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Bahrain’s Fiscal Deficit

Factors, Causes and Solutions

Report prepared by:


Maryam Hussain 201500161

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EXECUTIVE SUMMARY
Bahrain is an island next to Saudi Arabia. Bahrain’s major GDP contribution consists of the oil
production and exports, and the second biggest sector is financial market. Due to the recent decline
in international oil prices, Bahrain budget for the next few years is facing deficits. Bahrain is
facing increasing fiscal deficits as per the reports of Bahrain Development Board and IMF. Hence
Bahrain needs to improve its fiscal condition and restore investors’ confidence in the economy.
Bahrain has to make several reforms in terms of taxation and social allowances and subsidies cut.
In this report, the possible causes of Bahrain’s fiscal deficit are discussed and possible solutions
are discussed.

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CONTENTS
INTRODUCTION: .......................................................................................................................................... 4
ECONOMIC THEORIES AND MODELS ..................................................................................................... 5
MICROECONOMICS: ................................................................................................................................ 5
MACROECONOMICS ............................................................................................................................. 12
APPLICATION AND RECOMMENDATIONS .......................................................................................... 15
CONCLUSION .............................................................................................................................................. 20
REFERENCES .............................................................................................................................................. 21

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INTRODUCTION:
This report will focus on the current condition Bahrain’s economy is facing. The factors both
microeconomic and macroeconomics, which drive the economy, will be discussed in detail. As per
IMF, Bahrain will face increasing deficit due to the slow GDP growth as well as the current impact
of oil prices which mainly drive the economy. IMF reported the following:

“Economic growth is projected at 2.3 percent in 2017, which will be “driven by strong
infrastructure spending from GCC funds,” the IMF said.” – 11/04/17

Bahrain is incurring large fiscal deficit every year which is passing by. Therefore, the government
debts level is increasing at a steadfast and alarming rate. Several factors including will be
discussed and solutions will be recommended in order to cope up with the current situation.
Bahraini Cabinet has already taken some measures to lower the budget deficits by increasing
prices of gasoline in the country by almost 60 percent. However, Bahrain has also local political
problems which are causing the foreign investment away from the country (Schulz, 2016). Fitch
and Moody have also suggested containing and addressing the local problems in order for Bahrain
to have stability in the economy. (Schulz, 2016)
Real GDP growth of the country has fallen to 2.9% in 2015 and is further declining in the current
scenarios. On the other hand, Bahrain is also facing increased competition in its financial sector
from its GCC neighbors Dubai and Qatar. The financial sector in Bahrain accounts for its GDP
around 15%. Bahrain is contributing more towards its infrastructure, tourism and transportation
sector with the support of GCC Development Program. Due to the fall in Bahrain’s oil prices from
$120.6 per barrel in 2014 has gone down to as low as $30 per barrel. Although the oil prices have
become a little stagnant but the consequences of these issues is leading Bahrain to large
government debts. It is said that Bahrain can only finance its deficits from foreign reserves for the
next two years, unlike its competitors Dubai and Qatar which can finance it up to 30 years. (Azimi,
2016)
Bahraini government has taken drastic measures to reduce the social spending in order to counter
the budget deficits. The current examples of such implications are: energy prices reforms, cut in
meat subsidiaries and increase in tobacco and alcohol taxes. The energy prices are planned to
increase gradually till year 2019 in order to cover the costs of production. Bahrain is also planning,
along with other GCC states, to implement 5% value added tax (VAT) and further change the
social spending in the coming future. (Azimi, 2016)
The report will discuss the microeconomics and macroeconomics factor which are affecting the
economy. Under microeconomics, following models will be discussed within the report: scarcity;
opportunity cost; supply and demand curves; price elasticity of demand; market structures; and
production costs.
Under macroeconomics, following theories and models will be discussed which are essential to
look at for the growth of economy and recommendation of possible solutions: inflation,

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unemployment, GDP, fiscal and monetary policy. These theories can be used as tools to correct the
market imperfections and bring the economy back to the equilibrium.

