Bahrain's economy strained as low oil prices persist

Bahrain's central bank says net foreign assets dropped 11% to $1.7bn in February
Bahrain's economy strained as low oil prices persist
Bahrain skyline
By Bloomberg
Mon 08 May 2017 02:07 PM

Bahrain has been unable to stem the decline in its foreign reserves as lower oil prices strain the smallest economy among Gulf Arab monarchies.

Net foreign assets dropped 11 percent to 645.2 million dinars ($1.7 billion) in February, from the 725.9 million dinars in January, Bahrain’s central bank reported.

Overall, they’re down 71 percent from a peak of 2.24 billion dinars in November 2014, according to data compiled by Bloomberg.

Bahrain, which pegs the dinar to the dollar, has been more vulnerable to slumping oil prices and regional political instability than richer Gulf Cooperation Council states. Authorities increased spending in response to the global recession in 2009 and civil unrest two years later as sectarian tensions escalated in the Gulf island nation.

The further drop in foreign reserves comes nearly a month after the International Monetary Fund warned that Bahrain, a close Saudi ally and the home of the US Navy Fifth Fleet, needs to make significant spending cuts to restore stability to its budget and improve investor confidence.

“We expect FX reserves to remain under pressure this year, in part due to financing the current account deficit,” said Carla Slim, Dubai-based economist at Standard Chartered.

With authorities expected to preserve the peg, “Bahrain will likely either tap international markets or receive support from other GCC governments” if it needs to boost reserves, she said.

The government went to domestic and international markets last year to finance the country’s 2016 budget deficit of 1.5 billion dinars. Economic growth is forecast to slow to 2.3 percent this year, the lowest level since 2011, according to data compiled by Bloomberg.

The Washington-based IMF said in April that the drop in crude prices has largely offset “significant fiscal measures that were implemented,” causing the budget deficit and public debt in 2016 to stand at 18 percent and 82 percent of gross domestic product, respectively.

It said fiscal measures could include valued-added taxation and further rationalizing of spending on subsidies and social transfers.

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