahrain Stock Exchange (BSE). These steps include a new draft law that would require publicly listed companies to declare their financial performance and any management changes. Another step is the introduction of a new electronics clearance and settlement system. The BSE is developing into a regional capital market and already crosslists some stocks with Oman, Kuwait, and Sudan. BSE operations became fully automated in 1999, enhancing regional links and other services. GCC nationals are now permitted 100 percent ownership of listed companies on the exchange. Non-GCC foreign nationals may own up to 49 percent, but the new law allows the Minister of Commerce to increase this percentage according to the general interest of the national economy. In November 2001, the Minister of Commerce announced that the Government of Bahrain would offer 100 percent ownership to foreign nationals within three years. As of June 2001, 42 companies were listed in the country's stock exchange in the form of equities, bonds, mutual funds, securities, and financial instruments with a market capitalization of roughly USD 6.2 billion.

The tourism industry is one of Bahrain's fastest growing sectors. Accounting for over 10 percent of GDP, the Government of Bahrain hopes to see it grow to 20 percent with aggressive public sector promotion and private sector investment. With projected multi-billion dollar investments, the government is counting on the creation of at least 15,000 jobs. To boost the sector, the government seeks to upgrade and expand existing tourist facilities (such as a wildlife park, museums, historic sites, western-style shopping malls, cinemas, restaurant franchises, and golf courses), support planned large-scale resort development by private investors, and attract additional investors with ecological ("green") tourism opportunities. Four distinct markets are targeted: specialized exhibitions and conferences; tourism by nationals of GCC countries, especially from neighboring Saudi Arabia and Kuwait; non-GCC visitors; and business travelers.

In 200I approximately 4.4 million tourists and passengers visited Bahrain in comparison to 3.3 million in 2000. 94 percent of these tourists arrive by the King Fahad Causeway linking Bahrain and Saudi Arabia. The number of visitors for the year 2002 may increase further due to the two-month summer promotion expected to attract at least 320,000 tourists. In June 2002, the Minister of Information announced that his Ministry was studying the possibility of creating an independent tourism bureau to oversee tourist sites and projects. Government oversight of the tourism industry currently rests with the Assistant Undersecretary for Tourism within the Ministry of Information.

The Bahraini government is streamlining its immigration system to facilitate the rising flow of visitors by issuing multiple entry visas, and granting Arab and foreign businessmen residence visas through personal sponsorship. Bahrain opened its doors to Gulf tourists by allowing them to travel to and from Bahrain using their local identity cards as of July 1, 2000.

Bahrain launched its aluminum industry nearly 30 years ago to take advantage of its relatively low energy costs and to diversify the economy. Over the years, the sector has expanded from basic smelting to a host of downstream operations, including a rolling mill, an extrusion plant, a cable plant, factories producing aluminum powder and wire mesh screening, and two automobile wheel factories. With a current production capacity of over 500,000 metric tons per year, the smelter operation, Aluminum Bahrain (ALBA) is one of the biggest aluminum producers in the Middle East and one of the largest single-site aluminum smelters in the world. The Bahraini government holds a 77 percent stake in ALBA, the public investment fund of Saudi Arabia owns 20 percent and Germany's Breton Investments holds 3 percent.

ALBA aims to expand its annual production to 750,000 tons – an increase of 50 percent. The proposed expansion will make ALBA the second largest smelter in the world after one in Russia.

With 40 percent of Bahrain's aluminum output being reserved for local industries, the Ministry of Oil and Industry is offering investment opportunities worth USD 300 million to international investors. The projects range from a USD68 million can-manufacturing unit to a USD 460,000 facility to produce venetian blinds. Individual downstream aluminum industries are also seeking joint venture partners to expand their range of products and markets.