As Bahrain’s economy continues to struggle amid instability and mismanagement, the government has reportedly sought renewed financial assistance from neighboring members of the Gulf Cooperation Council (GCC) to stave off crisis. Bloomberg revealed on 2 November 2017 that the small kingdom is currently in talks with Saudi Arabia and the United Arab Emirates (UAE) to help “replenish its foreign-exchange reserves and avert a currency devaluation.” The other GCC countries, whose economies have traditionally been fueled by petroleum and natural gas exports, fear that potential financial turmoil in Bahrain would reverberate in the region and cause broader economic decline across state borders.

Experts anticipate that the GCC, and particularly Saudi Arabia and the UAE, will assist Bahrain in refilling its foreign-exchange reserves, which amounted to $1.39 billion in August 2017 – covering just over a month of the government’s expenditures. They will also help to keep the Bahraini dinar at its fixed US dollar exchange rate. In return, however, Bahrain will most likely have to submit to further external control of its finances by its larger neighbors.

A Struggling Economy

Bahrain, compared to its GCC neighbors, has a small, largely undiversified economy. The kingdom’s Gross Domestic Product (GDP) is estimated at around $32-$34 billion for 2017, only 5% of Saudi Arabia’s GDP and 10% of United Arab Emirates’ GDP; and its revenues for 2017 are expected to amount to a total of $5.8 billion, with expenditures of over $9.2 billion. Bahrain’s public debt totals over $24 billion as of 2017 – 75% of its GDP – and is growing at a 13% annual rate due to the limitations of its budget. This past June the government decided to raise the debt ceiling to approximately $34.5 billion, or nearly “100% of GDP” according to the Arab Gulf States Institute Washington (AGISW). While it collects 15% of its revenues from taxes, Bahrain effectively remains a duty-free rentier state that relies almost entirely on the performance of the oil market, complemented by the issuing of public debt. The economy has seen some recent growth due to infrastructure spending but, as noted by the AGISW, this expansion is effectively financed by the other GCC states – a strategy that is “unsustainable” in the long-term. Government revenue remains dominated by oil rent.

As a result, all three major US rating agencies have downgraded Bahrain’s credit rating to just over “junk” status with negative outlook from an upper medium grade in 2011. The rating agencies cite the country’s dependency on oil and the lack of a comprehensive fiscal consolidation strategy, though they welcome the introduction of some fiscal reforms suck as the value-added tax announced for 2018.

The same organizations list the financial support provided previously by the other GCC countries and the moderately diversified Bahraini economy as factors preventing the complete collapse of the kingdom’s credit rating. Similarly, investors seem to count on Saudi Arabia and the UAE to aid Bahrain as they previously did in 2011 – at almost the same time in which the GCC sent its joint military Peninsula Shield Force into the kingdom to support the violent suppression of pro-democracy protests. This is one of the reasons why, with such adverse economic prospects, Bahrain still managed to successfully conduct in September 2017 its largest debt sale yet.

Exacerbating these broader economic difficulties, Bahrain is also experiencing a serious housing crisis. Although the government announced several initiatives intended to create approximately 80,000-100,000 new homes between 2012-2014, as well as the Ministry of Housing’s “Bahrain Affordable Housing public-private partnership project” to deliver social and affordable housing solutions to growing communities in places like Al Madina Al Shamaliya, little progress has yet been made. Housing remains a significant problem in Bahrain, especially for low-income families and the Shia community. In 2017, the United States Commercial Real Estate Services (CBRE) found that Bahrain still suffers from a shortage of about 75,000 houses, which translates into 2,000 slum areas in Bahrain and approximately 10,000 citizens living in poverty and/or substandard conditions.

Oil Dependency

Bahrain evolved from an economy which had pearls as its only relevant export, to an economy based on the extraction and refinement of hydrocarbons by the 1940s. Since then, Bahrain’s economy has largely relied on oil exports, with 86% of Bahrain’s budget revenues coming from oil. Unlike the rest of the GCC, however, Bahrain has very limited crude reserves and requires a very high oil price to balance its budget. The International Monetary Fund (IMF) estimates that Bahrain needs oil prices at around $99, whereas Saudi Arabia could break even with the barrel around $73, and Bahrain was listed amongst the 68 countries most affected by the plunge in oil prices by Bank of America Merrill Lynch in a June 2017 report. The parallel decline in Bahrain’s domestic oil supplies has further deepened its dependency on neighbors like Saudi Arabia, with their shared Abu Sa’fa oil field accounting for approximately 70% of the former’s overall production and “between one-half and two-thirds of its total government revenues,” according to Qatar University’s Justin Gengler. Bahrain is reportedly seeking to construct both a new pipeline and a new causeway to Saudi Arabia in order to continue extending these economic ties.

Bahrain embarked in the 1990s on a project to diversify its economy and thus reduce its dependence on oil production and refining processes, but this has had only nominal success. Other main economic activities include finance, construction, and the production and export of aluminum. Bahrain has particularly attempted to position itself as a key regional player in financial services, especially Islamic banking and more recently, as a fintech hub. More recently, and following the path taken by other GCC countries, Bahrain has tried to attract luxury tourism and big international events like the Formula 1 Bahrain Grand Prix, and has invested billions of dollars in projects like Durrat Al Bahrain or the construction of 15 new five-star hotelsbetween now and 2020.

Moreover, Bahrain is the only Gulf country which has signed a Free Trade Agreement (FTA) with the US. The accord, which entered into force in 2006, “supports Bahrain’s economic and political reforms and enhances commercial relations with an economic leader in the Arabian Gulf,” also allowing US farmers to export to the kingdom without facing any tariffs, and the establishment of financial service providers and telecommunication companies on the island.

