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Middle East

Bahrain overhauls economy as oil prices plummet

media Bahrain's Oil minister Mohamed Khalifa Al-Khalifa speaks to the Euro Gulf Information Centre, Rome, Italy RFI/Christina Okello

Bahrain has launched major reforms to diversify its economy as oil prices continue to plummet. It comes as world producers gather in Algeria for a special Opec summit to discuss how to stabilize the market. RFI's Christina Okello spoke to Bahrain's Oil Minister Mohamed Khalifa Al-Khalifa.

“If oil prices continue at this level, it will become even more challenging for us,” Bahrain’s Oil Minister Mohamed Khalifa Al-Khalifa told RFI, ahead of a meeting in Algeria of the world’s largest oil producers.

“Since 2015 oil prices have crashed literally, and that’s had an effect on government finances.”

The slump in oil prices -  a barrel of oil is currently around €40 - knocked €300 billion off the governemt revenues of Arab oil-exporting states’ last year, according to the IMF.

Bahrain is no exception. The small island state in the Persian Gulf is expected to post a budget deficit this year of €4.1 billion.

Budget deficits are a relatively new phenomenon in the countries of the Gulf Cooperation Council (GCC) that operate on a rentier system, where leaders are accustomed to distributing oil wealth to their citizens.

“We don’t tax people,” explains Minister Al-Khalifa, “so it means government finances are going to be affected by lower oil prices.”

So too could the state's generous welfare system as it looks for new ways to pay for it.

Lack of investment

“We are at serious risk of under-investment," warns Al-Khalifa.

Increased competition sparked by the US shale revolution has led to an oil glut that has driven down prices.

"Sooner than we think, we might actually have a supply shortage, because demand although it is lower has never gone negative for oil," he said.

The push for economic reform in the Gulf was center stage at a conference by the Euro Gulf Information Centre in Rome recently.

Around 200 people gathered in a former palace next to Italy’s parliament to listen to Minister Al-Khalifa and other stakeholders discuss how to steer GCC countries away from oil.

Structural reform is the passport needed to reduce their vulnerability to market volatility, Khalid Chaouki, a member of Italy’s parliament told RFI.

“I think we need to help the Gulf today, to imagine a new kind of social welfare for example.”

Bahrain, like other GCC countries, offers citizens an extensive state-funded security system, including free education and health care, while energy subsidies last year cost governments of the GCC over €156 billion.

“We need to discuss how to improve cooperation between the public and private sectors,” argues Chaouki.

The overburdened public sector employs the bulk of Bahraini nationals, attracted by its high wages. It’s hoped that the private sector will play a bigger role in economic development to shoulder some of the burden.

Capital quest

Other sectors like manufacturing and tourism are also expected to contribute to Manama’s post-oil phase.

So too will new industries such as aluminum processing. “The aluminum smelter has attracted a lot of financial services,” outlines Al-Khalifa.

Yet it also consumes a lot of gas. Like much of Bahrain’s non-oil sectors, the aluminum smelter is very much dependent on oil. In fact, oil  is responsible for 20 percent of the country’s growth.

"Currently Bahrain churns out 200,000 barrels per day, and the government is working to develop some of its more difficult reserves,” says Al-Khalifa.

The country relies partly on Saudi Arabia for its production, but the oil minister rejects claims that Manama is tied to Riyad despite the fact that the two countries share an oil pipeline.

"Granted, against the likes of Saudi Arabia, we don't size up, but we still have significant reserves left," he said.

But Manama needs cash and that’s what Al-Khalifa came to tell stakeholders gathered in Rome.

Growth Vs. Capital

Italy could plug the gap. Bahrain has been working with Italian companies on new drilling exploration projects that could benefit the two countries Senator Benedetto Della Vedova, Italy’s Under-Secretary for Foreign Affairs, believes.

“Italy could be a wonderful gateway for Bahrain into the European Union single market in terms of manufacturing,” the Senator told RFI.

“And Bahrain can be a gateway for Italy to the GCC area.”

The small island state of less than one million inhabitants has launched several infrastructure projects in Europe, including its new Bapco refinery.

"Project finance is the best way of accessing funds," explains Al-Khalifa.

Bapco is expected to rely on debt financing for the expansion as it did for an earlier project. The government, like many in the region, is short of funds but has good credit ratings.

Oil here to stay

Concerns about the state’s crackdown on the Shia opposition haven't affected its international standing says Al-Khalifa.

“Bahrain remains a democracy. Our political situation is stable," he said.

“Oil is still going to be a contributor but other sectors will have to contribute."

His case for oil may seem out of sync with today’s trend towards renewable energy.

“Yes, there are more furrows into solar energy, but it’s not going to cause a dent unfortunately. I think if the world wants to continue to live the way it does, hydrocarbons are here to stay.”

Difficult business of reform

Bahrain's welfare model should work too, at least for now.

“Authorities feel obliged to share oil wealth with their citizens to improve their welfare” explains economist Dr Ahmed Alyushaa.

Stability in the Gulf is crucial for world markets. That stability has long been linked to governments' ability to feed and house their populations.

Nonetheless, the reforms in place suggest that the petrodollar wealth of Gulf States is now being scaled back.

Sustainability

“I believe sustainable tourism to be one of the solutions, one of the emerging fields that the government should look into,” Dr Khawla Al-Muhannadi, director of the Manama-based NGO Environment Friends Society, told RFI.

“We are a diverse nation. For years and years, we go to the sea, to the depths of the sea, to extract the best pearls," a reference to the fact that the kingdom was renowned for its pearling industry, until it was overtaken by Japan as a producer of pearls.

"The sea is sometimes angry, sometimes generous, and we adapted."

It has a history of adapting too. It had to adapt in the 1930s when it became the first Gulf State to discover oil.

"We will[adapt] this time [too]," Al-Muhannadi added.

"Tourism can bring in good future investments that will protect the environment and the social economic principles we live by."

Bahrain is ready to take this journey with the government, she reckons, arguing that sustainable tourism is the way forward.

That journey will take Bahrain to a future with a dominant private sector, “higher quality service, more efficiency and state of the art infrastructure,” Minister Al-Khalifa concludes.

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