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Bahrain, a member of the World Trade Organisation, has a liberal trade policy and its trade balance is usually in surplus except when oil prices have been exceptionally low (such as in 1998). Oil and gas account for almost 70 percent of Bahrain’s merchandise exports. Bahrain depends on imports for most of its needs, but is striving towards replacing 30 per cent of its imports with domestic production. The government actively promotes foreign investment, it allows 100 per cent foreign ownership of new industrial enterprises and the establishment of representative offices of branches of foreign companies without local sponsors. The Kingdom of Bahrain has been ranked 40th out of 160 countries, topping the Arab countries in terms of attracting foreign direct investment as published in the United Nations Annual World Investment Report (2002). Bahrain’s government spending accounts for 30 per cent of GDP. Receipts from oil, gas and borrowing from investment funds are the main sources for budgetary revenues. Oil revenues are greater than 50 per cent of total government revenues. There is a need to diversify government revenue and reduce reliance on oil production. Since the mid-1980s, Bahrain has had persistent budget deficit almost every year depending on oil prices. Budget deficits are mainly financed through treasury bills and long-term development bonds. In the last five years, the general government balance has recorded an average surplus of 2.6 percent of GDP. Standard & Poors report (2002) shows that Bahrain’s general government debt and debt-service burden are relatively low compared to peers. The government debt stood at about 18 per cent of GDP in past five years, while interest payments are relatively small, representing about 1.5 percent of GDP.2 The Bahrain Monetary Agency (BMA), the Kingdom central bank, has maintained a restrictive approach to monetary policy to protect the dinar which is pegged to the SDR at a rate of BD 0.376 per SDR for almost twenty years and recently the dinar is pegged to the US dollar at the same rate of 0.376. The long-standing fixed exchange rate regime has served Bahrain well in maintaining financial stability. Thus, interest rates on dinar have been close to their US dollar counterparts. The BMA can 2 All of the government’s external debt is to regional development funds where external funds are used to finance major infrastructure projects. 11