Bahrain’s latest economic reforms aim to balance the books as Bahrain remains hostage to a widening deficit and a rising public debt/GDP ratio.
Initially, Manama had a fiscal balance program which sought to achieve a zero-deficit target by 2022.
However, this was delayed until 2024 after the economic crisis was prolonged by COVID-19.
This sustained reality led Fitch Ratings to revise its Outlook on Bahrain to ‘Negative‘ in February this year.
In fact, the rating agency projects Bahrain’s government debt to rise from 130% in 2024 to 136% of GDP in 2026.
International Coordination: Bahrain Builds on IMF Macroeconomic Policy
Therefore, it was no surprise that soon after this Outlook revision, a 12-point economic reform plan, that builds on several previous initiatives including the economic recovery plan, was shared with local newspapers.
The plan appeared to consider the International Monetary Fund Article IV consultation with Bahrain, which last concluded in November 2024.
The IMF had recommended “increasing nonhydrocarbon revenues” and “reforming energy subsidies,” amongst other policies.
The 12-point plan was made public in Ramadan, a time when people congregate in the “majlis”, gatherings which facilitate discussions during the holy month.
his likely led many to vent their concerns in a civil manner, especially with their MP representatives, but there remained a perception that such a plan would raise public discontent and emerge to a security issue.
Balancing Structural Reform with Politics
In theory, the state would have to match tax rises with political concessions. Inevitably, the state would remind its citizens that Bahrain has the highest level of political freedom, at least institutionally, in the Gulf.
Bahrain has the freest functioning fully elected parliamentary chamber with repeated successful elections since the King’s of Bahrain accession near the turn of the millennium.
However, this usually falls on deaf ears given the country’s political dynamics.
Contents of the 12-Point Plan
The original plan was ambitious and included the following measures:
- Optimised spending
- Adjusting commercial natural gas prices
- Liberalising fuel, electricity, and water prices towards market-based pricing
- Introducing carbon emission fees
- Imposing taxes on local corporate profits
- Increasing the value-added tax (VAT)
- Expanding selective (sin) taxes on unhealthy foods
- Reviewing and adjusting current tax brackets for:
- Energy drinks
- Tobacco products
- Soft drinks
- Introducing infrastructure sustainability fees
- Implementing mandatory health insurance and a fee for expatriates
- Introducing wastewater fees (excluding citizens’ primary residences)
- Rolling out revenue-generating initiatives
- Reducing debt servicing costs
However, since its release, there have been several announcements to counter public discontent because of consultations between the executive and legislative authorities.
The 12-point plan became an eight-point deal.
12-Point Plan Becomes a Eight-Point Deal
Firstly, an agreement was reached to reverse back on an increase in VAT.
Spending optimisation was adjusted; a 5% expenditure cut, across ministries and government bodies, was set.
Nonetheless, several points in the plan appeared to preserve the discussions, including the plan for a corporate tax, carbon emission fees, and increasing selective revenues from energy drinks, soft drinks, sweetened beverages, and tobacco products.
An additional compromise was also reached, with retaining the cost-of-living allowance for pensioners introduced in the 2023-2024 budget, with an additional increase in the 2025-2026 cycle.
Royal Directive: Public Appeasement
Perhaps most constructive for public appeasement were two initiatives that were announced on top of the deal: a royal directive was made to expedite housing projects by providing 50,000 new housing units; and a new direct cash support Programme for people of low income was being discussed.
The direct cash support initiative, known as the “Citizen Account [Muwatin]”, was advertised as being a result of policy benchmarks with countries such as Saudi Arabia.
These policies would have made Bahrain perhaps the economy with the most progressive policies in the Gulf.
This should come as no surprise as Bahrain is also arguably the most challenged economy in the Gulf at present, receiving financing from other Gulf partners including the UAE and Saudi Arabia.
Hard times require harder measures, and this is the situation Bahrain finds itself in due to a series of crises, and structural challenges including the fact it has a small geography and population.
Bahraini National Identity: Rentier State Thinking Lives On
However, many Bahrainis compare themselves to fellow Gulf citizens, and perhaps still believe in a rentier model of receiving resource rents in exchange for political acquiescence. These policies would mean Bahrainis would need to adopt a change in lifestyle.
This is why Bahrain was right to be nervous – will expectations change too?
Malicious actors abroad may seek to capitalise on any discontent to further an agenda of destabilising the country: and nothing is more contentious than a reduction in the size of people’s pockets.
Economic Reforms Shelved For Now
Despite the urgency for economic reform, the reforms were shelved.
The final government budget reached parliament on 25 March, yet it appeared to be emptied of most of these plans.
In fact, the government kept the costly subsidies, both the pensioners’ cost-of-living allowance, and the Citizen Account [Muwatin] in the budget whilst removing most of the revenue-generating initiatives.
The typical rentier-state spending spree continued whilst taxation, the consumer burden, got shelved.
Therefore, from a plan that appeared to be aiming for a surplus, it emerged to legislation that gave in to an inevitable deficit. As one would expect, this was immediately passed through parliament.
Delaying the Inevitable: The Implications
For many this will come as a relief, but for others it will be disappointing. The planned reforms were a sign of hope for the economy. The government was perhaps shocked by the reaction to the plans, and as mentioned above, Ramadan was the perfect time to gauge public sentiment.
Just as people would advise swiftly removing a sticky plaster from one’s injury to shorten the length of the pain, the Kingdom would have been right to speedily implement its policies and show people that this pain will garner fast results and long-term relief.
The scale of these plans required efficient implementation.
It seems the course of action the government has favoured is to delay the inevitable, until such time where people may be more receptive to economic reform.
However, incremental changes only risks prolonging the economic challenges and pushing back tangible benefits.
Still, eventually, a royal decree may pass some of these reforms, should the government regret not standing its ground with parliament.
A royal decree would garner less negative sentiment as people are more likely to rally behind the monarch’s directive rather than the government and parliament.
Surely, time will tell, but these dilemmas are far from over for Bahrain.
Op-Ed: The views of this author are independent of The Daily Euro Times and are not a representation of The Daily Euro Times as a publication.
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