ECONOMIC THEORIES AND MODELS


MICROECONOMICS:
Microeconomics is the study of individual behaviors. Those behaviors deal with the patterns in
which individuals make decisions about their social choices. Based on the decisions made, scarce
resources are allocated for the utilization and fulfill the needs and wants of the people. It is a study
which shows the factors affecting the market mechanisms. (Investopedia, 2014)
Microeconomic Concepts:
 Scarcity:
Scarcity is the basic economic problem. It states that the human wants are infinite, while the
resources to fulfill them are finite. The society has to make decisions and allocate resources
accordingly. The main aim of the concept is to allocate resources to fulfill the basic needs of the
society and later comes the limitless wants. (Investopedia, 2016)
One individual cannot have it all, since the whole human population would want iPhones, but not
all can have it since the materials, technology, production allocated to the iPhones cannot outweigh
other wants such as household products or services.

 Opportunity Cost:
Opportunity cost is the cost of next best alternative forgone. When an individual makes a decision,
there are other alternatives on which he/she can spend on. For example, a person can either buy a
MacBook or have a vacation trip to another country. The events are mutually exclusive ones. That
is only one of them could be selected. (Investopedia, 2016)
When allocating scarce resources of the economy, increasing production from one product to
another causes opportunity cost. These could be displayed on a Production Possibility Frontier. A
production possibility frontier displays comparison of two goods or services that a country can
produce with all resources efficiently and fully employed. (Riley, n.d.)
As can be seen in Figure 1 below, if the food production is increased in the economy, the resources
producing clothing will be reduced having an opportunity cost. The curve shows the best allocation
of resources which are fully utilized in the economy from point A to F. The production might vary
from one point to another but the resources will be allocated efficiently without any wastage or
under-employment. The area under the curve represents inefficient allocation of scarce resources
while area outside is unachievable. (Riley, n.d.)

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Figure 1 extracted from: http://www.lidderdale.com/econ/104/gifs/Fig2-1.gif

Opportunity cost can also be related to the concepts of Comparative advantage and Absolute
advantage. The law of comparative advantage states that the individual as a person or country who
has the lowest opportunity cost in producing good A rather than good B, should specialize in the
production of good A. (McEachern, 2006)
Absolute advantage happens when an individual, firm or country is better at producing something
using less resources than the other firms or countries.(McEachern, 2006)

 Demand:
The free market mechanism ideally works on demand and supply of the product/service. Demand
is the ability and willingness of the consumers to buy a product at certain price. Demand curve is
downward sloping because of the fact that as prices decreases, the quantity demanded would
automatically increase (McEachern, 2006).For example, when LEDs of 60 inch or more were first
launched, the prices were more than 4,000 BD. Many people were willing to buy; however, they
did not have the ability to buy it until ater when prices reduced.

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Figure 2: https://s3-eu-west-1.amazonaws.com/tutor2u-media/subjects/economics/micro_demand_curve.png

The demand curve may shift depending on the following factors.


Changes in Consumer Income: When the income of consumers rises, so does their buying
power. (McEachern, 2006) For example, when the consumers income increase more people can
increase their spending on daily items. Therefore, the demand curve will move to the right as
shown in the figure 3 below.
Changes in the Prices of Related Goods: Prices of other goods can affect the demand of other
products. They can be substitutes or complementary goods. Substitute goods are those which can
be used instead of consumption of Good A (McEachern, 2006). If the prices of “Chai Karak” (Tea)
or orange juice decrease, more people will be prone to drink those in order to have their daily
caffeine needs. As shown in Figure 3, the demand curve of coffee will move to the left. However,
when the price of complementary goods decreases, the demand for coffee will increase.
(McEachern, 2006).
Changes in Consumer Expectations: A change in consumer expectations might increase or
decrease the demand of the products/services. For example, if a consumer graduates and starts his
work career, he might buy a new car and clothes accordingly in order to commute to and from the
workplace. (McEachern, 2006)
Changes in the Number or Composition of Consumers: If the number of people living in
Bahrain increases, the total demand for commodities will increase. For example, the number of
teenagers who get to the age of 18 will demand their own cars after they get their license.
Therefore, the demand curve for cars will move to the right. (McEachern, 2006)

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Changes in Consumer Tastes: The new fashion of buying online will increase demand for the
online businessman. As more people are getting aware of social media and internet, the demand for
online shopping is increasing day by day. (McEachern, 2006)
Such factors would lead to the shifts in demand curve in the economy of Bahrain.

