Trade Compliance Center

BAHRAIN TRADE POLICY REVIEW SUMMARY - 2000

PRESS RELEASE

PRESS/TPRB/139

5 October 2000

Bahrain: October 2000

Liberal trade and investment policies have helped Bahrain to

maintain stable economic growth for much of the period since the

1980s and allowed some diversification into non-energy related

economic activities.

Continued dependence on petroleum resources, however, has

resulted in a slowdown in economic growth, particularly during the

period 1994-1999 as a result of lower energy prices.

Accelerated economic reform crucial to raising real

economic growth in Bahrain.

Lower economic growth and declining public revenue, which is

mainly derived from taxes on petroleum and natural gas, prompted

Bahrain to implement economic reforms aimed at further diversifying

the economy and raising economic growth to accommodate a

growing population. The liberalization programme has gone some

way in addressing rising unemployment among Bahrainis and raising

private investment. However, foreign investment, particularly in

key sectors of the economy has been sluggish, suggesting that

accelerated reform would better meet Bahrain's targets of

economic diversification and growth. says a new WTO report on

the trade policies and practices of Bahrain.

The WTO report, along with a policy statement by the Government

of Bahrain, will serve as the basis for the trade policy review of

Bahrain which will take place on 11 and 13 October in the Trade

Policy Review Body of the WTO.

Bahrain's MFN tariff on imports is relatively low, averaging 7.7% in

2000, with tariffs on alcohol and tobacco products considerably

higher than for other products. Escalation in the tariff, however,

provides greater protection for finished products although in some

sectors there is de-escalation in the tariff, providing greater

protection to primary products and intermediate goods. The report

also notes that Bahrain's bound tariff average at 35.6% is

significantly higher than the simple average tariff, introducing an

element of uncertainty for traders and investors by providing

Bahrain with scope to raise applied tariffs within their bindings.

There also appears to be some discrepancy between trade-related

legislation and practice, potentially reducing transparency and

predictability in Bahrain's trade regime.

The report also notes that Bahrain has few non-tariff barriers and

recent tariff reductions have taken place in the context of the Gulf

Cooperation Council's Unified Economic Agreement which is to be

completed by 2005. Bahrain's trade and investment relations are

particularly strong with other members of the Gulf Cooperation

Council to which it grants preferential treatment on tariffs,

investment and government procurement.

In addition to trade reform, Bahrain has also attempted to open up

the economy to private investment and to reduce the size of the

public sector which dominates key economic activities and is an

important source of employment for Bahraini nationals. Efforts

include full or partial privatization of several companies, especially

in services, and contracting out of some government services to

private sector providers. Given that private investment, while

allowed in several activities has not taken place in sectors with a

major public sector presence, however, the report stresses the

need for a more systematic and stepped up privatization

programme to increase private investors' confidence in the

economy and to attract foreign investment. Competition policy

legislation may also be needed to address issues relating to

monopolies and unfair competition in the economy.

Sectoral reform appears to have been mainly concentrated in

services. Bahrain has a well developed financial services sector and

liberalization has been pursued to try and strengthen the sector

further. Banking, especially offshore banking has grown rapidly and

policies regulating offshore banking, are liberal. Foreign investment

restrictions in onshore banking are up to 49% for non-GCC

nationals and up to 100% for GCC nationals. Bahrain is also trying

to develop its Stock Exchange which began operating in 1989.

Financial services was also the only sector in which Bahrain made

commitments under the General Agreement on Trade in Services

(GATS). Liberalization has also been proceeding in other services,

notably telecommunications, and transport, although more slowly

than in financial services.

The petroleum and manufacturing sectors tend to be dominated by

the public sector. As part of its diversification strategy, Bahrain

has targeted investment in downstream activities related to

Bahrain's existing energy intensive industries and is providing

supporting infrastructure to attract investment in these activities.

A number of investment incentives, including reduced infrastructure

costs such as free rental for a two year period and reductions in

electricity tariffs are already provided to encourage investment in

manufacturing.

