Bahrain WT/TPR/S/74
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I. ECONOMIC ENVIRONMENT
(1) RECENT ECONOMIC DEVELOPMENTS
1. Bahrain is an archipelago off the coast of Saudi Arabia in the Persian Gulf.  It has a
population of around 640,000, of which about 40% are expatriates.  Per capita income was some
Bahrain dinar (BD) 2,861 (around US$7,600) in 1998 (T able I.1).  Bahrain's economy depends largely
on petroleum exports (around 64% of merchandise exports in 1999);  the sector (including mining)accounted for some 14% of GDP in 1998, down from 19% in 1991.  Bahrain's crude oil production
comes mainly from an offshore oilfield.
1  Domestically produced crude petroleum, as well as
imported crude petroleum, is refined domestically and exported.  Bahrain's relatively small domestic
petroleum and natural gas reserves have prompted economic diversification.  As petroleum's share in
the economy has declined, the role of manufacturing and services has become more important.Services accounted for almost 77% of GDP in 1998, its share rising from some 69% in 1990, while
manufacturing accounted for 13% in 1998.  Services is also the largest employer in Bahrain,
providing employment to around 50% of the workforce in 1998.
Table I.1
Basic economic and social indicators, 1990-2000
(Bahrain dinar and per cent)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999a2000b
National income
Nominal GDP
(billion Bahrain
dinar)1.70 1.74 1.79 1.96 2.09 2.20 2.29 2.39 2.33 2.58 2.90
GDP per capita
At market
prices2,668 2,589 2,773 2,963 2,968 3,172 3,127 3,041 2,861 .. ..
At constant
prices2,599 2,520 2,804 3,102 2,881 3,050 3,001 2,892 2,960 .. ..
Share in GDP Per cent
Agriculture 0.8 0.8 0.9 0.9 0.8 0.9 0.9 0.9 0.9 .. ..
Petroleum and
mining19.1 16.9 16.3 15.7 14.3 15.4 18.1 18.7 13.6 .. ..
Manufacturing 10.9 11.2 10.9 12.3 14.5 17.5 14.7 14.7 12.7 .. ..
Electricity and
water1.7 1.6 1.7 1.6 1.4 1.6 1.6 1.6 1.9 .. ..
Construction 5.5 5.3 5.7 5.4 5.2 4.8 4.3 3.9 4.1 .. ..
Services 69.2 70.1 64.9 73.1 73.3 69.1 69.9 70.0 76.9 .. ..
Financial
services18.8 17.3 18.4 20.2 20.3 17.8 19.8 21.1 22.9 .. ..
Trade 9.1 9.7 11.3 10.6 12.2 11.2 10.6 9.3 10.1 .. ..
Hotels and
restaurants1.9 2.3 2.4 2.3 2.2 2.1 2.0 2.0 2.3 .. ..
Transport and
communication7.5 8.4 8.2 7.9 8.0 7.4 7.2 7.1 8.3 .. ..
Real estate 9.1 9.2 9.1 9.7 9.4 9.5 9.4 9.6 10.3 .. ..
Table I.1 (cont'd)
                                                     
1 Production from the Abu Saafa field owned by Saudi Arabia, of which Bahrain currently receives
100%, is exported as crude oil.WT/TPR/S/74 Trade Policy Review
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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999a2000b
Social and
personal
services3.7 3.5 3.7 3.6 3.6 3.6 3.7 3.8 4.3 .. ..
Government
services19.1 19.7 20.0 18.8 17.6 17.5 17.2 17.1 18.7 .. ..
Less imputed
banking services.. .. 9.2 9.5 9.9 9.0 8.6 .. .. .. ..
Share in
employmentPer cent
Agriculture 3.5 3.6 3.6 3.5 3.4 3.4 3.4 3.1 3.0 .. ..
Petroleum and
mining0.4 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.5 .. ..
Manufacturing 12.3 12.2 12.1 12.0 11.6 12.3 12.3 12.4 12.1 .. ..
Electricity and
water25.7 21.1 18.8 19.6 19.0 19.7 20.0 20.4 20.5 .. ..
Construction 14.6 13.9 13.9 13.9 14.0 12.8 12.8 12.9 13.6 .. ..
Services 43.5 51.2 51.2 50.5 51.5 51.3 51.0 50.7 50.3 .. ..
Social indicators
Population
(million)
Urban population 503 508 519 538 557 577 598 620 642 .. ..
Unemployment
(per cent).. .. .. .. .. .. .. .. 2.3 .. ..
Birth rate (per
cent).. 3.3 3.3 3.4 3.5 3.6 3.5 3.5 .. .. ..
Life expectancy
at birth70 70 70 70 70 70 70 70 70 .. ..