Figure 3: https://s3-eu-west-1.amazonaws.com/tutor2u-media/subjects/economics/micro_demand_curve_shifts.png

 Supply
On the other hand, supply is the ability and willingness of the producers to produce and sell
goods/services in the market. Supply curve is positively proportional to the price. When the prices
increase, suppliers want to supply more in order to gain more profit. (McEachern, 2006)

Figure 4: https://s3-eu-west-1.amazonaws.com/tutor2u-media/subjects/economics/supply_curve_expansion.png

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 Market Equilibrium
Market Equilibrium is the point where demand meets supply within a market. For example, Figure
5 shows that when per unit price of a commodity is set to be $0.75; the market is said to be in
equilibrium on 80 units. On this point, the buyers and sellers are both willing to trade exactly
matches, leading to no pressure to change the price or quantity of the product. (McEachern, 2006)

Figure 5: https://classconnection.s3.amazonaws.com/456/flashcards/1710456/gif/market_equilibrium_021344136306718.gif

As shown in Figure 5, if the market price of the product is set at $1.25, the quantity demanded for
the product will reduce to 40 units while the supply will increase to 120 units. This will lead to
surplus, causing an excess of 80 units in the market. (McEachern, 2006)
On the other hand, if the price is set below the market price at $0.25, the demand will exceed the
supply by 80 units causing a shortage of units supplied. (McEachern, 2006)

 Consumer And Producer Surplus


As shown in the figure 6 below, consumer surplus is the maximum amount that a consumer is
willing to pay above the market equilibrium price as shown in Figure 6. On the other hand,
producer surplus is the purple shaded region above the supply curve in figure 6. This area
represents the benefit suppliers will get in order to produce till the market price. In this area, the
revenue generated is higher than the marginal costs of producing one extra unit. (McEachern,
2006)

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Figure 6: http://thismatter.com/economics/images/total-surplus.gif

Deadweight loss is the net loss to the market when the price is set above the market equilibrium.
As can be seen in the Figure 7, there is a deadweight loss to the society as the demand exceeds the
supply making the deadweight loss region colored in orange color. (McEachern, 2006)

Figure 7: http://4.bp.blogspot.com/-Nwx_H9zc7fM/UTARe0sizwI/AAAAAAAAH4I/z6c34eb0Ji0/s1600/Surplus-and-Deadweight-
Loss-from-Minimum-Wage-Hike-Over-Equilibrium.png

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 Market Structure
Market structure is the way firms operate in the market. How many suppliers are in the market,
type of products being sold in the market (similar or differentiated products)? What type of
competition is in the market? Is the market a monopoly, dominated by one supplier only or has
various suppliers as per perfect competition? (McEachern, 2006)
The market can be divided into two types of structures:
Perfect competition:
Following are the characteristics in perfect competition; there are many buyers and sellers in the
market; all the products are identical; buyers and sellers have complete knowledge of the market
that is suppliers cannot charge high prices; there are very few or no barriers of entry and exit for
the suppliers. (Investopedia, 2014)
Monopoly:
A monopoly market structure is one in which one company owns the maximum market share
within the economy. Being the biggest supplier of the market, the company can dictate prices. The
characteristics of the monopoly market structure is opposite of perfect competition, which are:
there are no close substitutes of the product, for example, before Zain and Viva operated in the
market, Batelco was the sole provider of telecommunication services in Bahrain. Therefore, it
charged higher prices than they are today. The barriers to entry are significant as they required
huge capital investment which small companies cannot provide. Batelco earned huge profits due to
lack of substitutes. (Agarwal, 2017)

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MACROECONOMICS
While Microeconomics is the study of individual, companies or country, Macroeconomics looks at
the bigger picture. It looks at the demand of everything within the country, deals with prices of all
the goods and services provided. (McEachern, 2006)
Bahrain’s large fiscal deficit can be explained the theories from macroeconomic factors which are:
inflation; unemployment; GDP; fiscal and monetary policy.

