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Home / Blog / Bahrain Economy Struggles with Oil Price
January 20, 2016

Bahrain Economy Struggles with Oil Price

By Leah Schulz

Last week the Bahraini cabinet announced it was raising the country’s price of gasoline for the first time in 33 years. The price of regular gasoline rose from 20 cents per liter to 33 cents while the price of super gasoline jumped from 27 cents per liter to 42—a staggering 60 percent increase.

The decision sparked outcry even from members of Bahrain’s mostly pro-government parliament. "The decision will make the poor poorer. We demand an improvement to people's standard of living, and what the government did yesterday will not achieve that," said MP Jamal Dawood.

No one is disputing that declining oil prices have hurt Bahrain’s economy. Revenues from oil sales provide about 70 percent of the country’s annual budget. For Bahrain to fiscally break even, the price per oil barrel must be around $120, according to international credit agency Fitch in 2015. Today the price hovers below $30.

While Bahrain has little control over the world’s falling oil prices, their drastic price decrease is not the only reason for the country’s economic decline. Bahrain’s failure to achieve a political resolution of the country’s ongoing crisis plays a major role.

The government’s violent crackdown on the pro-democracy protests of early 2011 led to an ongoing volatile environment. This strains the country’s economy by driving away potential foreign investment. In December of 2015, Fitch revised Bahrain’s rating from stable to negative, citing falling oil prices and a failure to address the political situation. While Fitch does not anticipate improving Bahrain’s rating any time soon, factors that could lead to a more positive evaluation include “a broadly accepted political solution that eases political unrest.”

Echoing Fitch’s sentiments, in April 2015 the credit rating agency Moody’s also warned, “Economic policymaking is hampered by a still unsettled domestic political situation in the country... The experience of public unrest in 2011 suggests that the government will face continuing pressure to keep current spending growing.”

Moody’s and Fitch are correct that underlying issues from 2011 plague the country today. In response to the 2011 protests, the regime imprisoned and in many cases tortured those who led the call for change. The government continues to stifle peaceful dissent and has failed to implement most reforms recommended in the Bahrain Independent Commission of Inquiry (BICI). As a result of the stalled political cooperation, problems of sectarianism and inequality are pushing Bahrain further and further away from becoming a stable and inclusive society.

The economic toll from this failure to reform is likely to grow worse. “Without a political solution, which would facilitate steps to cut expenditure and broaden the private sector, government debt as a percentage of GDP is forecast to increase to 60 percent in 2018, which would be extremely high by GCC standards,” cautioned the World Bank in 2014.

A stable, prosperous Bahrain cannot emerge until the regime addresses the grievances that sparked the 2011 protests. The longer the discontent remains unresolved, the more unpredictable the outcome for U.S. national interests. For fiscal year 2016 the United States allocated $3.5 million for Bahrain in Economic Support Funds (ESF) for “programs and activities to promote reconciliation, democratic reform, and adherence to international human rights and labor rights standards in Bahrain.” Unless the Bahrain government reverses course, one shouldn’t expect much return on this investment.