The report concludes that despite these efforts, important sectors

such as petroleum and telecommunications appear to be essentially

closed to private investment, whereas reform in services, other

than financial services, has been piecemeal. An acceleration and

deepening of economic reform will therefore not only be important

for economic growth, but would also send a positive signal to

potential investors. Predictability and transparency of the trade

and investment regime would be enhanced were Bahrain to more

actively notify its legislation to the WTO, and bind a greater

number of services in the GATS.

Notes to Editors

Trade Policy Reviews are an exercise, mandated in the WTO

agreements, in which member countries' trade and related policies

are examined and evaluated at regular intervals. Significant

developments which may have an impact on the global trading

system are also monitored. For each review, two documents are

prepared: a policy statement by the government of the member

under review, and a detailed report written independently by the

WTO Secretariat. These two documents are then discussed by the

WTO's full membership in the Trade Policy Review Body (TPRB).

These documents and the proceedings of the TPRB's meetings are

published shortly afterwards. Since 1995, when the WTO came into

force, services and trade-related aspects of intellectual property

rights have also been covered.

For this review, the WTO's Secretariat report, together with the

policy statement prepared by the Bahrain Government, will be

discussed by the Trade Policy Review Body on 11 and 13 October

2000. The Secretariat report covers the development of all aspects

of Bahrain's trade policies, including domestic laws and regulations,

the institutional framework, trade policies by measure and by

sector.

Attached to this press release is a summary of the observations in

the Secretariat report and parts of the government's policy

statement. The Secretariat report and the government's policy

statement are available for the press in the newsroom of the WTO

internet site (www.wto.org). These two documents and the

minutes of the TPRB's discussion and the Chairman's summing up,

will be published in hardback in due course and will be available

from the Secretariat, Centre William Rappard, 154 rue de Lausanne,

1211 Geneva 21.

Since December 1989, the following reports have been completed: Argentina

(1992 and 1999), Australia (1989, 1994 and 1998), Austria (1992), Bangladesh

(1992 and 2000), Benin (1997), Bolivia (1993 and 1999), Botswana (1998),

Brazil (1992 and 1996), Burkina Faso (1998), Cameroon (1995), Canada

(1990, 1992, 1994, 1996 and 1998), Chile (1991 and 1997), Colombia (1990

and 1996), Costa Rica (1995), C?te d'Ivoire (1995), Cyprus (1997), the Czech

Republic (1996), the Dominican Republic (1996), Egypt (1992 and 1999), El

Salvador (1996), the European Communities (1991, 1993, 1995, 1997 and

2000), Fiji (1997), Finland (1992), Ghana (1992), Guinea (1999), Hong Kong

(1990, 1994 and 1998), Hungary (1991 and 1998), Iceland (1994 and 2000),

India (1993 and 1998), Indonesia (1991, 1994 and 1998), Israel (1994 and

1999), Jamaica (1998), Japan (1990, 1992, 1995 and 1998), Kenya (1993 and

2000), Korea, Rep. of (1992, 1996 and 2000), Lesotho (1998), Macau (1994),

Malaysia (1993 and 1997), Mali (1998), Mauritius (1995), Mexico (1993 and

1997), Morocco (1989 and 1996), New Zealand (1990 and 1996), Namibia

(1998), Nicaragua (1999), Nigeria (1991 and 1998), Norway (1991, 1996 and

2000), Pakistan (1995), Papua New Guinea (1999), Paraguay (1997), Peru

(1994 and 2000), the Philippines (1993), Poland (1993), Romania (1992 and

1999), Senegal (1994), Singapore (1992, 1996 and 2000), Slovak Republic

(1995), the Solomon Islands (1998), South Africa (1993 and 1998), Sri

Lanka(1995), Swaziland (1998), Sweden (1990 and 1994), Switzerland (1991

and 1996), Tanzania (2000), Thailand (1991, 1995 and 1999), Togo (1999),

Trinidad and Tobago (1998), Tunisia (1994), Turkey (1994 and 1998), the

United States (1989, 1992, 1994, 1996 and 1999), Uganda (1995), Uruguay

(1992 and 1998), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).