 Inflation
Inflation is the sustained and general increase in the prices of goods or services within and
economy over a period of time. (Hayes, 2017)
Inflation may be caused by various theories, which are:
Demand-Pull Inflation: In this scenario, there is an increased demand for the good or service
within the economy while the supply is limited (Hayes, 2017).
We can imagine when a new iPhone is launched within the market; people in Bahrain tend to buy a
lot of these new devices. However, the supply is limited in numbers. The new batch of iPhones is
may be 200% higher than the actual market price quoted by Apple.
Cost-Push Inflation: In this scenario, the cost of production for companies goes up and they pass
on these costs onto the consumers. Suppliers do so in order to protect their profit margins and
operate in the market. Increase in cost of production can include government taxes such as VAT
being implemented in the market of Bahrain; increased salaries for employees; or increase in the
prices of natural resources or import prices. (Hayes, 2017)
Monetary Inflation: This type of inflation is caused in the economy due to the increase in money
supply within the market. When there is too much supply of money, ultimately the value of money
goes down as the consumers will want more goods and services. Thus, it leads to increase in the
prices of commodities. In other words, it can be said that too much money chasing few goods in
the market. (Hayes, 2017)
 Unemployment
Unemployment happens when an individual is of working age and actively seeking for full time
employment is not able to find a job. (McEachern, 2006)
There are three types of unemployment in the economy:
Cyclical Unemployment: This type of unemployment happens due to the economic cycles. When
the economy hits into a recession, many people are laid off in order for the companies to reduce
their costs. However, when the economy starts to grow back and come out of recessions, new jobs
are created and people who are actively looking for jobs are employed back. (Nash, n.d.)
Frictional Unemployment: People quit their current jobs in order to find new ones due to any
reason. People take time in order to find new job opportunities because of the lack of information.

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Some employers use newspaper for the hiring while others may select through personal references,
internet and so on. (Nash, n.d.)
Structural unemployment: It is based on when the employers are looking for certain unique
skills which the working population may not possess or vice versa. For example, if an oil field
company was to close down today in Bahrain, the engineers who specialized and excel in this field
will not be able to quickly find another job as there is no demand for their skills in the market. The
working force might need to acquire new skills, retrain and look for current opportunities in the
market. (Nash, n.d.)

 National Output (GDP):


GDP is the calculation of total market value of output produced in an economy over a period of
one year from the resources operating in one country whether it is owned by local population or
foreign direct investment. There are two approaches to measure GDP of a country. (McEachern,
2006)
Expenditure Approach: The expenditure approach is denoted by the equation GDP = Household
Spending (c) + Capital Investment Spending (I) + Government Spending (G) + Exports (X) –
Imports (M).
Household spending is the expenditure local population makes in order to cater for their daily
needs as well as leisure expenses, for example, salons, dry cleaning, travelling, and non-durable
goods etc. Capital Investment consists of purchases of physical capital such as houses, machinery,
work in progress etc. Government expenditure ranges from all the government spending in the
economy. It can be in terms of health centre, local libraries, or bridges etc. It also includes all the
government jobs which are not directly paid by the population but rather are free goods in the
economy for example street lights. Last component is the net exports. As Bahrain is a small
country, most of its products are imported and only few products and services are exported to other
countries such as oil, aluminum or financial services. (McEachern, 2006)
Income Approach: It is the sum of all income earned by the suppliers, whether it is employees or
companies. This can be categorized as the income earned by people in jobs or self employed;
profits earned by the private businesses; rent income generated from renting the property by the
owners and Gross domestic product in terms of factor incomes. GDP by income approach includes
only that income which is generated in the production of goods and services within the economy.
(Riley, n.d.)

