Bahrain, officially the Kingdom of Bahrain, is a borderless island country in the Persian Gulf and is the smallest Arab nation. Saudi Arabia lies to the west and is connected to Bahrain by the King Fahd Causeway (officially opened on November 25, 1986), and Qatar is to the south across the Gulf of Bahrain. The Qatar–Bahrain Friendship Bridge currently being planned will link Bahrain to Qatar as the longest fixed link in the world.In a region currently experiencing an unprecedented oil boom, Bahrain has the fastest growing economy in the Arab world, the United Nations Economic and Social Commission for Western Asia found in January 2006. Bahrain also has the freest economy in the Middle East according to the 2006 Index of Economic Freedom published by the Heritage Foundation/Wall Street Journal, and is twenty-fifth freest overall in the world.
Economy
With its highly developed communication and transport facilities, Bahrain is home to numerous multinational firms with business in the Gulf. Petroleum production and refining account for over 60% of Bahrain's export receipts, over 70% of government revenues, and 11% of GDP (exclusive of allied industries), underpinning Bahrain's strong economic growth in recent years. Other major segments of Bahrain's economy are the financial and construction sectors. Bahrain is actively pursuing the diversification and privatization of its economy to reduce the country's dependence on oil. As part of this effort, in August 2006 Bahrain and the US implemented a Free Trade Agreement (FTA), the first FTA between the US and a Gulf state. Unemployment, especially among the young, and the depletion of oil and underground water resources are major long-term economic problems. Construction proceeds on several major industrial projects. Unemployment, especially among the young, and the depletion of both oil and underground water resources are major long-term economic problems. In 2004, Bahrain signed the US-Bahrain Free Trade Agreement, which will reduce certain barriers to trade between the two nations.
Market Overview
Bahrain's almost $9.6 billion 2003 GDP economy has been growing 4 to 5 percent per year for the last five years. Its population of nearly 690,000 enjoys a per capita income estimated at $16,900 on a purchasing power parity basis. The Government of Bahrain keeps price inflation low and its currency stable (the Bahraini Dinar is pegged at .377 to one U.S. dollar).
The U.S. trade deficit with Bahrain in 2004 was $128 million, a negative swing of $247 million from the $119 million trade surplus in 2003. U.S. goods exports in 2004 were $278 million, down 44 percent from the previous year. Corresponding U.S. imports from Bahrain were $406 million, up 7.4 percent. Bahrain is currently the 88th largest export market for U.S. goods. The stock of U.S. foreign direct investment (FDI) in Bahrain in 2003 was $196 million; up from $70 million in 2002. In February 2002, the former Emirate of Bahrain became the Kingdom of Bahrain, and adopted a new constitution. Subsequent democratic reforms include universal suffrage, the first municipal elections in half a century (May 2002), and the first parliamentary elections in 30 years (October 2002). In 2005, the Heritage Foundation listed Bahrain as the world’s 20th freest economy – the highest ranking in the region. The United States Trade Representative (USTR) concluded bilateral Free Trade Agreement (FTA) negotiations in May 2004 and signed the Free Trade Agreement in September 2004. Implementation of the FTA awaits ratification by both legislatures. The agreement seeks to expand and promote the scope of economic, commercial, investment, and trade relations between the two countries.
The volume of trade between the U.S. and Bahrain ($684 million in 2004) dropped significantly from 2003 to 2004 because of a decline in U.S. exports to Bahrain of over $200 million, mostly attributed to a fall in sales of aircraft and parts following several years of strong sales. The U.S. is consistently one of Bahrain’s leading trading partners with $278 million in U.S. exports to Bahrain in 2004. U.S. products that traditionally do particular well are in aircraft and motor vehicles, mechanical and electrical, and medical equipment. U.S. firms are also involved in major infrastructure projects. Over 180 U.S. companies are currently represented in Bahrain with virtually all major U.S.-product brand names represented in local retail stores.
Capitalizing on Bahrain's long history as a trading nation, the Government of Bahrain has developed the transportation and communication infrastructure necessary to attract and foster international business. Diversifying its economy to reduce Bahrain’s reliance on oil, the government has become a regional 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. After early success, the financial, telecommunications, and transportation sectors have faced stiff competition from Dubai and elsewhere. In its quest to increase foreign investment, the Government of Bahrain targeted six "economic clusters" for further expansion: tourism, information and communication technology, health care, education and training, business services, and financial services. Downstream aluminum and petrochemicals industries also remain priorities.
