In the Middle East, many oil-dependent nations have broadened their economic base beyond the oil sector. The discovery of oil in 1928, the formation of the Bahrain Petroleum Company in 1929, and the start of oil production in 1932 all played important roles in shaping Bahrain’s present state. Traditionally reliant on oil, Bahrain has been actively working to diversify its economy. The oil sector accounts for approximately 18% of Bahrain’s GDP, down substantially from 42% in 2002. 

“Bahrain’s economy grew by 2.4% in 2023 and 3.3% in Q1 2024. Although diversification efforts are being implemented, hydrocarbon revenues still account for more than 60% of total budget revenues, which exposes the economy to the volatility of energy prices,” says Dr. Burcu Kapar, Associate Professor of Finance and Economics at the School of Business of the University of Wollongong in Dubai.

Bahrain’s economy is gradually recovering after the COVID-19 pandemic, owing to strong oil prices, government reforms, and diversification attempts. 

“Limited spending growth under the Fiscal Balance Program and higher oil and non-oil revenues are expected to result in a lower fiscal deficit of 3.2% in 2024, down from more than 5% in 2023. Contained spending, subsidy cuts and freezes in public wages and increase in revenues such as rise in the VAT rate to 10% are the main contributors to the decrease in fiscal deficit,” adds Dr. Kapar.

KEY PROJECTS

Bahrain has actively pursued diversification efforts as part of its Economic Vision 2030 strategy. Key non-oil industries are financial services, tourism and real estate, manufacturing, especially aluminum production, and tech.

Dr. Kapar said the transition has revolved around a few important key projects. The Bahrain Petroleum Company (BAPCO) has enhanced the country’s oil refinery by expanding its capacity and producing cleaner energy. In November 2023, Bahrain introduced its national energy strategy, which targets a 30% reduction in emissions by 2035 and aims for net-zero emissions by 2060, all while ensuring reliable and affordable energy access. 

The King Hamad Causeway investment boosts trade and travel between Bahrain and Saudi Arabia. Additionally, Aluminium Bahrain’s major 2019 expansion has significantly increased its production capacity, positioning Bahrain as a leading player in the aluminum industry. 

“Furthermore, the new National Labor Market Plan seeks to boost Bahrainis’ employment in the private sector and enhance women’s participation in the workforce,” adds Dr. Kapar.

Several other projects are underway that will impact Bahrain’s economic landscape, says Sajin Hentry, CEO and Founder of Syskode Technologies. “The Bahrain International Airport Expansion Project, BAPCO’s refinery modernization, and various renewable energy initiatives reflect the country’s move towards sustainable energy solutions. On the technology front, there’s significant focus on smart city infrastructure and digital transformation.”

Given Bahrain’s small size, Dr. Saqar Al Khalifa, senior advisor at the Ministry of Youth and Sports, formerly worked at the Bahrain Economic Development Board, identifies tourism and travel as two key focus industries, noting that “they are among the fastest-growing in GDP and job creation.” 

REFINED FISCAL POLICIES

“While targeting key industries for Bahrain’s economic transformation is clear, two urgent projects need priority. First, refined fiscal policies must be implemented to manage debt-to-GDP ratios. Second, improving infrastructure, including new bridges and highways, is crucial for economic growth,” adds Dr. Al Khalifa. 

Any thriving economy needs workforce, labor, and investments. “If the growth in various industries boost exports, Bahrain would see a higher demand for workers and capital. This would likely result in more workers moving to Bahrain and a shift of Bahraini investments from abroad back to the country,” says Dr. Robert Allen, Professor of Economic History at New York University, Abu Dhabi. According to Dr. Allen, the rise in economic activity in Bahrain will lead to higher demand for land, housing, and commercial buildings, which are vital for any growing economy. 

To further attract foreign business, Bahrain has worked to enhance the local business environment and streamline foreign investment processes. According to the World Bank’s Doing Business 2020 report, Bahrain was ranked among the top 10 global improvers in business climate.

As part of its Economic Vision 2030, Bahrain has focused on investing in ICT, fintech, and e-commerce industries. To become a leader in cloud technology, Bahrain was one of the first countries in the region to adopt a cloud-first policy in 2017, says Dr. Kapar. 

Bahrain Fintech Bay is one of the largest fintech hubs in the Middle East. The regulatory sandbox established by the Central Bank of Bahrain enables fintech companies to test innovative products in a controlled environment. The National Cybersecurity Strategy was developed to safeguard critical infrastructure and promote international collaboration in tackling cyber threats. 

The Fintech Bay has been a game changer for Bahrain’s financial industry, says Hentry. “Fintech Bay is creating an ecosystem where traditional finance meets cutting-edge technology. By attracting regional and global fintech companies, this initiative is helping reshape Bahrain’s role as a regional financial hub. The innovation sparked here has encouraged collaboration between startups and established institutions, leading to a more dynamic and future-proof financial sector.”