TRADE POLICY REVIEW BODY: BAHRAIN

Report by the Secretariat Summary Observations

Introduction

Bahrain has a population of around 640,000 of which some 40% are

expatriates, and a gross domestic product of Bahrain dinar 2.9

billion (around US$8.6 billion). Since independence, in 1971, Bahrain

has essentially pursued a liberal trade and investment policy, and

has integrated its economy closely with those of other countries in

the region, primarily through regional agreements, such as the

Unified Economic Agreement of the Gulf Cooperation Council (GCC).

Economic growth in Bahrain is strongly affected by variations in

international energy prices. Real GDP growth, as a result, was

slower during the 1990s compared with the previous decade,

averaging around 3.6% annually since 1994; growth is expected to

be around 3.5% in 2000. Although petroleum's share in GDP has

been declining, it still accounts for 14% of GDP and some 64% of

merchandise exports. Non-oil GDP growth was also moderate in the

1990s, in part due to low rates of investment, which, after

declining since 1992, have shown signs of improvement since 1997.

Public investment declined due to a cutback in government

spending as efforts were made to rationalize fiscal expenditures. At

the same time, private investment declined, most likely due to

slower economic activity as oil prices remained low for much of the

period. An improvement in private sector investment since 1998 is

a sign of greater confidence in the performance of the economy

and in the economic reforms pursued to date.

The dependence of Bahrain's economy on its relatively small

petroleum resources has prompted the Government to implement a

number of reforms aimed at diversifying economic activity and

raising economic growth to accommodate a population growing at

around 3.5% per year. Efforts focus on fiscal reform to respond to

budgetary deficits caused by low petroleum revenue; stepped up

privatization and contracting out of certain government services to

the private sector; an opening up of a larger number of sectors to

private sector investment, both foreign and domestic; and sectoral

reform, particularly in services.

More targeted efforts have also been made to address the problem

of unemployment among Bahrainis, which has been rising recently

and was 6% in 1998, considerably higher than the overall average

of around 2% (including expatriate workers). In 1989, the

Government, with assistance from international organizations,

introduced a programme of Bahrainization, which, inter alia, sets

quantitative targets for firms to employ Bahrainis, although,

according to the authorities, these targets are flexible, and training

and employment-search facilities for Bahrainis.

Trade and Investment Policy Framework

The Government of Bahrain is headed jointly by the Amir of Bahrain

and the Cabinet. Bahrain's National Assembly was suspended by

the Amir in 1975, and replaced in 1992 by a Consultative Council,

currently with 40 members, which comments on most government

policies before they become law.

The authorities see the maintenance of liberal and transparent

trade and investment regimes as important for the continued

economic growth and prosperity of Bahrain. Thus, even though

Bahrain's international treaty obligations supersede national law

once the treaty is ratified by the Amir, the Government has been

actively revising Bahrain's trade and related laws to ensure that

national legislation reflects Bahrain's WTO commitments. In general,

all legislation, including trade legislation, is submitted to the

Cabinet, and once commented upon by the Consultative Council,

must be assented to by the Amir before becoming law. The Amir

and the Cabinet may also promulgate legislation through Amiri,

prime ministerial and ministerial decrees, which carry the force of

law. Trade policy implementation is generally carried out by the

Ministry of Commerce in cooperation with other ministries if

relevant.

Bahrain was a founding member of the WTO and provides at least

most-favoured-nation (MFN) treatment to all WTO Members.

Bahrain has notified its intention to make use of the transitional

period granted to developing countries under various WTO

agreements, including Customs Valuation and Trade-Related

Aspects of Intellectual Property Rights (TRIPS). Notifications in a

number of areas, including preferential rules of origin, legislation on

technical barriers to trade, sanitary and phytosanitary measures,

and state trading, have, not however, been made. Under the

General Agreement on Trade in Services (GATS), commitments

were made in financial services, and Bahrain signed the Fifth

Protocol on financial services.

In addition to expanding trade, Bahrain has increasingly sought

private, in particular foreign direct, investment in order to increase

economic growth and diversification. In general, foreign investment

has been permitted in offshore units, export oriented industries or

in sectors that the Government wishes to develop. This includes

new industrial companies, in which up to 100% foreign investment

may take place with the permission of the relevant authority, as

well as in services associated with these companies or where the

company is established as the regional centre for the distribution of

its own services. Since 1999, additional reform has taken place;

foreign equity ownership limits in firms listed on the Bahrain Stock

Exchange has been raised from 24% to 49% (from 49% to 100%

for GCC nationals). In addition, efforts are being made to

streamline the approval of foreign investment projects, an often

cumbersome process requiring permission from a number of

ministries and agencies before commercial registration is approved.

