The small island nation of Bahrain is caught in a big squeeze. Middle Eastern rivals Iran and Saudi Arabia both feel a degree of connection and influence over its people and territory, and some of its wealthy neighbors — Saudi Arabia, the United Arab Emirates and Kuwait — often instruct the ruling al-Khalifa family on how to conduct the country's domestic and foreign policies. The rulers, who are Sunni, oversee a Shiite Arab majority population and an economy with more foreign workers than citizens. Those rulers also have a habit of needing help managing the country, and they are again in need of economic aid.
Bahrain, like the rest of its oil-rich neighbors, is trying to diversify away from hydrocarbons. In some ways, because it lacks the oil reserves of its neighbors Saudi Arabia, Kuwait and the United Arab Emirates, Bahrain has had a head start. But structural problems and unrest abound on the islands, and to keep those troubles contained, its powerful neighbors are willing to step in to help, as they have done before.
An Economy in Trouble
Bahrain has about 1.5 million people living on 771 square kilometers (297 square miles) of islands off the coast of Saudi Arabia in the Persian Gulf. Until the discovery of oil on the islands in the late 1920s, national income was primarily dependent on dates and pearls. Today its economy relies heavily on oil and natural gas, and it has also become strained under the weight of public subsidies.
The country now faces a precarious debt problem, brought on by low oil prices from 2014 to 2017 and expansionary national budgets that helped control its often-restive population. Bahrain's public debt reached 89 percent of its roughly $33 billion gross domestic product in 2017, while the government's fiscal deficit reached 13 percent of GDP. The International Monetary Fund (IMF) forecast that public debt could reach 100 percent of GDP in 2019 — an unheard of red line for the wealthy, oil-rich Gulf Cooperation Council (GCC). Bahrain is also facing low foreign currency reserves; in June 2018, the country had enough to cover only 1.5 months of imports.
In addition, the Bahraini dinar has hit exchange-rate lows this past year that it hasn't seen in 17 years. This drop is heightening concern in other GCC states that Bahrain's currency peg to the dollar is threatened and that the accompanying fear and instability could harm their own pegs (five out of six members tie their currency to the dollar). This currency contagion, low reserves and high debt are among the reasons the United Arab Emirates, Saudi Arabia and Kuwait agreed this year to a vague program of "supporting Bahrain's fiscal stability," a repeat of a similar extension of aid these countries made to Bahrain and Oman in the unstable initial months of the 2011 Arab Spring.
Bahrain's economy suffers from deep structural problems and needs extensive reform. Despite its high wealth per capita, the economy functions like those in some of the Middle East's most imbalanced countries, such as Jordan, where injections of money pour through like water through a sieve because of inefficiency and bloated bureaucracy. In Bahrain, the public-private wage gap is second only to Kuwait in the Middle East, meaning both have a high number of public employees. Also, while oil prices have recovered somewhat over the past year, the government hasn't maintained the urgency and support it needs to build up its non-oil sector. The IMF expects total stagnation on that front during the coming year.
In addition, higher taxes and subsidy cuts, which other GCC countries are introducing as part of a drive toward diversification, are difficult to implement in Bahrain, though the government is trying out of economic necessity. Controlling the population is a primary goal, because periodic slashes to subsidies for water and electricity have at times inflamed further anti-government sentiment. And a countrywide value-added tax was originally set for January 2018, but the government has put off its introduction until 2019, and that start could be delayed even longer.
Even the silver lining for Bahrain's economy, such as its healthy financial sector, which it has cultivated and nurtured for decades, is looking at tough competition from other GCC states. The IMF has called financial services technology a promising opportunity for Bahrain, but the tiny country will not be able to stay ahead of other GCC states that are strongly focused on their financial sectors as they accelerate their diversification drives and as global competition in Islamic finance increases.
Torn Between Two Powers
Bahrain has long had a deep connection to Saudi Arabia, with many jokingly referring to the islands as an appendage of the kingdom. Besides geographic proximity, those links include ethnic and tribal ties connecting Bahrain's ruling family to the ruling elite in Saudi Arabia. Bahrain's al-Khalifa hail from the Utub tribal families, which descend from the Anizah tribes that migrated to the shores of the Persian Gulf from the heart of the Arabian Peninsula. The islands also serve as a pressure valve, quietly approved by Riyadh, for Saudis seeking to step away from the kingdom's strict social and legal barriers to activities such as alcohol consumption. And to reach the islands, Saudis can take the massive King Fahd Causeway, a 25-kilometer-long physical testament to the symbolic link between Riyadh and Manama.
Across the Persian Gulf lies Iran, whose ties to Bahrain go back centuries. During the third to seventh centuries, the trading communities on the islands fell under the writ of the Persian Sassanid empire, and these enduring Tehran-Manama connections also play a part in driving Saudi Arabia to ever increase its influence and ownership over Bahrain. In addition, the Shiite Arab majority in Bahrain swelled with the migration of members of that group from Iran's southwest coastal regions in the 20th century. Today, Iran feels deep ties to that majority Shiite population, and over the past decades, it has occasionally tried to connect with Shiite anti-government activists. The most prominent example of this was the Islamic Front for the Liberation of Bahrain in the early 1980s, which the ruling family crushed.
In the aftermath of the Islamic Revolution in Iran in 1979, the GCC was formed. Its member states feared Iran's economic development and deepening geopolitical opposition to the Arab oil states. That apprehension underlies the deep political link between Riyadh and Manama. GCC members see Bahrain as a weak link that Iran may try to use to access the rest of the Arabian Peninsula, and the deployment of the GCC Peninsula Shield Force to Bahrain in 2011 reflected that fear. In addition, their support protects a fellow Gulf monarchy that toes the Saudi and Emirati foreign policy line publicly and loudly.
Bahrain does have a noisy parliament, which indicates the significant amount of public dissent simmering in the country, but elections later this year will be largely a nonevent. The al-Khalifa family has been steadily broadening its control since the British protectorate over the islands ended in the middle of the 20th century, and now it holds all meaningful political power in the country. The most meaningful event this quarter will involve the solidification of GCC aid, which may only trickle in during 2019, after members of the regional bloc draft their national budgets.
In the end, Saudi Arabia and the United Arab Emirates remain strongly inclined to extend this aid because they want to keep Bahrain's economic problems contained and want to keep a bulwark against Iranian influence from weakening. But these countries are also in the midst of their own aggressive economic reforms, and they will probably attach demands for fiscal reform to any aid. These measures will be in line with the vigorous moves on taxes and subsidies that they are introducing themselves. This aid, along with higher oil prices, will help keep Bahrain afloat, but hardly thriving.