The Numbers
Bahrain’s fiscal position is, by the standards of the GCC, uniquely precarious. The numbers tell a story that no amount of diplomatic language can soften.
Public debt stands at approximately 120 percent of GDP — a figure that would be alarming for a developed economy and is extraordinary for a Gulf state. For context, Abu Dhabi’s debt-to-GDP ratio is negligible. Saudi Arabia’s is approximately 25 percent. Kuwait’s is under 10 percent. Bahrain is not merely more indebted than its neighbours — it occupies a different fiscal universe.
The fiscal deficit has been persistent. Bahrain has run budget deficits in most years since the 2014 oil price collapse, with the shortfall typically ranging from 5 to 10 percent of GDP. The deficits are funded by a combination of domestic and international borrowing, drawing down reserves, and — critically — financial support from Gulf neighbours.
Credit ratings have deteriorated accordingly. Bahrain is rated B+ by S&P and Fitch, and B2 by Moody’s. These are sub-investment-grade ratings — below the level at which many institutional investors are permitted to hold sovereign debt. The ratings reflect not merely the current fiscal position but the agencies’ assessment that Bahrain’s capacity to service its debts depends, in part, on continued support from Saudi Arabia and other GCC states.
How Bahrain Got Here
Bahrain’s fiscal predicament is the product of three structural forces that have operated in parallel over the past two decades.
Declining oil revenues. Bahrain’s oil production is approximately 190,000 barrels per day from the Abu Safa field (shared with Saudi Arabia, with revenues split equally) and the Bahrain field. This production is a fraction of Abu Dhabi’s output and generates revenues that are insufficient to fund the government’s expenditure commitments. Bahrain’s proven oil reserves are estimated at approximately 125 million barrels — less than what Abu Dhabi produces in a single month. The kingdom has announced the discovery of a large tight oil and deep gas resource in the Khalij al-Bahrain basin, but developing this resource will require years of investment and technical work before it contributes meaningfully to revenues.
Sticky public sector costs. Bahrain’s government is the kingdom’s largest employer. Public sector wages and salaries, subsidies, and social transfers constitute the majority of government expenditure. These costs are politically difficult to reduce because they directly affect the living standards of Bahraini citizens, many of whom depend on government employment or subsidies. Attempts to reduce subsidies — particularly on fuel, electricity, and water — have provoked public resistance.
Insufficient sovereign wealth. Mumtalakat, Bahrain’s sovereign wealth fund, manages approximately $18 billion in assets. While this is a meaningful sum, it is too small to serve as a fiscal backstop of the kind that ADIA provides Abu Dhabi. If Bahrain were to draw on Mumtalakat to fund fiscal deficits at the current rate, the fund would be depleted within a decade. Mumtalakat’s portfolio is also concentrated in domestic assets — including a 69 percent stake in Alba, Bahrain’s aluminium smelter — which limits its liquidity and diversification.
The combination of these three forces creates a fiscal dynamic that is fundamentally different from any other GCC state. Saudi Arabia, Kuwait, Qatar, and Abu Dhabi all have either larger oil revenues, larger sovereign wealth reserves, or both. Bahrain has neither.
The 2018 GCC Support Package
In 2018, at a moment when Bahrain’s fiscal trajectory appeared unsustainable, Saudi Arabia, Kuwait, and the UAE pledged a $10 billion support package. The package was structured as a combination of grants, deposits with the Central Bank of Bahrain, and project financing, to be disbursed over several years.
The support package was not charity. It was a strategic intervention by Bahrain’s GCC neighbours — principally Saudi Arabia — to prevent a fiscal crisis that could have destabilised the kingdom and, by extension, the broader Gulf security architecture. Bahrain hosts the United States Fifth Fleet, sits across the causeway from Saudi Arabia’s Eastern Province (where much of the kingdom’s oil infrastructure and Shia population are concentrated), and plays a role in Gulf security cooperation that is disproportionate to its economic size.
The 2018 package bought Bahrain time. It reduced the immediate pressure on the sovereign bond market, stabilised the central bank’s foreign reserves, and provided a window for fiscal reform. But it did not resolve the underlying structural imbalance. Bahrain’s fiscal deficits have continued, and the kingdom’s debt has continued to grow.
The implicit — and occasionally explicit — message from the GCC donors was that the support came with expectations of reform. Bahrain was expected to implement fiscal consolidation measures, reduce subsidies, broaden the revenue base, and move toward a sustainable fiscal path. Whether those expectations have been met is a matter of debate.
Reform Efforts
Bahrain has implemented several reform measures since 2018, most notably under the Fiscal Balance Programme.
Value Added Tax (VAT) was introduced in January 2019 at a rate of 5 percent, subsequently increased to 10 percent in 2022. VAT has broadened the government’s revenue base, generating meaningful non-oil income for the first time. The implementation was relatively smooth by regional standards, though compliance and enforcement remain works in progress.
Subsidy reform has been partial and politically constrained. Fuel subsidies have been reduced but not eliminated. Electricity and water subsidies for commercial users have been restructured. But the most politically sensitive subsidies — those affecting household energy costs, food prices, and social transfers — remain largely intact.
Government expenditure rationalisation has been attempted through hiring freezes, salary caps, and the consolidation of government agencies. Progress has been incremental rather than transformative. The public sector wage bill remains the largest single item in the budget, and the political dynamics of a small kingdom with a population of 1.5 million make aggressive public sector reform risky.