However, data show that foreign direct investment (FDI) has not

increased substantially in recent years, suggesting perhaps that

further reform is required. Moreover, Bahrain's approach to

approving private investment in sectors with a strong public sector

presence may be dissuasive to foreign investment.

Trade and Trade-Related Reforms

Tariffs

Although committed to the multilateral process, Bahrain's trade

liberalization has a strong regional focus. While remaining

unchanged for much of the 1990s, the tariff was amended recently

in the context of the GCC's Unified Economic Agreement which aims

to complete a customs union by 2005. On 1 July 1998, duty on

tobacco products was raised from 70% to 100%. On 1 January

2000, customs duties were removed on essential goods and fruit,

previously at rates of 5% and 7%, respectively.

Bahrain's average applied MFN tariff is 7.7%. With the exception of

alcohol and tobacco products, and some paper products related to

tobacco, tariffs generally range from 0% to 20%; alcohol and

tobacco products carry rates of 125% and at least 100%,

respectively. Approximately 99.6% of Bahrain's tariff carries ad

valorem rates of duty; specific rates are applied to 20 tariff lines at

the HS 8-digit level, covering tobacco products. Imports under 11

tariff lines, including live pigs, oilseeds, poppy seeds and cultured

pearls, are prohibited according to the tariff and carry no rates.

Tariff protection of up to 20% is provided for products covered by

the Local Industries Protection and Support programme (Legislative

Decree No. 11 of 1985), which is available to industries that meet

a minimum local (and GCC) content requirement. The items

presently covered under the Law include medical products,

aluminium products, and edible oils.

Although the average tariff is relatively low it is subject to

considerable escalation, in general providing greater protection for

finished products. Escalation is probably even more pronounced

due to tariff exemptions provided to certain imports, including from

GCC countries, and for raw material, machinery, and equipment,

which are not included in the tariff analysis. In some sectors,

notably non-metallic products (except petroleum), textiles and

clothing, wood and wood products, and other manufactures, there

is de-escalation in the tariff, with finished products receiving less

effective protection than primary products and intermediate goods,

thus providing an unclear picture of overall effective protection

provided by the tariff to Bahraini industry.

As a result of the Uruguay Round, Bahrain bound 77.1% of its tariff

at an average rate of 35.6%. Most tariffs are bound at 35% with

the exception of alcohol and most tobacco products, for which

bindings are at rates of 200% and 100%, respectively. The

average bound rate of 35.6% significantly exceeds the overall

applied average rate of 7.7%, providing considerable leeway for the

Government to raise tariffs within the bindings, introducing an

element of uncertainty for traders and investors. Although the

majority of the applied tariff is below the bound rate, applied rates

on 18 lines, relating mainly to tobacco, alcohol and edible oils,

appear to exceed their corresponding rates in Bahrain's schedule of

tariff bindings.

Non-tariff measures

Bahrain maintains non-tariff measures in the form of import and

export prohibitions and licences for a limited number of products,

mainly for health and security reasons. There does, however,

appear to be a certain degree of divergence between legislation on

these restrictions and in the application of the legislation. This

includes information in the Customs Handbook, according to which

trade with South Africa is embargoed although de facto such an

embargo no longer exists; import prohibitions on certain products

are included in the current applied tariff but these are not included

in the list of import prohibitions provided by the authorities to the

Secretariat; and the list of restricted imports and exports

according to the Customs Handbook provided to the Secretariat is

different from the list of restricted products provided by the

authorities. Other measures, such as labelling requirements for

imported eggs, appear not to be applied equally to imported and

domestically produced goods, although there seems to be no

explicit mention of this in the SPS legislation provided. The

apparent discrepancy between legislation and practice potentially

reduces transparency and predictability in Bahrain's trade regime

and may increase the scope for administrative discretion,

particularly at the border.