 Fiscal Policy:
Fiscal policy is the tool by which a government uses taxation and its spending patterns in order to
correct the market situations. The government sets out new budget and policies for the future years
in order to sustain growth and achieve other macroeconomic objectives that are to control inflation,
reduce unemployment and sustain growth of the economy. Government action of changing fiscal
tools will affect the economy directly as it affects all the factors involved. For example,
Government of Bahrain is planning to introduce VAT in the market, making consumer goods more
expensive as a whole. This will increase inflation as the product prices will rise and reduce the

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demand for products local population buys unnecessarily. Same goes for the spending patterns, if
the government stops current investment in the infrastructure, construction companies will not be
able to get new contracts leading to a shortfall in their earning and force them to redundant a lot of
employees. (Heakal, 2017)

 Monetary Policy
Just like fiscal policy is the tool of the government, monetary policy is the tool of the Central Bank
of Bahrain which controls the money supply and set interest rates in the economy. The central
bank uses following tools in order to regulate the market and control money supply: change in
interest rates in order to persuade investors to borrow more or less and increase investing activities;
issuing, buying or selling government bonds in order to restrict or expand the money supply in the
market; lastly, minimum reserve ratio that banks are required to keep in the bank and lend the rest.
(Investopedia, 2017)
Central Bank of Bahrain can use expansionary or contractionary measures in order to correct the
market situations. Expansionary monetary policy stimulates the market in order which results in
reduced unemployment levels, increased private sector borrowing and consumer spending. On the
other hand, contractionary monetary policy targets to slow the growth of rapid emerging markets
in order to counter the inflation rate. However, the drawbacks of doing so will cause an increase in
the unemployment level as lesser investing activities will be conducted in the market.
(Investopedia, 2017)

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APPLICATION AND RECOMMENDATIONS
As per local newspaper Dilmun-Times, His Majesty King Hamad issued a law approving
Bahrain’s budget for 2015 and 2016. The revenue is estimated to be BD4.274 billion while the
expenditure incurred in the economy is BD7.284 billion. The expenditure is almost twice the size
of revenues which would lead to increased government borrowings from international markets.
The government has planned to borrow from Financial Institutions as well as from Arab and GCC
Funds. (Dilmun-Times, n.d.)
Bahrain will have to focus on its macroeconomic factors in order to stimulate growth and become
non-dependant on the revenues generated from Oil Industry alone. Bahrain needs to diversify and
explore other policies in order to reduce the budget deficits and come out of recession.
Bahrain needs to focus on its macroeconomic factors and use the correct policies in order to
recover from the fiscal deficits.

 Inflation
As per Bahrain Economic Development Board, the inflation rate stood at 1.8% in 2015, 3.8% in
2016. This percentage of inflation is not bad for the economy, as it can suggest that the demand is
increasing in the economy. Bahrain’s government might come out of recession little bit using a bit
higher inflation such as these. (EDB, 2015)
People in Bahrain are not spending that much and have a more conservative approach to increase
savings and not to spend more as constant fear of further recession, lost jobs etc. Therefore, at
times like this in Bahrain, when the economy is in recession and demand is already stagnant, it
requires stimulus to increase it back to the pace where the economy would not be sluggish
anymore. (EDB, 2015)
As shown in the graph below, it is expected that the inflation rate target of the government by 2020
will be 2.70 percent.

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The imposition of VAT by 2018 would already increase the prices of goods and services by 5%,
making an increased expenditure in the economy and creating tax collections for the government.

 Unemployment

Unemployment rate in Bahrain remained unchanged at 3.70 percent as per statistics chart provided
by Central Informatics Organization.

Working population of Bahrain as per the 2011 statistics provided by CBB is 541,318, which is
43.8% of the total Bahrain population. Private sector consists of 92.1% of the working population
while public sector employment consists of 7.9%. In the private sector, Bahraini population
consists of 17.4% while the non-Bahraini population 82.6%. On the other hand, in public sector
Bahraini population comprise of 87% while non-Bahraini employees are 13%. (CBB, 2015)

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From the statistics, one can argue that the Bahrainis are not employed that much in the private
sectors. However, the mean average salaries of Bahrainis are BD614, while non-Bahrainis have
only BD207. Since Bahrainis require highly paid jobs and do not apply for low position with low
salaries. Bahraini families will not be able to survive on the mean salaries as low as BD207 (CBB,
2015)

