Bahrain looks to manufacturing and finance in drive to diversify

Published November 15th, 2015 - 12:00 GMT

The latest round of official statistics point to a growing — and welcome — diversification for the Bahrain economy. Until now, the lack of diversification and high jobless rates were the twin factors undermining growth.

The oil and gas sector had a 44 per cent share of the GDP in 2000 and dropped to 20 per cent in 2014. Still, the low level of oil prices should further reduce role the petroleum sector in the economy at large.

Yet, this figure somehow downplays another part of the petroleum sector, namely oil refining. The process of refining crude oil into petroleum products like jet fuel and diesel is counted as part of manufacturing activity.

For its part, the manufacturing sector constituted 14 per cent of the GDP in 2014, clearly a major contributor to economic activities. Aluminium Bahrain (Alba) dominates the manufacturing sector. The setting up of Alba dates back to 1971. Bahrain is a major exporter of aluminium products in the world despite being the smallest within the Gulf Cooperation Council countries in terms of GDP, size and population.

Paradoxically, the government is investing heavily in the energy sector notwithstanding the current drop in oil prices and the stated objective of diversifying away from oil. In fact, Bahrain will be responsible for all the costs associated with enhancing capacity of the pipeline carrying Saudi crude.

Bahrain incidentally pays market price for imported crude oil from Saudi Arabia.

Reportedly, work is in progress to expand the pipeline’s throughput from 267,000 barrels per day to 350,000 bpd with the option for a further expansion to 400,000 bpd. The crude oil ends up at the Sitra refinery, east of Manama.

Additionally, Petrovac of the UK has a contract valued at $100 million to build a gas dehydration facility capable of producing 500 million standard cubic feet per day.

Not surprisingly, the share of the financial services sector has edged up from 14 per cent in 2000 to 17 per cent in 2014. This translates into the sector serving as the second major source of GDP growth after oil.

Bahrain serves as a hub for financial institutions for doing business in the region and beyond. However, Bahrain must face rivalry from other hubs, notably the DIFC as well as centres in Doha and Riyadh.

The financial services sector is popular with Bahraini nationals looking for career development and with earning possibilities. Yet, technology is restricting employment potentials in financial institutions at large.

Conversely, the statistics suggest growing governmental involvement in the economy, standing at 9 per cent and 13 per cent of the GDP in the years 2000 and 2014, respectively. This fact raises the challenge of enticing private sector firms to do more.

The drop of oil prices over the past 18 months is adding to economic challenges confronting the country. Suffice to say that Bahrain suffers from serious joblessness among locals. Overall unemployment rate stands at 7.4 per cent, rising to 27.5 per cent among the youth.

Certainly, the government is not in a position to increase spending in the hope of creating more job opportunities for Bahraini nationals. Public finance must overcome an acute challenge, as the budget for fiscal year 2015 was approved with a $4 billion deficit (6 per cent of the GDP). The fiscal year 2014 ended with a shortfall of $1.2 billion (3.6 per cent of the GDP).

Maintaining a diversified economy remains a challenge.

By Jasim Ali

The writer is a Member of Parliament in Bahrain.

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