School enrolment ratio
P r i m a r y . .5 7 . . . .5 55 45 55 5 . . . . . .
Preparatory .. 25 .. .. 25 25 25 25 .. .. ..
Secondary .. 18 .. .. 14 14 14 14 .. .. ..
.. Not available.
a Estimated data.
bP r o j e c t e d  d a t a .
Source: Ministry of Finance and National Economy (1998), National Accounts, 1998 ;  and data provided by the authorities.
2. Real economic growth has averaged arou nd 4.6% annually since 1992, slowing since 1994
(average annual growth between 1994 and 2000 was about 3.6% compared with some 8.1% during
1992-1994).  Growth in 2000 is expected to be  3.5% (Table I.2).  The slowdown since 1994 is
generally associated with erratic petroleum production;  growth in petroleum output in 1996 and 1997
was mainly attributed to an increased allocation of petroleum from the offshore Abu Saafa field; non-oil GDP growth has also been lower since the mid-1990s.  Bahrain has relatively low inflation,
measured by the consumer price index, which has averaged around 0.7% annually since 1992.
3. Slower non-oil GDP growth during 1994-97 was in pa rt due to a decline in investment;  gross
domestic investment fell between 1992 and 1996 with fixed capital formation, as a percentage of
GDP, declining to 12% in 1997.  Private and public investment have declined.  Lower publicinvestment has reflected cutbacks in government capital spending as part of a programme to reduce
the fiscal deficit;  private investment also declined sharply until 1997 before showing signs of
improvement in 1998 as economic activity picked up.  Overall domestic investment has also risen,
especially since 1997 (Table I.2).Bahrain WT/TPR/S/74
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Table I.2
Economic performance, 1992-2000
(Per cent and US$)
1992 1993 1994 1995 1996 1997 1998 1999a2000b
Annual per cent change
Real GDP growth 7.8 8.3 2.4 3.9 4.1 3.1 4.8 3.5 3.5
Oil (including refinery) 14.4 11.6 -0.8 2.0 6.7 3.4 11.4 -1.8 3.1
Non-oil GDP 6.6 7.6 0.8 4.2 3.7 3.0 3.6 3.8 3.5
Agriculture and fishing .. .. 2.9 18.5 12.8 -7.6 -0.5 .. ..
Manufacturing .. .. 9.9 7.5 -2.5 2.4 2.0 .. ..
Electricity and water .. .. 11.4 7.4 9.1 -4.2 15.5 .. ..
Construction .. .. -5.5 11.3 -14.6 -6.2 1.0 .. ..
Services .. .. 2.0 0.8 5.2 4.1 2.7 .. ..
Transport and commun-
ications.. .. 7.0 -2.6 2.1 1.5 5.8 .. ..
Social and personal services .. .. 9.9 3.6 3.6 6.3 6.4 .. ..
Trade hotels and restaurants .. .. -6.0 -2.1 4.1 3.4 7.4 .. ..
Banking and insurance .. .. 9.7 -1.5 10.7 8.1 -1.8 .. ..
Domestic banks .. .. -14.3 6.2 10.0 13.6 8.2 .. ..
Offshore banks .. .. 22.3 -14.0 15.1 11.5 -5.7 .. ..
Government services .. .. -0.3 4.6 3.2 2.0 1.8 .. ..
Savings and demand Per cent of GDP
Savings 19.8 25.0 27.2 31.3 33.8 .. .. .. ..
Gross domestic investment 34.9 20.0 24.0 19.0 19.6 20.3 27.2 .. ..
Fixed capital formation 29.8 31.2 20.6 17.3 12.4 12.0 14.0 .. ..
Public 7.5 7.1 6.7 5.1 4.8 6.6 6.4 .. ..
Private 22.3 24.1 13.9 12.2 7.6 5.4 7.6 .. ..
Change in stocks .. .. 3.4 1.7 7.3 8.4 13.2 .. ..
Final consumption 59.9 56.9 70.3 69.5 68.6 70.1 72.1 .. ..
Inflation and exchange rate Percentage change
GDP deflator .. .. .. 1.1 0.2 0.9 -7.1 7.7 8.9
CPI (period average) 0.0 2.1 0.4 3.1 -0.2 2.2 -0.3 -1.3 0.2
Nominal effective exchange
rate4.5 5.3 -2.0 -4.8 3.4 6.2 3.6 -0.3 ..
Real effective exchange rate 2.6 5.1 -3.5 -4.7 -0.4 6.6 1.6 -0.3 ..