 National Output (GDP):


Bahrain Economic Development Board announced the GDP for 2016 to be 3% which was 0.1% of
the forecasted result. The growth was made in non-oil sector as the oil sector did not grow due to
drop in production in fourth quarter of 2016. This happened because of the normal maintenance
work which needs to be done yearly on the oil fields and plants. (EDB, 2017)
The government is trying to stimulate and diversify growth in non-oil sector. This happened due to
the decrease in recent oil prices from $110 per barrel to $40 which hit the OPEC countries the
most. This will make government less dependent on the oil sector in the future. However, there are
many problems yet to be addressed as most of the finished goods consumed in Bahrain are
imported and there are hardly any factories which make goods in Bahrain. The government is
deploying new infrastructure projects to stimulate growth in the economy. The few examples of
such projects are Alba Line 6, airport expansion project, and the LNG Terminal. (EDB, 2017)
 Fiscal Policy:
As stated earlier, fiscal policy is a tool which is used by the government in order to correct the
situations in the market. As fiscal policy is based on taxation and government spending,
government should target such practices in order to increase the GDP for taxes and reduce its fiscal
deficits.
Bahrain is already on its way to impose 5% VAT, which would increase the revenue for the
country. This way the country may spend on the social welfare of the society and finance its fiscal
deficit. Although it may not fully help to cover the deficits, but it would be a little more effective
in the long run. At the same time, there will be negative implications of VAT in the economy, as
the goods and services will become more expensive and people might take time to change their
perceptions about VAT. In an already slow growing economy, people will become even more
conservative. This will result in a sharp decrease in the profits of the organization because of the
lower quantity demanded in the economy. However, normal goods in the economy which are
consumed on a daily basis will not be affected.
Government can counter this issue by increasing the salary scale so as to help locals and expats to
maintain their living standards. It should be noted that in the private sector there are more than
80% foreigners employed, but at the same time majority of that work force is low skilled workers
earning salaries of BD120 to BD200 on average. These types of taxes which do not discriminate
the population and charge them on the same scale usually cause the poor ones to suffer more.
Therefore, the government has to carefully plan.
Government may on a small scale introduce corporate tax laws. There are many big companies
operating in Bahrain earning huge profits and paying no taxes. Rather than introducing income

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taxes, corporate taxes should be introduced only. The reason in doing so is that the economy is
already growing slow and imposing taxes on individuals will decrease their disposable income
causing a shortfall in spending. The population will be discouraged to buy more while the
corporations will face little or no effect of a short corporate tax imposed on them.
The government may increase taxes on the harmful products such as tobacco, sheesha and alcohol.
All the products that come under the list of giving harm to the society as a whole including soft
and energy drinks should be taxed a little higher. However, all the taxes imposed should be gradual
rather than sudden, which might trigger public outcry. This way the users will get used to the taxes
if they are imposed slowly and gradually on them.
Although, utility prices have been increased by the government and are bound to increase by 2019,
government should cut down any unnecessary allowances given to the local population. For
example, removal of subsidy on the meat, government is granting Bahraini nationals with per
house member allowance. These should be cut down slowly as when items are purchased from
restaurants, it is on the market prices. The government could help to find sources of cheap meat
with good quality from other countries. This will help keep the prices low. Moreover, the
population usually resorts to eating chicken than meat.
Government should also spend more on the tourism industry, with increased number of attractions
in the Kingdom. Not only Saudis should come to Bahrain to spend their weekends but people all
around the world should focus on Bahrain just like they look at Dubai. Improving road networks
and creating Metro trains will also help a lot of people to commute using these sources rather than
to use their own cars reducing traffic congestion. Currently, Bahrain holds only one annual
Bahrain International Circuit event, which attracts fans all over the world. Bahrain should invest in
at least two different types of sports and hold annual functions. For example, some time ago there
were wrestling match in Abu Dhabi, in which international wrestlers like John Cena participated.
Many people came to attend from all over GCC to attend that increasing Abu Dhabi’s tourism.
Government should also keep on investing in the construction stimulating the market. This will
help restore investors’ confidence in the economy when the GDP will grow and the economy will
sustain growth. Government should privatize loss making national assets such as Gulf Air or at
least privatize 49% of the shares in order to increase the investment it has and finance fiscal
deficit. By bringing in the new owners and changing the management, national airline might
become a symbol of profit making organization unlike right now.
Moreover, government should also attract local and foreign investments to set up more businesses
in Bahrain. Currently there might be many opportunities in Bahrain, but the problem is that the
Bahraini market is small with the same number of population living. A person, who used to buy
from Zara in Seef Mall, buys now from City Centre and later may be from The Avenue. The same
person cannot buy from all three places. Government should focus on creating more jobs as well as
try thinking for the ways in order to increase the disposable income of individual households to
improve their buying power.
Programs like Tamkeen should be made limited in nature based on the fact as to how many people
started projects with Tamkeen and how many actually continued the business. Tamkeen is a

