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Fancy a ride on Bahrain's economic merry-go-round?

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Given the country’s regressive welfare system and the absence of a progressive income tax regime, households on the top of the income ladder who can afford to consume more end up benefiting disproportionately.

Hasan Tariq Al Hasan
13 June 2012

In a recent public statement to the press, Bahrain’s Economic Development Board (EDB) sounded the alarm: “EDB Stresses on Need to Diversify Away From Oil” . Although the need to diversify away from oil is news to no one, the matter has been given renewed urgency by a study carried out by the International Monetary Fund that placed Bahrain’s break-even oil price, i.e. the oil price at which the country can balance its annual budget, at $114 up from $80 in the 2008, an increase owed mainly to growing recurrent expenditure.

The EDB has played a diminished role in shaping public policy in Bahrain since protests erupted in February 2011. Its statement can be seen as more of a message to the government itself than anything else. Its most recent Economic Quarterly review (Q4 2011 – Q1 2012) argues that due to the kingdom’s heavy reliance on oil revenues and a growing non-oil deficit, the country’s ‘budget was exposed’ when oil prices fell sharply in late 2008, catapulting government debt from a mere 6% of nominal GDP at the end of 2008 to 35% by the end of 2010.

In a tense political situation however, the government does not seem eager to slash and redirect any of its public expenditure, which is deemed highly inefficient. In a 2010 study , the EDB estimates that only 3.6% of the country’s welfare spending goes to the lowest household income group earning BD2,400 ($6,367) per year. In contrast, the top category of households earning BD30,000 ($79,584) and above per year receives about 17%, i.e. about 5 times more. Given the country’s regressive welfare system and the absence of a progressive income tax regime, households on the top of the income ladder who can afford to consume more end up benefiting disproportionately. In other words, Bahrain’s current welfare spending policies not only do nothing to help its debt situation but also clearly exacerbate income inequality.

Yet, old habits die hard. Instead of heeding both the EDB’s and the IMF’s warning, Bahrain’s oil minister announced in  early May plans to invest $15 billion over the next two decades to increase the island’s crude oil and gas production capacity. Enhancing gas production capacity is deemed critical especially in light of plans to considerably expand Alba , the country’s aluminium smelter, given Qatar’s obscure refusal to provide Bahrain with its additional gas requirements. Moreover, the IMF points out that in August 2011, civil servants received a salary hike of 15%, a move aimed at allaying political pressure. The government also dealt a blow to its non-oil revenues end of last March when, succumbing to pressure from the Chamber of Commerce and business owners , it extended the freeze on a fee levied on businesses for every expatriate worker they employ to June 31 of this year. For its part, the parliament, renowned for not being the epitome of fiscal responsibility, has honoured its populist ‘hand-outs’ tradition by approving a one-time marriage assistance sum of BD1,000 ($2653) to newlywed couples, a watered down amount relative to the initial proposed sum of BD5,000 ($13,264), despite the absence of any downward demographic pressure.

For the time being however, the government believes that it can count on the $10 billion aid package that GCC countries have pledged to solve its difficulties in the short-medium term, and this may very well be true. Without a clear and decisive plan to attain long term sustainability though, Bahrain might soon find itself back right in the same position it is in today.

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