Other Measures Affecting Trade

An important factor affecting trade and investment is the size of

the public sector. The public sector is an important source of

employment for Bahraini nationals, and dominates key activities of

the economy, including petroleum, aluminium, and

telecommunications, but consolidated data on the sector is not

available. Efforts are being made to reduce the size of the public

sector: during the 1990s the Government partially or fully

privatized a number of state-owned companies, especially in the

services industry. In addition, some government services are being

contracted out to the private sector, mainly, it appears, for fiscal

reasons. However, a more systematic and stepped up privatization

programme would help to increase private investors' confidence in

the economy and attract foreign investment. Given the size of the

public sector and the number of key industries in which monopolies

exist, Bahrain may be well served by specific legislation on

competition policy addressing issues relating to monopolies and

unfair competition.

The Government of Bahrain provides a number of incentives,

particularly in manufacturing, in order to attract investment to the

sector. At present, this includes direct subsidies for electricity and

rent, as well as the provision of other utilities, including water and

sewerage services, at below economic cost. There appear to be

few distribution controls although distribution monopolies exist in

some sectors, notably petroleum, gas, and primary aluminium.

Administered prices are applied to a small number of products, such

as petroleum, gas, flour, and meat.

Sectoral Policies

Agriculture and fisheries

The agriculture and fisheries sector is small, accounting for some

1% of GDP in 1998. Environmental constraints have limited

production to fruit and vegetables, fodder, poultry, eggs, and fish.

Bahrain imports most of its consumption requirements, including

fruit and nuts, livestock, vegetables, dairy products, and cereals.

The sector is heavily subsidized with the Government providing

most inputs such as electricity, water, feed, and pesticides, and

credit at low cost or free of charge. In line with efforts to reduce

government spending, however, there has been a recent shift in

favour of subsidies that encourage water conservation and

intensified farming. Fisheries subsidies have also been reduced and

shifted from the provision of equipment, storage facilities, as well

as technical extension services, to infrastructural and technical

assistance.

Petroleum and natural gas

Despite its relatively diversified economy, Bahrain depends to a

large extent on sales of petroleum and petroleum products for

economic growth. The majority of its petroleum (almost 79%)

comes from the offshore Abu Saafa oilfield in Saudi Arabia; at

present, Bahrain receives all of the oil produced by this field, which

is exported as crude. Bahrain also imports a significant amount of

petroleum, mainly from Saudi Arabia; along with locally produced

petroleum, this is refined locally and exported. In 1998, petroleum

and mining accounted for around 14% of GDP. The importance of

the sector has been declining, however, prompting efforts to

increase exploration in addition to diversification of the economic

base.

Policy issues relating to petroleum and natural gas are overseen by

the Supreme Council of Petroleum, headed by the Prime Minister.

Until January 2000, the production and distribution of petroleum

was carried out by the state-owned company, the Bahrain National

Oil Company (BANOCO). In January 2000, BANOCO was merged

with the Bahrain Petroleum Company (BAPCO), also state owned,

which previously managed Bahrain's oil refinery. The new company

BAPCO will henceforth be responsible for exploration, crude and

refined oil production as well as distribution and marketing, both in

Bahrain and abroad. Private investment is allowed in petroleum

refining, and in petroleum extraction, through production- sharing

agreements with the Government of Bahrain; with the exception of

Chevron Corporation, however, which is involved in exploration

activities, there is no private investment in the sector. In an effort

to further develop Bahrain's petroleum resources, the Ministry of Oil

and Industry has signed agreements with foreign companies to

conduct exploration activities for oil and gas.

Natural gas is used mainly for local industry and for reinjection. As

for petroleum, BANOCO (now part of BAPCO) has a monopoly over

the production of gas, whereas the Bahrain National Gas Company

(BANAGAS), owned by the Government of Bahrain, Caltex and the

Arab Petroleum Investment Corporation (APIC), operates Bahrain's

gas liquefaction plant.

Domestic prices of petroleum and gas are controlled; gas prices

remain below international rates despite an 80% increase in the

price to consumers in 1998. Domestic distribution of petroleum and

natural gas products may be carried out only by BANOCO (now part

of BAPCO) and BANAGAS, respectively.

