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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
All of the government’s external debt is to regional development funds where external
funds are used to finance major infrastructure projects.