Money and creditc
Broad money (M3) .. .. .. 7.4 3.1 7.9 16.6 5.4 12.6
Credit to public sector (net) .. .. .. 2.5 -3.5 1.6 4.5 3.2 0.4
Credit to private sector .. .. .. 2.4 0.5 8.0 5.3 7.6 11.1
Interest rate (3-month
deposits, %).. .. .. 6.2 5.7 5.9 5.7 5.2 5.2
Balance of trade and
payments (US$ billion)
Exports 3.46 3.72 3.62 4.11 4.70 4.38 3.27 4.09 5.51
Imports 4.26 3.86 3.75 2.46 3.16 2.73 1.77 2.71 4.33
Services balance .. .. .. 0.04 0.05 0.00 0.07 0.14 0.16
Balance of payments (% of
GDP)-2.5 -2.0 -2.8 2.9 -1.0 1.6 -0.3 0.4 0.5
Current account balance (% of
GDP)-19.2 -3.6 -3.7 4.05 4.23 -0.49 -12.65 -4.97 2.9
Table I.2 (cont'd)WT/TPR/S/74 Trade Policy Review
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1992 1993 1994 1995 1996 1997 1998 1999a2000b
International reserves and
debt
Gross official reserves
(Bahrain dinar).. .. .. 1.27 1.26 1.37 1.35 1.38 1.43
(in months of imports) .. .. .. 3.3 3.4 4.2 4.1 3.4 3.8
Gross external debt (% of
GDP).. .. .. 36.6 33.7 29.5 29.9 26.1 22.8
.. Not available.
a Estimated data .
bP r o j e c t e d .
c Data from 1995 onwards based on a revised system of monetary statistics.
Source: Data provided by the authorities.
4. The fact that private sector participation appears to be increasing shows greater confidence in
the reforms initiated by the Government, which albeit gradual, are opening up a larger number of
activities to domestic and foreign investment and streamlining investment and commercial registration
procedures.  The Government has also been gradually privatizing public sector holdings, which willreduce the fiscal burden on the Government and also free up resources for private sector investment.
In the view of the authorities, Bahrain's present reliance on the public sector, rather than on private
investment, is not sustainable in the long run due  to budgetary constraints and a need to raise real
economic growth.  The Government's longer term efforts will therefore concentrate on, inter alia ,
developing laws, regulations, and infrastructure that are conducive to investment by the private sector;
directing local financial resources into investment, particularly in priority sectors such as downstream
manufacturing and services, in particular financial services;  and improving worker productivity and
training.
5. Another challenge facing Bahrain is that of rising unemployment, especially among
Bahraini nationals.  In 1998, unemployment among Bahrainis was, according to the authorities,
around 6%, compared with an overall unemployment rate of 2.3%.
2  Concerns about unemployment
and a rapidly growing population (around 3% annually) have led the authorities to initiate a number of
reforms and incentives to encourage employment, especially of Bahrainis.  These measures include
incentives for firms to hire a certain percentage of Bahraini nationals, the so-called Bahrainization
policy, and training of Bahrainis (Box I.1).
(i) Macroeconomic policies
(a) Fiscal balance
6. Bahrain's budget is prepared on a biannual basis, with budgets set for two years at a time.
The budget for 1999 and 2000 was approved by the Cabinet in January 1999.
7. Government revenue is derived mainly from the oil and gas sector, including Bahrain's share
in the Abu Saafa field owned by Saudi Arabia3, export revenue from refined petroleum, from fees for
processing Saudi Arabian crude oil in the Sitra refinery, and from local sales of refined petroleum andgas products.  In addition, the Government charges a 46% corporate tax on the profits of petroleum
                                                     
2 Government of Bahrain (1999).
3 Around 79% of Bahrain's crude oil comes from the Abu Saafa field in Saudi Arabia.  Under an
agreement signed between the Governments of Bahrain and Saudi Arabia, 100% of Abu Saafa production istransferred to Bahrain, net of production costs (Chapter IV(3)(i)).Bahrain WT/TPR/S/74
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and gas companies.  The revenue from oil and gas accounted for around 46% of total state revenue, or
14% of GDP in 1999, making the budget susceptibl e to changes in petroleum prices and exports.
Another major sources of revenue is taxation, which accounted for 7.2% of GDP (27% of total
revenue) in 1999;  revenue from the tariff accounted for around 11% of the total, or about 2.5% of
GDP budgeted for 1999 (Table I.3).
Box I.1:  The labour market and employment policy
Bahrain has a large expatriate population (around 40% in 1999).  The labour market tends to be segmented;
employment of expatriates is generally higher in the private sector (around 90% of total private sector
employment in 1997), while around 77% of public sect or employees are Bahraini nationals.  In addition,
low-wage positions generally tend to be filled by expatriates.
