Bahrain’s slumping economy and mushrooming public debt have been given a fresh lifeline as Saudi Arabia and other Gulf Cooperation Council (GCC) allies have agreed to inject billions in order to stabilize the tiny island gulf nation and prevent a looming financial crisis.
In a move designed to keep Bahrain’s currency from collapsing and to avoid a potential credit crunch, Saudi Arabia, Kuwait, and the United Arab Emirates have pledged to give Bahrain $10 billion — enough to meet its funding requirements as it attempts to eliminate its budget deficit by 2022.
Bahrain had faced the likelihood of defaulting on a $750 million Islamic bond repayment due on Nov. 22. and the IMF last spring warned its public debt represents 89 percent of its gross domestic product, while reserves are low.
Bahrain was severely impacted by a slump in global oil prices in 2014 and has experienced sporadic political unrest going back to the so-called “Arab Spring” protests of 2011.
Beyond wanting to stave off financial collapse and any associated contagion or dwindling confidence in the region from spreading, its GCC partners have a pressing geopolitical interest in protecting the ruling Khalifa monarchy as well.
The last time Bahrain needed an urgent “bail out” from its Saudi older brother – a New York Times headline from 2011: Saudi Troops Enter Bahrain to Help Put Down Unrest
The tanks poured across the King Fahd Causeway bridge, which connects Saudi Arabia and Bahrain
When widespread protests among Bahrain’s Shia-dominant population first broke out against the longtime Sunni rule of King Hamad bin Isa Al Khalifa and his family — a dynasty which has held power since 1783 — the Saudis immediately sent tanks and over 1000 troops across the King Fahd causeway to suppress the Shia rebellion, with the UAE sending a further 500 of its own police and security personnel.
Thus Bahrain’s Sunni “big brothers” in the region fear that any deep financial turmoil could quickly lead to internal political unrest among the majority Shia population.
Bahrain – Public debt (% of GDP) projected through 2020, via the IMF/Actualitix
The details of what’s essentially an Arab bailout deal are summarized by Reuters as follows:
A package of reforms announced by the Bahrain government on Thursday are aimed at delivering 800 million Bahraini dinars ($2.12 billion) in annual savings and eliminate its budget deficit by 2022. Manama had projected a $3.5 billion budget deficit in 2018.
…The program includes reforms aimed at reducing public expenditure and inefficient spending while also simplifying government processes and increasing non-oil revenue.
A source quoted by Reuters said the $10 billion support package is to be delivered through a long-term, interest-fee loan with financing to be provided gradually on terms acceptable to both parties. The loan is said to be enough to keep Bahrain’s economy afloat and able to avoid defaulting on loans until it balances the budget.
The timing is politically interesting as the bailout comes ahead of potentially contentious November parliamentary elections on November 24th, the last two of which sparked anti-government demonstrations.
Notably, the Navy’s 5th Fleet is based out of Bahrain, so the US-Saudi alliance clearly prioritizes the stability of the island-nation’s Sunni ruling family and the economy it oversees.
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