Oil revenues generate almost three-quarters, the government is (73% in 2003), and inexpensive gas fuels aluminum, iron, and petrochemical production facilities. The Bahraini Government hopes that exploration by ChevronTexaco and Petronas in recently opened offshore sites will yield commercially viable finds of oil.
Based on the 2003-2004 budget, government expenditures will account for close to 30 percent of Bahrain's GDP. The government is deeply involved in industry, with wholly or partially government-owned enterprises still dominating much of the economy. Such leading enterprises as Bapco (oil refining), ALBA (aluminum) and Batelco (telecommunications), are all parastatals of varying degree. On February 8, 2005, Bapco announced access to $1 billion in credit facilities from nine regional and international banks to develop and fund new investments, to include a $685 million low-sulphur diesel project and a gas desulphurization project.
Islamic banking is growing steadily. The Government of Bahrain seeks to strengthen the Islamic financial market in Bahrain.
The Government of Bahrain is moving ahead with a number of industrial and infrastructure projects, which are driven by commercial, economic and social imperatives (expansion of electricity and water networks, job creation, and export expansion), which was made possible by years of healthy oil revenues.
Market Challenges
The divide between the government and the private sector is not well defined in Bahrain, leading to potential conflicts of interest. In a few cases where entrenched local business interests are threatened, government decision-making becomes opaque. U.S. companies note a lack of transparency in government project tendering at times. The GOB implemented a new tenders law in January 2003 to promote a more transparent tendering process. The newly established Tenders Board regulates and oversees most of the Government‘s tenders and purchases.
Entrenched local business interests with government influence can cause problems for potential competitors. Interpretation and application of the law sometimes varies by ministry, and may be dependent on the stature and connections of an investor's local partner. Departures such as these from the consistent, transparent application of regulations and the law remain rare, and investors are usually well pleased with government cooperation and support.
Bureaucracy and poor coordination between ministries on occasion impedes new industrial ventures. The government's priority of "Bahrainization" of the labor force – a quota system requiring employers to employ a minimum percentage of Bahrainis – can lead to delays and confusion over work permit issuance and renewal. The Crown Prince launched a labor reform process seeking to promote the employment and training of Bahraini workers. The process may result in legal changes in the labor field.
Periodically – usually due to the Bahraini government’s efforts to promote greater numbers of Bahraini citizens in the workforce – foreign firms have problems obtaining required work permits and residence visas for expatriate employees. However, this is not a matter of high-level policy and can often be resolved on a case-by-case basis.
Market Opportunities
Bahrain offers a number of advantages as a business or investment destination, including a Bilateral Investment Treaty (BIT) with the United States (in force as of May 2001) and a bilateral Free Trade Agreement (FTA) signed in September 2004. English is widely spoken, and the openness of a centuries-old trade-based culture makes businesses and visitors feel welcome. The presence of the U.S. Navy's Fifth Fleet and Bahrain's designation as a Major Non-NATO Ally have given the island international recognition.
The Government of Bahrain has substantially liberalized Bahrain's economy and deepened commercial ties with the U.S. In the past two years, Bahrain has passed laws liberalizing foreign property ownership and tightening its anti-money laundering laws. Bahrain was removed from the U.S. Special 301 Watch List in 1999, and has remained off through 2005.
In spring 2002, the Government announced reforms allowing expatriates working in Bahrain to change jobs more easily, which introduced more flexibility into the labor market. In September 2002, the Government announced that both Bahrainis and expatriate workers would have the right to join unions under the new labor and trade unions law.
The U.S.-Bahrain Bilateral Investment Treaty (BIT) entered into force in May 2001, as the first BIT in the GCC. The U.S.-Bahrain Bilateral Investment Treaty (BIT) provides benefits and protection to U.S. investors in Bahrain, such as most-favored-nation treatment and national treatment, the right to make financial transfers freely and without delay, international law standards for expropriation and compensation cases, and access to international arbitration. The BIT guarantees national treatment for U.S. investments across all sectors, with exceptions for ownership of television, radio (or other media), fisheries, and privatization of oil dredging or exploration. Bahrain also provides most-favored-nation or national treatment status to U.S. investments in air transportation, the buying or ownership of land, and the buying or ownership of shares traded on the Bahrain Stock Exchange (BSE).
In June 2002, the U.S. and Bahrain signed a Trade and Investment Framework Agreement (TIFA), setting up a council for the negotiation of trade and investment issues. In May 2003, the Office of the United States Trade Representative (USTR) announced its intention to negotiate a free trade agreement with Bahrain. U.S.-Bahrain FTA negotiations were concluded in May 2004. The agreement was signed in September 2004 and is currently awaiting legislative approval from both the U.S. Congress and Bahrain’s National Assembly. The agreement seeks to expand and promote economic, commercial, investment, and trade relations between the two countries.