Recently, it has been estimated that unemployment among Bahraini nationals has been rising for a number
of reasons, including rapid population growth, greater participation of women in the workforce and aslowdown in growth associated with declining energy prices since the mid-1980s.  Although the overallofficial unemployment figures were estimated at 2.3% in 1998, the unemployment rate for Bahrainis was6% according to the authorities, and estimated by the World Bank in 1995 to be closer to 10%.  As a result,
there has been a recent shift in policy to encourage employment and training of Bahrainis.
Bahrainization
In 1989, the Government, with the help of international organizations, including the World Bank, the
International Labour Organization, and the United Nations Development Programme, introduced itsprogramme on "Bahrainization".  The programme was aimed initially at creating 20,000 private sector jobsfor Bahrainis by 1993;  it was revised in May 1996 to increase the share of Bahrainis in the total workforcefrom 38% in 1996 to 50% by 2000.  This involved setting quantitative guidelines for employment of
Bahraini nationals by companies based on their size:  for existing firms these quantitative targets were to
raise their share of Bahraini employees to 50%;  new companies with more than ten employees would beexpected to ensure that at least 20%  of their workforce were nationals of Bahrain, subsequently achieving
the same targets as for existing firms through a 5% increase per year;  for firms with fewer than tenemployees, at least one of the employees other than the owner is required to be Bahraini.  According to the
authorities these targets are set on a flexible basis and are mindful of the need to improve economic
efficiency as well as increased employment opportunities for Bahraini nationals.
In addition to quantitative targets for Bahrainis, the Foreign Employment Section of the Ministry of Labour
and Social Affairs monitors the employment of expatriates through the issuing of work permits.  Fees paid
by expatriate employees for work visas were raised in 1996, doubling for a two-year work permit fromBD 50 to BD 100 and increasing from BD 40 to BD 150 for renewal.  The Government has also establishedan Employment Services Bureau, which operates as a job placement centre, matching registeredunemployed Bahrainis with listed job vacancies.
Training
Another factor in the Government's employment policy is to increase training facilities for Bahrainis.
Currently the training facilities in Bahrain include th e Bahrain Training Institut e, set up in 1992, which
trains around 1,000 Bahrainis a year;  the Industrial Garments Training Centre, which was opened in 1997
with an initial capacity to train around 240 trainees per year;  and the private Bahrain Institute of Banking.The Bahrain Training Institute has also been accredited by a number of foreign institutions, including theBusiness Technology Education Council (BTEC), the City and Guilds of London Institute (CGLI), theLondon Chamber of Commerce and Industry, and the Royal Society of the Arts.
The results of the Bahrainization and training progra mmes appear to show a declining share of expatriate
workers, from around 62% of the workforce in 1994 to 56% in 1999.  In addition, the number of Bahrainis
working in the private sector increased by 48% between 1992 and 1997.
Source:   Government of Bahrain.WT/TPR/S/74 Trade Policy Review
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Table I.3
Fiscal balance, 1995-2000
(Per cent of GDP unless otherwise indicated)
1995 1996 1997a1998b1999b1999c2000b
Total revenue and grants (million
Bahrain dinar)560.8 633.3 615.0 630.0 566.0 660.0 572.0
Total revenue 25.5 27.6 29.6 33.8 21.9 25.6 19.3
Current revenue 23.8 26.8 27.6 22.2 20.1 24.2 17.7
Petroleum and gas related revenue 14.5 17.1 17.7 11.2 10.1 14.4 8.6
Non-oil revenue 9.3 9.6 9.9 11.1 10.9 9.8 9.1
Taxation 7.7 7.9 7.9 8.5 .. 7.2 ..
of which customs revenue 2.5 2.3 2.3 2.0 2.5 2.6 ..
Non-tax revenue 1.6 1.8 2.0 2.6 .. .. ..
Grants 1.7 0.8 2.0 1.6 1.8 1.5 1.6
Total expenditure (million Bahrain
dinar)626.1 627.3 704.0 705.0 726.0 724.0 732.0
Total expenditure 28.5 27.3 29.5 30.3 28.2 8.1 24.7
Current expenditure 23.7 22.8 23.2 24.1 23.2 23.1 20.3
Wages and salaries 15.0 14.8 15.2 16.4 15.2 15.2 13.5
Other goods and services 4.8 5.0 4.9 4.5 4.5 4.6 3.9
Interest payments 0.9 0.9 0.9 1.0 0.9 1.2 0.8
Subsidies and transfers 3.0 2.1 2.2 2.2 2.6 2.1 2.1
Capital expenditures 4.8 4.5 6.3 6.2 5.0 5.0 4.4
State budget balance (million
Bahrain dinar)-65.3 6.0 2.0 -151.0 -160.0 -64.0 -160.0
(as per cent of GDP) -3.0 0.3 0.1 -6.5 -6.2 -2.5 -5.4
Extra budgetary operations (net) -40.8 2.6 -93.0 57.0 .. -80.0 ..
