Gulf Cooperation Council: A Bulwark of Subsidies for Bahrain and Oman

5 MINS READMar 10, 2011 | 21:06 GMT
The Gulf Cooperation Council — the organization of Gulf Arab states — has announced the formation of a $20 billion financial assistance fund to help stabilize some of their weaker members. While it is odd for one country to give another country raw cash as a grant, in this case the Gulf Arabs all face the same problem.
Shiite unrest in Bahrain, likely amplified by Iran, has inspired the Gulf Cooperation Council (GCC) to create a financial assistance fund, which the GCC announced March 10. The $20 billion grant package put together by the GCC states, which include Saudi Arabia, Kuwait and the United Arab Emirates, is meant to provide a bulwark of subsidies to Bahrain and Oman, the two GCC states currently facing the most severe protests and financial pressures. The problem stems from a long and deep rut in which the Gulf Arab states have found themselves. Decades of high national incomes from oil and natural gas exports have altered the societies of the Arab states of the Persian Gulf. Accustomed to their governments providing for all their needs, most Arabs of the Gulf Arab states do not want to work and yet demand high — and constantly increasing — levels of subsidies. Since the rulers of these states do not come from majority groups — or even pluralities, in most cases — they spread the oil largess deep and wide to purchase political calm. Of course, someone still has to do the work, and the only way to placate the masses and have the trains run on time is to import legions of temporary guest workers — typically a mix of Egyptians and South Asians — to do all of the construction and maintenance. The result is chronically high inflation as the citizens never produce but always consume, and a bizarre mix of social tension and absolute placidity based on regular subsidy payments. There have been on-again, off-again efforts at economic diversification to break out of this rut, but they have not so much failed as they have been wildly inadequate or have simply added to the expense. Bahrain has attempted banking, but it lacks the core capital necessary to attract outside investors. Saudi Arabia's closed society has dissuaded all but the most heavily subsidized industries from sprouting. Dubai is probably the most successful case, sporting a regional financial center, a large tourist trade and a global airline, but none of those industries is viable without significant state support. And the 2008 financial crash exposed that Dubai was just as overleveraged as the most aggressive subprime mortgage lenders in the United States. Simply put, it is difficult to diversify when the locals will not work. This situation is sustainable only so long as the country has a rate of income that produces sufficient money to cover ever-rising subsidy costs. States with more oil and natural gas have tended to squirrel away surpluses for a rainy day, with the long-term intention of reaching sufficient size so that the entire country can live off the interest in perpetuity. So long as the income proves sufficient, demands for more subsidies are tolerable. Not all of these states, however, have such inexhaustible oil supplies, and that brings us to tiny Bahrain, the state that STRATFOR sees as the litmus test for Iran's ability to destabilize the Gulf Arab states. Like the other Gulf Arab states, Bahrain is ruled by minority Sunnis. Of the country's roughly 1.6 million people, half are guest workers and three-quarters of the citizenry are Shia. Bahrain has a sovereign wealth fund, but it is not a huge one: a $9.1 billion fund for a $21 billion economy. And unlike its Gulf Arab neighbors, Bahrain is nearly out of energy reserves. It produces roughly 40,000 barrels of crude per day and 12 billion cubic meters of natural gas per year, all of which is consumed locally. Its biggest source of income is a refining industry that produces about 230,000 barrels per day of products for export — a remarkable achievement for a country of Bahrain's size — nearly all of which is sold beyond the Middle East. Refined goods normally have a much fatter profit margin than crude oil but are subject to even greater price swings when demand falls; for instance, Bahrain took in $10.8 billion from product sales in 2007 but only $2 billion in 2009. That drastic drop landed the country with a budget deficit of 10 percent of gross domestic product that fiscal year. The bottom line is that Bahrain's income has dwindled to the point that it has little choice but to eat into the principal of its wealth fund when demands for higher subsidy levels occur, and such cannibalizing will not last very long. Protests are wracking the small country right now — unrest almost certainly fueled by Persian intelligence assets — and to fend off catastrophe the government has announced a multibillion-dollar housing-construction plan. Reports indicate that the plan will cost anywhere from $5.3 billion to $6.6 billion. Even assuming that this housing project will be the only effort to satisfy the protesters, and even assuming that the Bahrainis can liquidate the fund fast enough to pay down the social unrest, that is still about two-thirds of Bahrain's entire fund. The point is that while a Bahraini financial collapse might not be imminent, it is probably inevitable. And since Bahrain is the country that Iran sees as the test bed for its ability to stir up Shiite populations within the Gulf Arab states, the leaders of the other Gulf Arab states have certainly taken notice of Bahrain's financial problems. It is no surprise then that the GCC created a $20 billion grant to bulwark the subsidy structures of Bahrain and Oman. It is not so much that the rest of the Gulf Arabs have a deep and abiding love for the Bahrainis, but more that the Kuwaitis and others realize that if Iran can topple the Bahraini government, they could be next.

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