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government body which helps local for various programs, whether it is getting more education or
starting a new business. Tamkeen should hire professional analysts in order to analyze the
applications and not everyone is granted the appeals. This way it will reduce the impact of wastage
and resources will be more effectively utilized within the work frame.
Bahrain is an island, and yet without proper beaches. In order to improve tourism Bahrain needs to
create international standard beaches so that both local and tourists be attracted to these places.
New business ventures and water sports might start.
Government should also attract new investments by giving them free leasehold property to set up
their plants and start producing in the economy, this will increase more job opportunities;
multinationals will invest in the infrastructure of the area close by; government will have another
company to charge them corporate tax and so on.

 Monetary Policy:
Monetary Policy is a tool used by the Central Bank. Just like the government might intervene
within the economy, central bank can also help to correct the situations in the market. During
2015, the minimum reserve requirement was 5%. As at end-2015, the 3 month BHIBOR rate was
1.62 %, compared to 1% at end- 2014. The 6 month BHIBOR rate 1.77% at end-2015 compared to
1.25 % at end- 2014. (CBB, 2015)
CBB may issue more government bonds locally and internationally to reduce the fiscal deficits.
However, the government should set part in actively trading the government bonds and bills to the
local population as well. This way the investment will be raised and the interest earned by the
locals would also be reinvested in the economy rather than sending interest money into
international markets.
CBB should also increase the money supply. The country is currently facing recession and has
sluggish growth; increasing the money supply would leave individuals with higher disposable
income. This will stimulate the consumer spending in the economy by increasing the demands for
goods and services.
When there is a demand, there is a supply as well. Suppliers will enter the market or existing
suppliers will enjoy more profits and reinvest in their business and the economy. This will help to
create more jobs, and those individuals will again cause the demand to increase and the loop will
continue. However, CBB would have to notice that it does not cause high inflation due to the
increased economic activity.
More people are going bankrupt as we see in the market, people going bad on their loans turning
banks profits into loses. However, if the economic activity improves over the period of time,
people will have enough money to pay off their debts rather than be bankrupt. Just as individuals,
companies would be also able to get easy loans and make more investment in the country
stimulating more demand, helping GDP to increase.

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Interest is already lower in the country which might be reduced a bit as well in order to encourage
companies and investors to invest more in the Bahraini market. The minimum reserve ratio is
already at 5%, and it cannot be moved lower making it more risky for the overall economy.

CONCLUSION
Bahrain economy fiscal deficits will continually increase if the government and central bank does
not intervene in the market and put corrective actions. Though it does take some time usually an
year or two for the market to react to these policies and change of the consumer behaviors. Oil
prices have stabilized themselves and are forecasted to grow back to certain extent. However, the
country should not be just depending on the oil sector growth but rather diversify itself and have
major key players. New forms of taxes need to be imposed; government expenditure on subsidies
and social allowances for the local population needs to be reduced and adjusted as well.
Government needs to adjust its fiscal policy in order to improve trade and tourism in the country
and reduce the fiscal deficit gradually and stable the economic growth. Central Bank should also
fulfill its role by working in liaison with government on the monetary policy in order to support the
fiscal policy. By taking the economic decisions in the right direction, economy of Bahrain will
once again be back on fiscal surpluses in the long run.

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