Manufacturing

The manufacturing sector is mainly based on energy-intensive

products, including aluminium, metal industries, and chemicals. The

largest industry, aluminium, accounted for around 5% of GDP and

almost 60% of manufactured exports in 1998. Production of primary

aluminium, until June, 1999 was carried out by the state-owned

company Aluminium Bahrain (ALBA). The majority state-owned

Bahrain Saudi Aluminium Marketing Company (BALCO) was

responsible for marketing the output of ALBA. In June 1999, the

companies were merged; production and sales of primary aluminium

is currently carried out by the new company. A number of small,

private companies also operate in the sector, producing mainly

aluminium products from primary and recycled material.

The manufacturing sector is considered to be strategic for

Bahrain's development, and policy is therefore aimed at diversifying

the industrial base. Thus, a recent shift in policy has been to

encourage investment in downstream activities related to Bahrain's

existing energy intensive industries. The Government has also

invested in the development of infrastructure to support the

development of these new industries. In addition, efforts are being

made to attract foreign investment in these industries with

technical assistance from international organizations. Investment

incentives for the manufacturing sector include reduced

infrastructure costs, such as free rental for a two-year period of

land in the industrial zones and reductions in electricity tariffs, as

well as tariff exemptions for the import of raw material inputs for

exports and of equipment and machinery.

Services

Contributing around 77% of GDP and 50% of employment in 1998,

services is by far the largest economic sector in Bahrain. The main

activities include financial services, government services, real

estate, trade, and transport and communication services. Along

with manufacturing, the development of the services sector forms

an important part of Bahrain's diversification strategy. Financial

services, especially offshore banking, is well developed and the

Government has continued to pursue reforms to strengthen the

financial services sector further. This was also the only sector in

which Bahrain made commitments under the GATS and under the

Fifth Protocol.

Bahrain's banking sector is regulated by the Bahrain Monetary

Agency (BMA), and investors must be licensed by the BMA to open

banking units in Bahrain or offshore. There are no foreign ownership

restrictions for offshore banks, whereas up to 49% of the total

equity of a local bank may be held by foreign nationals (up to

100% is permitted for GCC nationals). The insurance sector, which

is regulated and supervised by the Ministry of Commerce is subject

to similar restrictions with regard to foreign investment. Bahrain

has also been developing its stock market, which began operating

in 1989, and recent reforms allow non-Bahrainis to own between a

49% (maximum for non-GCC nationals) and 100% (GCC nationals

and companies) of the shares of listed companies.

Liberalization is also proceeding, albeit more gradually, in other

services sectors, including telecommunications, maritime and air

transport, and tourism. All basic telecommunications services are

provided by the majority state-owned provider Bahrain

Telecommunications Company (BATELCO). Some value-added

services have been recently opened to competition although there

appear to be no plans to allow competition into basic

telecommunications. While Bahrain did not participate in

negotiations on Basic Telecommunications Services, the authorities

are considering making commitments under the GATS. In air

transport services, gradual liberalization in a controlled manner has

been favoured by the authorities. Gulf Air, which is jointly owned

with the Governments of Qatar, Abu Dhabi and Oman, according to

the authorities, no longer has exclusive access to some routes

under the terms of its charter, although government employees are

directed to use Gulf Air's services whenever possible. In maritime

transport, the authorities wish to develop Bahrain into a

competitive regional distribution centre. In this regard, a new port

is being developed to add to existing capacity at port facilities at

Mina Salman. Some private activities in the port are currently

allowed, notably stevedoring; the authorities believe however, that

efficiency of port services would be best maintained through joint

public-private ownership of port services. Tourism is an important

source of revenue, and employment and has grown steadily since

the completion of the King Fahd Causeway connecting Bahrain to

Saudi Arabia; this is the main route used by tourists to Bahrain.

The Government has also intensified efforts to attract specialized

tourism, including sports, conferences, and business meetings, in

addition to encouraging visitors to Bahrain's historical sites.