(as per cent of GDP) -1.9 0.1 -3.9 2.5 .. -3.1 ..
Overall balance -106.1 9.0 -91.0 -93.0 .. -144.0 ..
(as per cent of GDP) -4.8 0.4 -3.8 -4.0 .. -5.6 ..
.. Not available.
a Estimated.b Budget.
cP r e l i m i n a r y .
Source: Ministry of Finance and National Economy (1999), The Budget for the Fiscal Year 1999 ;  and data provided by the
authorities.
8. State revenue thus depends closely on sales of petroleum and gas and international energy
prices.  As a result of a sharp fall in petroleum prices, the budget balance deteriorated sharply in 1998
to a deficit of 6.5% of GDP from a small surplus of 0.1% in 1997.  The deficit was expected to be
around 6.2% in 1999 although an increase in the price of oil in the latter half of 1999, resulted in an
improvement in the budget balance, to an expect ed deficit of 2.5%.  In 2000, the budget deficit is
expected to be around 5.4% of GDP, although this may improve if oil prices remain at their presentlevels.
4  Given this vulnerability to petroleum prices and the need to reduce the budget deficit, a
number of steps have been taken both to raise revenue and to curb expenditure (Box I.2).  The
Government also intends to borrow funds for 1999 and 2000, of BD 100 million each year, from the
                                                     
4 In addition to the State Budget, the Government of Bahrain also has extra-budgetary operations
including external grants received, spending on defence and security, allocations for the Amir's financialassistance to needy Bahrainis, and loans to the domestic sector.Bahrain WT/TPR/S/74
Page 7
General Organization for Social Insurance (GOS I) and the Pension Fund Commission (PFC), by
issuing government bonds, repayable over a 30-year period, to be traded on the Bahrain Stock
Exchange.
9. Overall government spending has been declining during the 1990s, from around 36% of GDP
in the beginning of the decade, to around 28% in 1999.  Government expenditure is dominated by
current expenditure, of which wages and salaries accounts for the largest share, at around 13.5% ofGDP in 1999, declining from over 16% in 1998 due to a freeze on annual wage increases and
additional hiring.  Spending on subsidies, as a percentage of GDP, has also been declining.  Capital
expenditures, however, with the exception of non-esse ntial projects, have been largely maintained, as
has spending on healthcare and social services.
10. In the longer run, the Government hopes to streamline spending and increase productivity by
improving public expenditure management, and contracting out and privatizing several public sector
services.
(b) Monetary policy, exchange rate developments and the balance of payments
11. Monetary policy is focused on maintaining the nominal exchange rate peg of the
Bahrain dinar to the SDR, at a rate of BD 0.47619 pe r SDR, and regulating short-term fluctuations in
domestic liquidity.  The exchange rate may be varied within a 7.25% margin of this rate against the
SDR, which has been fixed since August 1978.  In practice, the Central Bank, the Bahrain Monetary
Authority (BMA), intervenes against the U.S. dollar in the exchange market.
5  The middle rate of the
dinar against the U.S. dollar is quoted by the BMA and has remained unchanged since December
1980 at US$2.6596 per dinar.6
12. The BMA has a limited number of monetary policy instruments at its disposal.  Treasury bills
are used to regulate liquidity positions of commercial banks in Bahrain dinars.  Liquidity is providedthrough secondary operations in Treasury bills, including discounted treasury bill operations and sales
of treasury bills by commercial banks to the BMA with an agreement to repurchase them at a later
date and at a higher price.  The BMA also appears to have legal authority to fix interest rates but has
not exercised this authority to date;  instead it publishes recommended rates for Bahrain dinar
deposits.
13. The nominal and real effective exchange rates of the Bahrain dinar have varied considerably
since 1990.  The real effective exchange rate (REER) depreciated between 1990 and 1996 with the
exception of 1993;  since 1996, its value has appreciated, although at a less rapid rate than the
nominal effective exchange rate (Chart I.1).
                                                     
5 IMF (1999).
6 The exchange system is free of restrictions on payments and transfers for international current and
capital transactions and there is no legislation on exchange control.  Bahrain accepted the obligations of
Article VIII, sections 2, 3 and 4 of the IMF's Articles of Agreement on 20 March 1973.WT/TPR/S/74 Trade Policy Review
Page 8
Box I.2:  Budgetary reform
According to the authorities, the medium-term objectives of fiscal policy include restraining and reducing
current expenditures;  enhancing non-oil revenues;  and eliminating the structural budget deficit.  In thisregard a number of measures to increase non-oil revenue and to curb expenditure have been initiated inrecent years.  Most of these are on the expenditure side but some measures have also been taken to increasenon-oil revenue.