Voluntary retirement schemes have been introduced to reduce the size of the public workforce without compulsory redundancies. Take-up has been modest.
Revenue diversification beyond VAT includes tourism levies, municipal fees, and efforts to increase non-oil exports. Bahrain has also pursued the monetisation of government assets — including partial privatisations and public-private partnerships — though the proceeds have been modest relative to the scale of the fiscal gap.
The Structural Problem
Bahrain’s fiscal challenge is fundamentally a problem of arithmetic. Government expenditure exceeds government revenue. The gap cannot be closed by oil production growth (reserves are too small), by sovereign wealth drawdowns (the fund is too small), or by GCC support alone (the package is finite and conditional).
The only sustainable solutions are some combination of: dramatically reducing expenditure (politically difficult), dramatically increasing non-oil revenue (economically challenging), and growing the economy fast enough that the debt-to-GDP ratio declines through denominator expansion rather than numerator reduction (optimistic but uncertain).
The difficulty is that all of these solutions require time, and time is the resource that Bahrain has least. Every year of continued fiscal deficits adds to the debt stock, increases interest payments, and narrows the fiscal space available for reform. The longer the structural imbalance persists, the more severe the eventual adjustment will need to be.
This creates a policy dilemma that is familiar from fiscal crises in other small, open economies. Austerity measures risk depressing economic growth, which worsens the debt-to-GDP ratio even as it reduces the deficit. Growth-oriented spending risks widening the deficit, which worsens the debt trajectory. The optimal path is narrow: enough consolidation to stabilise the debt ratio, enough investment to sustain economic growth, and enough reform to convince markets and GCC partners that the trajectory is changing.
The Saudi Factor
Any analysis of Bahrain’s fiscal sustainability must acknowledge the role of Saudi Arabia. The kingdom is Bahrain’s largest economic partner, its primary security guarantor, its neighbour across the 25-kilometre causeway, and the implicit — and occasionally explicit — backstop of its sovereign solvency.
The 2018 GCC support package was led by Saudi Arabia. The Abu Safa oilfield revenue-sharing arrangement — under which Saudi Arabia allocates half of the field’s production revenues to Bahrain — provides a significant portion of Bahrain’s oil income. Saudi weekend tourism, flowing across the King Fahd Causeway, is one of the largest sources of private-sector economic activity in Bahrain.
This dependence gives Saudi Arabia significant leverage over Bahrain’s economic policy, and it raises a question that markets continually assess: will Saudi Arabia continue to backstop Bahrain if the kingdom’s fiscal reforms are insufficient? The answer, most analysts conclude, is probably yes — because the geopolitical cost of a Bahraini fiscal collapse (instability on Saudi Arabia’s eastern border, risk to the US Fifth Fleet basing arrangement, precedent for GCC disunity) exceeds the fiscal cost of continued support.
But “probably yes” is not “certainly yes,” and the conditionality of GCC support — even if lightly enforced — creates a discipline that Bahrain’s domestic political dynamics alone might not produce.
The Comparison That Matters
The comparison that illuminates Bahrain’s predicament is not with Abu Dhabi — the asymmetry is too vast to be instructive — but with other small, resource-dependent economies that have faced fiscal crises.
Trinidad and Tobago, another small oil-dependent island economy, experienced a severe fiscal adjustment in the 1980s and 1990s when oil prices declined and the Heritage and Stabilisation Fund was too small to bridge the gap. The adjustment was painful but eventually successful, driven by diversification into petrochemicals and financial services.
Oman, the GCC state most comparable to Bahrain in fiscal terms, faces similar challenges: moderate oil reserves, growing debt, sub-AA credit ratings, and the need for structural reform. Oman’s adjustment has been slower and less decisive, reflecting the political constraints common to Gulf monarchies.
What these comparisons suggest is that fiscal adjustment in small, resource-dependent economies is possible but slow, politically difficult, and almost always requires external support during the transition period. Bahrain has the external support (from Saudi Arabia and the GCC). The question is whether it has the political will and institutional capacity to implement the structural reforms that the support is intended to facilitate.
Outlook
Bahrain’s fiscal trajectory is not yet unsustainable — but neither is it sustainable. The kingdom exists in a liminal space: solvent enough to service its debts, fragile enough that a sustained oil price downturn or a withdrawal of GCC support could precipitate a crisis.
The most probable scenario is continued muddling through: gradual reform, periodic GCC top-ups, manageable but growing debt, and a credit rating that hovers in sub-investment-grade territory. This scenario is not catastrophic — Bahrain is not headed for sovereign default — but it constrains the kingdom’s ambitions and limits its capacity to invest in the economic diversification that its Vision 2030 document envisions.
The less probable but more consequential scenarios are at the tails. A decisive reform programme — deeper VAT, meaningful subsidy reduction, aggressive non-oil revenue generation — could stabilise the fiscal position and restore investment-grade credit within a decade. A sustained external shock — prolonged low oil prices, withdrawal of GCC support, geopolitical crisis — could accelerate the debt trajectory toward a point where restructuring or a more dramatic rescue becomes necessary.
Bahrain needs to reform faster than any other GCC state because it has the smallest safety net. Whether it will is the question that defines the kingdom’s economic future.