In late 2004, GCC member state Saudi Arabia noted its concern about the U.S.-Bahrain Free Trade Agreement, claiming that the agreement violated GCC rules. Bahrain insists that the agreement is in keeping with GCC provisions concerning bilateral trade. Other GCC countries are in the process of negotiating an FTA with the United States.
In an economy largely dominated by parastatals (outside of the financial services sector), the Government of Bahrain seeks to foster a greater private sector role in economic growth. Following the creation of a Supreme Privatization Council in the spring of 2001, the King of Bahrain, Shaikh Hamad bin Isa Al-Khalifa, issued a decree on October 2002 laying out guidelines for privatizing the following sectors:
Tourism
Telecommunications
Transport
Electricity and water
Ports and airport services
Oil and gas
Postal services.
The telecommunications sector was the first key sector to be liberalized in Bahrain following the government's announced interest in opening traditionally government-controlled industries. The Telecommunications Regulatory Authority (TRA), established in late 2002, awarded a mobile telecommunications services license to MTC-Vodafone, thus ending the monopoly of Bahrain's telecom service provider, Batelco. Telecommunications liberalization also extended to paging services, very small aperture terminal (VSAT), public access mobile radio services, international telecommunications facilities, international telecommunications services, national fixed services, internet service provider (ISP) and value-added services license following the full liberalization of the sector on July 1, 2004. As of December 2004, the TRA announced the provision of three International Telecommunications Facility licenses (IFLs), five International Telecommunications Services Licenses (ISLs), five VSAT licenses, fifteen value-added Services (VAS) "Class" licenses and eight Internet Service Provider (ISP) licenses.
The Government, under the privatization law, has made a commitment to gradually dispose of its interests and stakes in certain companies. But some deputies in the National Assembly's lower house (Council of Representatives) criticized the Government's decision to sell the remaining state holdings of the Bahrain Telecommunication Company (Batelco).
Public transportation service was privatized in 2003. CARS, a Bahrain-UAE joint venture, started operating in May 2003 with 41 new, air-conditioned, 52-seat buses. The CARS company completed its plan to acquire 20 new buses by the end of 2003. Its total investment in the public transportation privatization project is approximately $10 million.
The Kingdom's first independent power plant project (IPP) was also successfully tendered and awarded to Bahraini-based Al Ezzel Independent Power Producer (IPP), which is equally owned by a Belgian-Gulf consortium of Trabactel EGI and Gulf Investment Corporation.
Four international operators have also been short-listed to manage Mina Salman and the new Hidd ports.
The Government of Bahrain has a generally liberal approach to foreign investment and is eager to improve Bahrain's attractiveness to international investors and businesses. Top government officials make frequent public statements citing growth of foreign investment as one of the government's main priorities. According to GOB officials, Bahrain rates number 29 worldwide in attracting foreign direct investment and the average foreign direct investment into the local market reached $1.7 billion over the past three years. The government has focused its efforts on the entry of new private firms, particularly in the information and communications technology, education and training services, tourism, financial services, business services, healthcare services and downstream industries. Bahrain's Crown Prince is also an outspoken proponent of privatization in Bahrain. The Crown Prince took over the chairmanship of the Economic Development Board (EDB), a "one-stop-shop" for potential investors, and in 2004 was entrusted with the King's labor, economic, and training reform visions.
The government actively seeks Bahraini and foreign private investments in large infrastructure projects. Previously, most such activity (other than hotels) was funded by development agencies from other Gulf countries (particularly Kuwait, UAE, and Saudi Arabia). Foreign-owned companies are eligible for partial financing from the state-owned Bahraini Development Bank (BDB), if they meet certain criteria such as providing training and employment to a significant number of Bahrainis.
There have been no expropriations in recent years, and no cases in contention. The U.S. - Bahrain Bilateral Investment Treaty (BIT) protects U.S. investments by banning all expropriations (including "creeping" and "measures tantamount to") except those for a public purpose. In which case, it must be carried out in a non-discriminatory manner, with due process, and prompt, adequate, effective compensation.
No organized economic boycotts took place in Bahrain in 2003 and 2004, in spite of the war in Iraq.
Bahrain’s economic performance further improved across the board in 2004 due to higher average oil prices throughout the entire year yielding greater government revenues, resulting in continued large scale investments, greater confidence in the banking sector, and the resumption of major private sector projects in Bahrain.
The Commercial Section in the U.S. Embassy Bahrain, encourages U.S. companies interested in coming to Bahrain to consult with them for additional details and guidance.