Trade Policies and Trading Partners

While committed to the WTO, Bahrain maintains close trade and

investment ties with other member countries of the Gulf

Cooperation Council (GCC). In addition to not paying customs

duties, investors from GCC countries have preferential investment

access in Bahrain; they are allowed equity ownership of up to

100% in certain sectors compared with 49% for other foreign

investors. Ties between the GCC countries were strengthened and

formalized through the Unified Economic Agreement, signed in

1981, forming a customs union between the member countries by

2005. In preparation for the union, Bahrain raised its tariff on

tobacco products, to a minimum rate of 100% in 1998, and

removed tariffs on essential goods and fruit in 2000. Imports from

GCC countries are exempt from customs duties; preferential

treatment is also provided for goods produced in other GCC

countries under the GCC's preferential rules of origin, and for

government procurement, and GCC content is included under

local-content programmes.

Members of the GCC also signed an agreement with 12 other

countries in the region in 1997 to form the Greater Arab Free-trade

area (GAFTA), to be completed by 2008. The agreement, which

came into effect on 1 January 1998, aims to reduce tariffs on

products included in the agreement by 10% per year until end

2007.

The GCC is currently negotiating a free-trade agreement with the

European Union), which would build on the Cooperation Agreement

signed between the GCC and the EU in 1998. Bahrain receives

preferential access to certain markets under the Generalized

System of Preferences.

Outlook

Although Bahrain has a relatively diversified economic base, real

economic growth must rise to sustain a growing labour force. The

Government's structural reforms to open up the economy and

reduce the size of the public sector have borne some fruit as

private investment has shown a tendency to increase recently.

However, the economy is still dependent on Bahrain's small

petroleum resources as has been evident from a slow-down in

economic activity since the mid 1990s. The Government's

privatization programme has been slow to start and private

domestic and foreign investment, while allowed in several

activities, has not taken place in sectors with a major public sector

presence. Important sectors such as petroleum and

telecommunications are essentially closed to private investment,

whereas reform in services, other than financial services, has been

piecemeal. An acceleration and deepening of economic reform will

therefore not only be important for economic growth, but would

also send a positive signal to potential investors. Predictability and

transparency of the trade and investment regime would be

enhanced were Bahrain to more actively notify its legislation to the

WTO, and bind a greater number of services in the GATS.

TRADE POLICY REVIEW BODY: BAHRAIN

Report by the Government - Part II

I. KEY ISSUES AND POLICIES

1. Indications are that the Bahraini economy will continue its

strong performance in 2000 thanks to such factors as the return to

normal of crude oil production at the Abu Saafa field, higher world

oil prices and strict financial policies. Notwithstanding the

uninterrupted implementation of prudent policies involving the

establishment of an open and private sector oriented economy,

Bahrain still faces the challenges of enhancing economic growth

and diversification as well as generating increased employment

opportunities for its citizens.

2. Economic objectives in the medium-term involve continued

diversification of the economic base, with emphasis on downstream

oil and aluminium activities, financial services, tourism,

knowledge-based industries, and encouraging small and medium

size enterprises. Generation of more employment opportunities

represents another important goal. In order to achieve these

objectives, several measures have been adopted, notably

promoting the private sector, mainly by maintaining an open

economic system attractive to foreign direct investment, ensuring

a well-supervised financial sector, streamlining the regulatory

environment, upgrading infrastructure and redefining the role of the

government.

3. The reform strategy has so far proved a success. It has

manifested itself, among other things, in government services and

public enterprises being privatized, simplifying administrative

business licensing procedures, and promotional activities for

attracting foreign direct investment.

4. Aimed at creating more jobs, the employment strategy rests on

four pillars. These are increasing productivity by investing in human

skills through the education system and training programmes;

helping nationals find suitable jobs through employment placement

centers; encouraging the private sector to employ national

employees; and improving conditions in the work place.

(1) FINANCIAL SECTOR

5. Bahrain's small economy notwithstanding, the financial system is

well diversified. As of end-1999, the financial system in Bahrain

comprised some 176 financial institutions. This included 19 full

commercial banks (FCBs), 48 offshore banking units (OBUs), 33

investment banks (IBs), 2 specialized banks, 19 money changers,

36 representative offices, 6 foreign exchange and money brokers,

and 13 investment advisory and other financial services. The

sector's contribution to the GDP is around 23%, more or less the

same share as the oil sector. Banks are profitable, adequately

capitalized, and hold high quality assets. The sound management

of Bahrain's banks together with the BMA's prudent regulatory and

supervision policies have enabled the sector to withstand the

recent volatility of world financial and oil markets.

