The nodding donkeys in Awali, where oil was first discovered in the centre of Bahrain in 1932, are museum pieces now. The government is pushing for the surrounding oil settlement, an unreconstructed mid-twentieth century company town complete with cricket pitch, pub and church, to be listed by Unesco as a world heritage site.
To the north in Manama, the capital, the lower house of parliament has just approved the budget. The government has proposed an environmental tax on companies’ carbon emissions – the first of its kind in the Arabian Gulf – while a new fiscal plan includes a corporate tax and an increase in taxes on energy drinks, sugary beverages and tobacco.
Crucially, the 40-member body has rejected an increase in the 10 percent rate of VAT, although it has agreed to the rise in “sin taxes”. As elsewhere, VAT has been successful in Bahrain. Each 5 percent hike collects BHD300 million in an economy of only $BHD18 billion ($48 billion), independent analysts say.
Bahrain is facing a series of unenviable choices. Total debt is about 130 percent of GDP and servicing it each year eats up BHD1.4 billion. Fitch, one of three big international ratings agencies, has put the island kingdom, already four steps below investment grade, on review for downgrade.
The choices, difficult as they are, have been made elsewhere.
Take gasoline. Other GCC states, such as the much wealthier UAE, charge market rates for nationals and non-nationals alike. Saudi Arabia – VAT rate 15 percent – is moving incrementally to charge motorists the cost of production. Bahrain is still charging peanuts at $0.53 per litre of ’95 – and much less for the ’91 grade.
Similarly, water and electricity are heavily subsidised for nationals, costing the government billions it cannot afford.
Or look at pensions. The system pays up to a generous BHD700 a month to the 85,000 retirees being supported by the social security fund.
But employees in the private sector can retire after 15 years service and, in the public sector, after 25. Which means it is possible to retire at age 35 – and perhaps start work elsewhere. Or not. Critics say that 15,000 ghost pensions are still being paid.
On the surface, things look good. Huge infrastructure spending – a new airport, new roads, and assorted towers for offices, hotels and social housing – has been made possible by support from fellow Gulf Cooperation Council members. The funding came on stream in the wake of the 2011 Arab Spring, but is due to run out next year.
In the meantime, demand for commercial real estate is “weak”, with limited interest from existing businesses and new entrants, according to CBRE.
HSBC has sold its retail banking operations. The Central Bank no longer publishes details of its forex reserves.
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Earlier this year, a deal between Aluminium Bahrain (Alba), one of the island’s champion industries, and Saudi Arabia’s Ma’aden was called off “by mutual consent”. The talk in Manama is that it fell through over the valuation of Alba – ie, the Saudis were not prepared to pay enough. Others say it may be that the UAE’s Emirates Global Aluminum is interested in the smelter.
Hope of a huge find of offshore oil announced in 2018 look illusory. Onshore, Bapco has called in US fracking expert EOG to develop sandstone reserves to replace dwindling conventional oil and gas.
Bahrain has a lot to offer. Schooling is better than in neighbouring Saudi Arabia. The Portuguese Fort, the excellent national museum and the Pearling Path on the neighbouring island of Muharraq, are delightful. The cost of housing is about half that of Dubai. Looking For Dilmun by Geoffrey Bibby, who spent 15 years excavating thousands of grave mounds on the island, is still the best book on the history of the Arabian Gulf and is testament to Bahrain’s charms.
But the kingdom looks less and less likely to avoid some sort of financial reckoning – particularly if it does not help itself. Bahrain does not need to turn into an open air museum.