Still, these initiatives have been unable to displace oil as the dominant source of revenue for the Bahraini government, and effective economic diversification has been further stymied by political repression and instability.

Economic Disruptions in 2011

Beginning in February 2011, mass pro-democracy demonstrations took place across Bahrain. The government, with the support of the GCC’s joint Peninsula Shield Force led by Saudi and Emirati security personnel, violently suppressed the protest movement, killing dozens in the process. As a result of the crackdown and unrest, experts estimated that Bahrain’s economy, already weak when the protests erupted, shrank by up to 2%, or approximately $2 billion. Investors withdrew capital from the country amid the violence and expatriate workers transferred larger amounts home. According to the ratings agency Standard & Poor, the country’s banking system has also been in constant decline since 2008, losing up to a quarter of its size. The reduction is in part due to the steadily increasing level of political repression imposed by the Bahraini government, which makes the country a less than appealing destination for doing business.

Bahrain’s economy was both disrupted by the protests and used as a tool against the protesters. Following the 2011 uprising, the government wielded its economic influence to punish citizens who called for reform, harassing and dismissing thousands of students, workers, and trade union representatives in retaliation. The International Trade Union Confederation (ITUC) described the government’s campaign as “an economic massacre following the deplorable human massacre,” and many affected workers remain arbitrarily dismissed and/or uncompensated, notwithstanding repeated agreements with the International Labour Organization.

Record-setting Military Expenditures

Yet, despite the country’s increasingly precarious economic situation, the Bahraini government has continued with major weapons purchases from key security partners like the United States and the United Kingdom. Most recently, on 8 September 2017, the US State Department announced potential foreign military sales (FMS) to the Government of Bahrain totaling approximately $3.8 billion – around 65% of all expected revenues for 2017, or nearly three times the annual defense budget. Between 2011 and 2015, meanwhile, the UK sold Bahrain over $59 million worth of arms, including body armor, direct view imaging equipment, training hand grenades, and small weapons.

This trend toward escalating militarization – even as the government considers cutting subsidies and expanding taxation – shows no signs of stopping. Between 16 and 18 October 2017, the kingdom hosted the first annual Bahrain International Defence Exhibition and Conference (BIDEC) featuring 180 international exhibitors from 60 countries, including 21 companies from the US. The US also sent an official delegation to the expo, with American speakers and military units participating in BIDEC events, culminating in the signing of the multi-billion-dollar F-16 sale between the Bahraini government and Lockheed Martin.

Bahrain has an extremely opaque state budget and arms expenditures are not publicly audited and reported, raising the risk of defense sector corruption as an additional drain on government finances and the economy. Transparency International, for example, has found that Bahrain’s defense and security sector is at the “highest risk category” for corruption to due to rampant nepotism, loose restrictions on intermediaries, and the near-total lack of transparency in budgeting and procurement processes.

Moreover, while these arms transfers exacerbate the potential for corruption, they also empower the authorities to crush dissent and restrict basic human rights – simultaneously increasing American and British complicity therein. All told, such reckless expenditures put further stress to Bahrain’s overstrained budget, hitting the kingdom’s most vulnerable communities the hardest.

Amplified Economic Discrimination

The Shia Muslim majority in Bahrain has long been marginalized by the ruling Sunni royal family, and it has it continues to face the brunt of the kingdom’s economic hardships. Shia lack equal opportunities in employment, with unemployment rates that can double the national average, and specifically experience discrimination in access to government positions. Shia communities typically face obstacles to accessing public services like healthcare and education as well. Students report that scholarships are now distributed based on interviews that include questions about religious and political affiliations, and the government fails to provide sufficient opportunities for Shia religious education, with only one Shia-specific school to serve the country’s majority population. Likewise, since 2012, the government has intensified a campaign of retaliatory denaturalization targeting Shia civil society actors that has directly resulted in mass economic disenfranchisement, as citizenship is required to open a bank account, access services, and carry out basic activities like work or travel.

Additionally, the Shia community continues to face broad-based discrimination in housing programs. Access to state-subsidized housing remains the only option for low-income families in the kingdom – which are disproportionately Shia – but it is often addressed along sectarian lines, with the government privileging housing development projects in mixed and majority Sunni districts over those with a majority Shia population. The consequences of discriminatory housing policies are exacerbated by the government’s related practice of providing expedited housing benefits and other social services to foreign or naturalized security personnel, typically recruited from foreign Sunni communities, while many Bahraini Shia communities remain unassisted. Some Shia citizens report waiting as long as 20 years to receive government housing – ten or fifteen years longer than the average waiting time for foreign-born Sunnis employed in the security services. This disparity has underscored the general sentiment among Bahraini Shia that the government gives priority to Sunni communities when distributing services.

As Bahrain’s economy deteriorates and the government prioritizes massive defense expenditures over improving the financial situation and funding equal provision of social welfare projects, the Shia community will continue to suffer disproportionately from the consequences.

Conclusion

Unlike many other rentier states, which effectively work to buy their citizens loyalty through public employment, tax-free economies and vast subsidies, Bahrain has chosen to implement a system in which a large share of state expenditure is assigned to a core support base oriented around the Sunni royal family’s longstanding patronage network. Therefore, the Government of Bahrain has increasingly created a crony capitalist environment, ripe for waste and corruption, which is more conducive to repression than broad-based, egalitarian responses to legitimate economic grievances – whether they originate among average Shia or Sunni communities. Much like the Peninsula Shield Force, which remains stationed in Bahrain, a larger economic intervention from the GCC will not address the root causes of the kingdoms instability: draconian restrictions on basic human rights, and inequality. Ironically, in failing to do so, it will only shore up the same system of corruption and mismanagement that drives unrest and undermines sustainable economic development in Bahrain.