6. Bahrain's transparent legal framework supports the sector's

growing role as a major financial center in the region. The financial

sector is open to foreign investors with virtually no restrictions on

capital ownership. The BMA has successfully introduced and

enforced international standards and best practices in accounting,

auditing, prudential regulation, and banking supervision. The BMA's

recent efforts to develop a comprehensive regulatory and

operational framework for Islamic banking will further help to

reinforce Bahrain's position as a leading Islamic financial center.

7. The BMA applies a comprehensive and effective off- and on-site

monitoring system of financial institutions, complying in general

with the standards set out in the Basle Core Principles for Effective

Banking Supervision. Following an IMF report on compliance with

the Basle Core Principles of Effective Banking Supervision, further

improvements are still being pursued in the following areas: (i)

greater legal independence of supervisory authorities, (ii) the

provision of additional resources for financial supervision, and (iii)

the legal definition of permissible "banking activities" and "banks".

8. The IMF noted in its report that the BMA had "achieved full

compliance with 24 of the 30 Core (and sub-core) Principles and is

largely compliant with another five (4 core and 1 sub-core)

Principles. These 29 Principles cover virtually all of the supervisory

factors that broadly encompass the fundamentals of a sound

supervisory system".

9. The Bahrain Stock Exchange is adequately supported by modern

computer equipment and information system. The average number

of trades per day is about 70, and shares traded in each

transaction stand at 400 on the average. Overall, there are 41

listed companies, with market capitalization amounting to around

BD 2.7 billion, or approximately 115% of GDP at the end of 1999.

Efforts are under way to strengthen the role of the stock exchange

in the economy by increasing the number of listed companies,

introducing new investment instruments, cross-listing shares at the

regional level, and developing automated depository, clearing and

settlement procedures. The Government is currently studying the

possibility of opening the Stock market still further to foreign

participation, both in terms of 100% ownership of listed companies,

as well as services rendered to the Stock Exchange.

B. FINANCIAL POLICIES

10. Efforts are being made within the framework of a medium-term

expenditure strategy to promote fiscal consolidation by increasing

non-oil revenues and restructuring expenditures. The ultimate

objective is to balance the budget by 2006.

11. The combination of expenditure and revenue measures

currently under consideration will allow the government to

accommodate prospective pressures. Such pressures include

retrenchment costs in the context of privatizing public sector

activities, the upfront cost of the proposed Early Retirement

Scheme and the cost of growing healthcare and education needs.

In addition, expenditure restraint is being exercised through the

existing freeze on the size of the civil service and the relative

wage structure. However, at the same time the Government is

aware of the need to maintain the attractiveness of civil service

employment in order to attract highly qualified and skilled

employees so as not to erode the capacity of the government to

play an effective role in the economy.

12. Similar favourable trends are projected for the balance of

payments in 2000 and beyond. However, the authorities remain

mindful of the vulnerability of the external position to developments

in world prices of oil and aluminium. On the basis of the IMF's WEO

price projections, Bahrain's oil export prices are expected to initially

rebound to US$23 per barrel before settling at around US$17.5 per

barrel. Based on the assumption that the existing agreement on

the Abu Saafa oil field is maintained and production from the Awali

field declines by 1% a year, revenues from oil and oil-related

exports are expected to reach about US$3 billion. With the

continued implementation of diversification policies non-oil exports

are projected to increase by about 4% a year. Efforts aimed at

consolidating the fiscal position and promoting export-oriented

private sector investment would largely improve the external

position.

13. The conduct of monetary policy continues to be geared

towards maintaining the de facto link between the national

currency and the U.S. dollar. Together with prudent and effective

supervision of the financial system, this policy has contributed to

low inflation and interest rates in line with those prevailing in the

USA.

C. TRANSPARENCY

14. Attracting foreign direct investment and promoting the private

sector are essential for maintaining sustainable growth. In this

context transparency proves a sine qua non for creating the

enabling environment for private sector investment.

15. In order to improve transparency, efforts are being made to

ensure timeliness and coverage quality of economic and labour

statistics.