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New Aid Package for Bahrain Signals Trouble

Varsha Koduvayur
9th October 2018 - FDD Policy Brief

Saudi Arabia, the United Arab Emirates, and Kuwait will provide a $10 billion aid package to cash-strapped Bahrain, building on a deal originally announced in June. Coming on top of a $10 billion injection already pledged by Gulf states in 2016, the deal is a further sign of Bahrain’s brewing economic crisis. 

Bahrain’s financials, among the weakest in the Gulf Cooperation Council (GCC), are battered by the oil price decline. Bahrain pumps only 198,000 barrels of oil per day and nearly 75 percent of the country’s revenues were from oil receipts last year, making it more vulnerable to the price collapse. Its other major industry, aluminum, makes up 12 percent of its GDP, but will be hard-hit by U.S. tariffs. Facing a budget deficit projected at 10.5 percent, Bahrain tapped debt markets to plug the hole. But Bahrain’s weak fundamentals have made it more expensive for the kingdom to borrow.

Bahrain’s GCC funders, who are themselves facing belt-tightening measures, negotiated for months over Manama’s fiscal consolidation efforts. The new five-year aid package is conditioned upon Bahrain curbing spending and implementing measures to boost non-oil revenue, which will likely include the introduction of a value-added tax. (The International Monetary Fund urged Bahrain to implement these reforms, as well.) 

To its credit, Bahrain has chipped away at some subsidies, but political sensitivities prevent more serious progress. In December, Manama implemented a GCC-wide excise tax on sugary drinks and tobacco, and in January increased gasoline prices to bring them closer to parity with international levels. But just two weeks later, the government announced it would pause new austerity moves until the parliament agreed on a new system for compensating citizens’ higher cost of living. 

As in other Gulf monarchies, citizens’ benefits – long considered their birthright in return for political quietism – is a sensitive subject in Bahrain. The kingdom has been in the midst of a domestic crackdown on dissent (primarily against the country’s Shiites) since the 2011 Arab Spring protests. With elections scheduled for November 24 – a vote in which the opposition is barred from participating – the government fears that a push for austerity could exacerbate political tensions. 

In return for Gulf aid, Manama will implement a new austerity program that tackles some important tenets, including early retirement for state employees, measures to balance state utilities’ budgets, and retargeting cash subsidies. But the pace of implementation remains unclear. With two major aid packages in as many years, Gulf neighbors are nearing the extent of their largesse for Bahrain. Fiscal reform may be a bitter pill to swallow, but seeking repeated rounds of Gulf aid, which will likely come with conditions as donor states struggle with their own fiscal woes, only bodes ill for Bahrain’s economic vitality.

Varsha Koduvayur is a senior research analyst at the Foundation for Defense of Democracies, where she focuses on the Gulf. Follow her on Twitter @varshakoduvayur.

Follow FDD on Twitter @FDD. FDD is a Washington-based, nonpartisan research institute focusing on national security and foreign policy.

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