Revenue enhancing measures
The price of natural gas was raised to US$0.75 per million British Thermal Unit (MBTU), an increase of
80%, in March 1998.  The measure is expected to rais e additional revenue of BD 12 million.  In addition,
fees for a variety of services including for embassy and consular services, environmental services, housing,transport, postal services, and education services, were raised in November 1998.
Expenditure cutting measures
The Public Expenditure Management Strategy (PEMSY):  was approved by Cabinet in 1996.  It is aimed at
increasing cost recovery on government services;  contracting out of several publicly provided services tothe private sector, where viable;  and the privatization of selected government activities.
Enhanced cost recovery:  in addition to restraining government expenditure, and postponing non-strategic
expenditure for the 1999/2000 budget, the Cabinet approved the merger of Aluminium Bahrain (ALBA)
and the Bahraini-Saudi Aluminium Company (BALCO), in February 1999, in order to reduce duplication
of administrative costs.  Cabinet also approved an increase in electricity and water, sewerage, and healthservice user charges in 1996.  A policy decision was taken to implement a compulsory healthcare insurancescheme for expatriate residents, and an inter-ministerial committee including representatives from theMinistries of Health, Finance and National Econom y, Commercial, and Labour and Social Affairs was
formed to examine this issue.  The Government hopes to recover around BD 8-10 million per year through
this measure.  A further measure was approved by Cabinet, in September 1998, under which, housing
allowances rather than accommodation will be provided to expatriate residents, saving the Governmentaround BD 700,000 per year.  Proposals for higher utility tariffs and a levy on sewerage services arecurrently being considered by Cabinet.
Contracting out and privatization:  seven out of 40 activities carried out by various ministries were
identified and approved by the PEMSY steering committee and/or were in advanced stages of
implementation for contracting out in 1998/99.  The activities include municipality services such as refusecollection and street cleaning, maintenance of air-conditioning units, transportation of teachers, towageoperations, maintenance of traffic signals, cleaning servi ces in schools, and airport car park.  The steering
committee also approved the formation of an employee-sponsored company for operating towage services,which is awaiting approval.  The privatization programme currently proposes to sell the government
slaughterhouse and to privatize some public transport activities;  the Government has also invited tenders
from the private sector to build and operate the second phase of the HIDD power project.  Much, however,depends on whether the early retirement scheme for potential redundancies from these sell-offs can beapproved.
Other measures include:  a programme and expenditure review (PER) commenced by the World Bank on
the education sector, and a United Nations Development Programme recommended Performance and
Programme Budgeting System (PPBS).  The PER is ex pected to recommend meas ures to rationalize the
education budget within the overall budget, improve resource mobilization, improve the efficiency of theeducation system, and enhance the role of the private sector.  A similar study is planned for the healthsector later.  Based on the PPBS report, which was submitted to Cabinet in April 1999, a pilot programmehas been initiated in Customs and Port Affairs; it will start with a reclassification of the accountingstructure and would gradually implement a programme based budget structure.
Source:   Government of Bahrain.Bahrain WT/TPR/S/74
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98.0100.0102.0104.0106.0108.0110.0112.0114.0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999Index 1995=100, period avera ge Chart I.1
Indices of real and nominal exchange rates, 1990-99
Source :   International Monetary Fund, International Financial Statistics.Real effective rate Nominal effective rate
14. As petroleum and petroleum products account for around 64% of Bahrain's total merchandise
exports, the trade balance closely follows trends in international energy prices and levels of domestic
petroleum production (including production from the offshore Abu Saafa field).  The current account
balance has thus fluctuated considerably since 1 995, falling to a deficit of almost 13% of GDP in
1998 as a result of a decline in international petroleum prices in that year.  An improvement in theprice of petroleum in 1999 led to a substantial improvement in exports in 1999 and 2000.  The current
account balance is expected to move to a surplus of almost 3% of GDP in 2000 as a result of this
improvement (Chart I.2 and Table AI.1).  The overall balance of payments has also tended to fluctuate
considerably, falling from a surplus of almost 3% of GDP in 1995 to a deficit of 1% in 1996;
following a surplus of 1.6% of GDP in 1997, the overall balance registered a deficit of 0.3% in 1998
before improving to a surplus of 0.4% and an expected 0.5% in 1999 and 2000, respectively
(Table AI.1).
