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Resilience and diversification.

THE GULF CRISIS in many respects was a watershed for the economies of the region's states. They demonstrated resilience in their abilities to withstand the great upheaval and to bounce back relatively unscathed with private and foreign investor confidence bolstered.

Despite the lingering effects of the Kuwait war, at the end of 1991, according to the Bahrain Monetary Agency (BMA), commercial banks' deposits rose by 7.7% over the previous year, the overall balance of payments showed a surplus of BD87.9m ($239m) in 1991 - up on the BD26.8m ($72m) surplus in 1990, and the actual budget deficit in 1991 totalled BD25.5m ($68m) - down on the 1990 figure of BD38.9m ($104m).

However the budget deficit for 1992 soared to an estimated BD131m ($350m) because of Bahraini commitments as a result of the Gulf war, of cuts in public service fees estimated to cost BD10m, and because of a reduction of the annual grants which Bahrain receives from Saudi Arabia and Kuwait due to the Gulf crisis. Like other GCC states, Bahrain has resorted to domestic borrowing through a higher weekly offering of treasury bills to finance a persistent budget deficit caused also by a sharp decline in oil revenues during the 1980s.

It seems that 1992 was the toughest year in that a large share of commitments as a result of the Gulf crisis were met in that year. But the boom and reconstruction needs that have materialised as a result of the crisis have also meant that Bahrain has been implementing important economic and industrial restructuring strategies which call for greater infrastructure and other expenditures. These include the capacity expansion of the Aluminium Bahrain (Alba) smelter, the building of two dry docks at Arab Shipbuilding and Repair Yard and the proposed new $600m iron and steel complex. Some of this financing will have to come from abroad.

The BD1,318m ($3.4bn) budget announced for fiscal year 1993/94, according to Bahrain's finance and economy minister, Ibrahim Abdul al Karim, was in response to "the delicate stage through which the national economy is passing. Therefore, the budget has applied a set of bases and principles which seek to attain the best exploitation of the available financial resources." The government's current policies include the expansion and diversification of the economy, job creation, application of incentives in key areas, continued reduction of costs to enterprises, improvement of economic planning and management, the privatisation of public enterprises, rationalisation of government expenditure and the development of ever-closer ties with the GCC and other neighbours.

Not surprisingly, the minister's own estimate of the 1993 budget deficit of BD63m is significantly down on the 1992 figure, although the deficit is expected to rise again in 1994 to BD75m. Al Karim considers this "a big burden" for an economy the size of Bahrain's. The implication is that the government is cautious about financing major public projects and is keen on the involvement of the private sector and foreign direct investment, which it is hoped will increasingly contribute to the island-state's medium-term industrial financing needs. Private sector building activity alone over the last three years has increased by 25%.

The fact that Bahrain is a minor oil producer, whose reserves are dwindling and likely to be exhausted by the turn of the century, means that the further development of the industrial sector and tourism are now top priorities for the Bahraini government. Indeed, the contribution of the non-oil sector to GDP has been steadily increasing and this has resulted in a progressive annual increase in GDP from BD1,158.1m ($3.1bn) in 1980 to BD1,467.5m ($3.9bn) in 1990, despite the fluctuations in oil prices.

Bahrain also boasts one of the highest per capita national incomes in the developing world, which stood at BD2,662 in 1990. The aim of the government is also to diversify the sources of national income, avoiding dependence on oil and gas as a principle source of revenue, and establishing a modern production base capable of self-sufficient growth.

Oil production remains at a more or less stable 15.6m barrels a year, although refined oil production in 1991 increased by 3.5m barrels to 93.5m barrels from the previous year. Net receipts from travel and tourism, according to BMA figures, increased from BD15.7m in 1990 to BD24.0m in 1991. This increase "was mainly the result of government efforts to encourage tourism in Bahrain."

Bahrain initiated a national industrial diversification programme in 1960s. Today this has transformed the economic base to include oil refining, petrochemicals, aluminium and related downstream industries, ship repairing, and small to medium-scale industry and manufacturing. In addition, Bahrain today has become an important centre for regional distribution and the major financial services centre in the Gulf.

Another reason for boosting industry is to promote exports as a revenue earner. Bahrain has for many years now had a deficit in its international trade. In 1991, according to the IMF, the island's imports rose 4.1% to $3,993m while its reports rose by 11% to $3,161m, leaving a trade deficit of $832m. Japan (which took $409m worth of Bahraini exports), the UAE, India, Pakistan and Singapore were the country's major export markets in 1991 for its refined oil, aluminium and petrochemical products. Saudi Arabia accounted for 41% (or $1,656m) of Bahrain's total imports in 1991.

The country is seeking to diversify its export markets and Bahraini delegations have been searching for new markets ranging from China and South Africa to the European Community. Bahrain believes that the framework agreement concluded in 1988 between the GCC and the EC contains important guidelines for the implementation of the general principles contained therein. Bahrain like other GCC states is lobbying strongly against the proposed EC carbon tax and high EC tariffs on Gulf petrochemical exports.
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Title Annotation:Special Report; industrial diversification in Bahrain
Author:Parker, Mushtak
Publication:The Middle East
Date:May 1, 1993
Previous Article:Open door to foreign investors.
Next Article:Aluminium on a roll.

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