(2) D
EVELOPMENTS IN TRADE
(i) Composition of trade
15. In 1999, Bahrain's total merchandise exports, including petroleum, totalled just under
US$4 billion (Chart I.3).7  The value of imports in 1999, including petroleum, was around
US$3.5 billion.  Exports and imports excluding petr oleum were valued at around US$1.4 billion and
                                                     
7 Data on merchandise trade provided by the authorities in the HS nomenclature, do not include data on
petroleum, which represents around 64% of exports and 37% of imports;  data on trade in petroleum by productonly has been taken from the Bahrain Monetary Agency (1999).  Thus, there may be some statisticaldiscrepancy in these data.WT/TPR/S/74 Trade Policy Review
Page 10
US$2.3 billion, respectively.  Despite its share of total exports falling from some 89% in 1985
(Table AI.2), petroleum still accounted for around 64% of merchandise exports in 1999.8  Bahrain's
other major exports include non-ferrous metals (18.7% of merchandise exports), textiles and clothing
(5.9%), ores and other minerals (4.1%) and chemicals (2.7%).  Bahrain's main imports are petroleum
(37.2% of total merchandise imports), machinery and transport equipment (18.2%) and agriculture
(13.7%).
01,0002,0003,0004,0005,0006,000
1995 1996 1997 1998 1999 2000-14.0-12.0-10.0-8.0-6.0-4.0-2.00.02.04.06.0Chart I.2
Balance of payments, 1995-2000
US$ millionPer cent
Left-hand scale: Right-hand scale:
Current account/GDP Total exports Petroleum exports Total imports
Estimated data.
Projected data.
Data provided b y the authorities.a
b
Source:a b
16. Non-oil exports are dominated by non-ferrous metals, the majority of which is aluminium
(accounting for around 52% of non-oil merchandise exports in 1999), followed by textiles and
clothing (16.5%), ores and other minerals (11.4%) and chemicals (7.5%) (Chart I.4).  Major non-oil
imports include machinery and transport equipment (29% of non-oil imports in 1999), agriculture(21.9%), other semi-manufactures (10.4%),  chemicals (9.4%) and mining (9.1%).
                                                     
8 Data on export and import shares of sectors may vary from those presented in Chapter IV due to the
different nomenclatures used.  Data in Chapter I are based on SITC Rev.1, whereas data in Chapter IV are basedon ISIC.Bahrain WT/TPR/S/74
Page 11
Per cent
Exports Imports
Machinery & transport equipment
18.2Textiles & clothing
5.3Other consumer
 goods  5.3Agriculture
13.7
Other semi-manufactures
6.5Other mining
5.7Chart I.3
Product composition of merchandise trade, 1999
Chemicals
5.9
Source :  Data provided by the authorities;  and Bahrain Monetary Authority (1999), Quarterly Statistical Bulletin,   
              Vol. 25 No. 4 , December.Non-ferrous metals
18.7
Textiles & clothing
5.9Agriculture  1.5Fuels
64.0
Other manuf.   3.0 Mining
86.8Ores and other 
minerals  4.1
Chemicals
2.7Manufactures
43.4Iron & steel  2.1
Total:  US$3,991.4 million Total:  US$3,536.5 million Manuf.
11.6 Mining
42.9Fuels
37.2
Per cent
Exports Imports
Machinery & transport equipment
29.0Textiles & clothing
8.5Other consumer 
goods
8.4Agriculture
21.9Other semi-
manufactures
10.4Mining
9.1Chart I.4
Non-oil product composition of merchandise trade, 1999
Chemicals
9.4Non-ferrous metals
52.0
Machinery & transport equip.
2.4Textiles & clothing
16.5Chemicals
7.5Iron & steel 
1.2
Other consumer goods
1.9Other semi-manuf.
2.8 Mining
63.4
Manufactures
32.3Ores and other 
minerals
11.4
Agriculture
4.3Manufactures
69.1Iron & steel
3.4
Total:  US$1,437.9 million Total:  US$2,288.8 million
Note:     Excluding petroleum (HS 2709), representing 64.0% of exports and 37.2% of imports.
Source :  Data provided by the authorities;  and Bahrain Monetary Authority (1999), Quarterly Statistical Bulletin,  
              Vol. 25 No. 4, December.
17. Trade in services grew during the 1990s.  In 1998 Bahrain's receipts from trade in services
were US$769 million, compared with US$411 million in 1991, while debits were US$740 million in
1998, growing slightly from US$710 million in 1991.9  Bahrain's main services exports are travel
                                                     
9 IMF (2000).WT/TPR/S/74 Trade Policy Review
Page 12
(47.6% of total services receipts), air transportation services (33.7%), and other business services
(18.7%).  In 1998, the main imports of services were freight transport by sea (43.2% of total debits
from services trade), passenger air transport (24.9%), travel (19.2%), and other services (12.6%).
(ii) Direction of trade
18. The majority of Bahrain's non-oil merchandise exports, 31.1%, are destined for the
Middle East (Chart I.5).  The largest single destination is the United States, accounting for 17.9% oftotal exports in 1999, followed by Saudi Arabia with 17.5% and India at 7.0%.  The European Union
accounted for around 10% of total exports.  Non-oil imports originate mainly in the European Union,
with a share of around 29% in 1999.  The largest single source of non-oil imports is Saudi Arabia at
9.3%, followed by the United States.  Data, by partner, on trade in petroleum, which accounted for
64% of exports and 37.2% of imports in 1999, were not available.
Per centExports ImportsChart I.5
Direction of non-oil merchandise trade, 1999
Note:     Excluding petroleum (HS 2709), representing 64.0% of exports and 37.2% of imports.United States
17.9
Kuwait
3.1Other Middle East
3.1United Arab Emirates
3.9Saudi Arabia
17.5EU15
9.8
Chinese Taipei
6.0
Qatar
3.5 East
Asia
25.7 Middle East
31.1South Korea
3.9
Japan
5.2Other East Asia
10.6India
7.0 Oceania  2.9Africa  
  2.5Other
3.0
Total:  US$1,437.9 million Total:  US$2,288.8 millionEU15
29.3South Asia
5.6
Other Europe
3.4Japan
8.1
Saudi Arabia
9.3United Arab
 Emirates
4.5Australia
7.9
Other America
5.0
Other East Asia
9.2
China
3.4United States
9.1
M. East
17.2 East
Asia
20.7Other
1.6
Other Middle East
3.4
Source :  Data provided by the authorities;  and Bahrain Monetary Authority (1999), Quarterly Statistical Bulletin,   
               Vol. 25 No. 4, December.
19. Data on trade in services by partner are not available.
(3) TRENDS IN FOREIGN DIRECT INVESTMENT
20. In an attempt to improve economic growth, Bahrain has actively promoted investment, both
foreign and domestic.  Inflows of foreign direct investment (FDI) increased steadily from 1993 to
1996, when around US$2.1 billion was invested in Bahrain.  Since then, however, FDI inflows have
fallen significantly, down to US$329 million and US$181 million in 1997 and 1998, respectively(Chart I.6).
21. Data provided by the authorities show th at the total stock of FDI in 1998 was some
US$700 million.  The majority of this stock, around 60%, appears to be held by the United Arab
Emirates (U.A.E.), followed by Kuwait (16.8%), Saudi Arabia (8.2%), and Qatar (6.6%).  There
appears to be very little FDI in Bahrain from outside the GCC region.Bahrain WT/TPR/S/74
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-50005001,0001,5002,0002,500
1992 93 94 95 96 97 1998FDI inflows, 1992-98
Source :  International Monetary Fund,  International Financial 
                Statistics (various issues).Chart I.6
Foreign direct investment (FDI)
FDI b y origin, 1998
US$ million
United Arab Emirates
59.5Per cent
Kuwait
16.8Other  2.5
India  1.6
Yemen  2.3
Oman  2.5
Qatar
6.6
Saudi Arabia
8.2
Source : Data provided by the authorities.Total:  US$699.7 million
(4) OUTLOOK
22. Despite considerable success in increasing economic diversification, Bahrain's economy
remains affected by volatility in the international market for petroleum products.  The main challengescurrently facing Bahrain are relatively low rates of real economic growth combined with low rates of
private investment in the economy;  a need for diversification to reduce Bahrain's vulnerability to
international petroleum prices and declining reserves;  and increasing unemployment, especially
among Bahrainis.  The Government's strategy has been to improve the economic climate for private
domestic and foreign investment, while gradually restricting its own role to investment in largeinfrastructural projects.  In this respect, new legislation has been enacted to raise limits on foreign
investment in sectors of the economy that the Government believes play a key role in helping Bahrain
to diversify its production base.  A programme to improve fiscal management has also been initiated
and includes contracting out some government services to the private sector;  in the longer run, the
privatization of some public sector companies is planned.  The Government has also had an ongoing
programme of Bahrainization, combining incentives for companies to employ Bahraini nationals with
improved training methods.
23. As a result of these policies there was some success in raising the share of non-oil products in
merchandise exports during the 1990s.  Trade in services also expanded during this period.  Private
investment, including foreign direct investment flow s, however, appear to have remained low, despite
reform in this area, suggesting that the discreti onary policy with regard to private investment in
activities dominated by the public sector may also need to be addressed to make the environmentmore attractive to investors.  The longer-term chal lenge remains that of raising real economic growth
rates and increasing economic diversification.  The Government has targeted services, especially
financial services, and downstream manufacturing activities, and has further opened these activities to
private investment.  It is likely that the Government's privatization programme will have to be
expanded, both to free up resources for the private sector but also to increase confidence in theeconomic reform programme.