Closer integration with Bahrain's Gulf neighbours should bring host of economic benefits

 

Bahrain has always been one of the more connected centres of the Gulf. It has been a vibrant entrepôt for millennia, boasting a maritime history dating back to the commercial traffic that once plied the waters between ancient Mesopotamia and the civilizations of the Indus valley. Its geographic location has resulted in a particularly close connection with the largest economy in the region. Saudi Arabia occupies an especially prominent position within the array of nations with which Bahrain has established ties, and Manama’s proximity to the eastern shore of its larger neighbour has resulted in a web of social, political and economic links, which have become increasingly strong over more recent decades.

The most visible manifestation of this phenomenon is the King Fahd Causeway, a 25-km link between the two kingdoms that opened in 1986 after a four-year construction period. Between its inauguration and the close of 2014, some 281.8m people, largely from Saudi Arabia, Kuwait and Qatar, crossed the causeway, at an average rate of 26,600 per day. Bahrain’s relationship with Saudi Arabia has grown even stronger since the onset of the Arab Spring in 2011. Saudi Arabia was quick to offer security assistance in response to the political unrest which broke out in Manama that year, and thereafter played a leading role in the establishment of the Gulf Development Fund, which has allowed the kingdom to maintain its crucial capital spending programme.

POTENTIAL GAINS: As a trading nation, Bahrain has been an enthusiastic proponent of the GCC’s principal success – the GCC Unified Customs Union. The kingdom signed up to it in 2003, eliminating tariffs on 426 categories of goods coming and going from GCC member states, and lowering the tariff of those goods not on the list to 5% in the vast majority of cases — with the notable exception of products such as alcohol and tobacco. Since that time it has been an early adopter of new technologies, which has made the task of shuttling goods between the GCC states an increasingly frictionless process. From 2012 onwards, for example, Bahrain has operated the Dubai-based Webb Fontaine Group’s Trade World Manager system to perform the automatic reconciliation of export and import claims with other GCC states . The process of Customs integration continues, with Bahrain’s Khalifa Bin Salman Port one of six in the region to receive a technical upgrade in 2016 aimed at streamlining Customs procedures and thereby boosting business and commercial activity.

DEEPENING TIES: The Customs union is widely regarded as the GCC’s most significant economic accomplishment, but there are signs that some members of the bloc would like to see a greater degree of cooperation. Chief among these is Saudi Arabia, the new leadership of which is attempting to radically reshape its oil-dependent economy and wean its population off a reliance on subsidies.

Alongside the UAE, the Saudis have been one of the principal forces behind the GCC-wide introduction of value-added tax, which may one day provide the model for the multilateral introduction of other revenue boosting taxation in the region. In 2016 the GCC made another important announcement, the establishment of the Economic and Development Affairs Authority (EDAA), which is tasked with will boosting “coherence, integration and coordination between member states in all economic and development sectors”.

The breadth of the EDAA’s mandate appears to mark a return to the GCC’s original aim of converting — in the words of its first secretary general — a six-room house into a mansion without barriers.

This, however, may involve the harmonisation of the various regulatory frameworks that are already in place, which are applied to important areas such as financial services. This regulatory convergence has long been called for by advocates of further GCC integration. For a state such as Bahrain, which has successfully marketed itself as having a superior financial regulatory framework than its neighbours, increased harmonisation is as much of a challenge as it is an important opportunity.

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The Report: Bahrain 2017

Economy chapter from The Report: Bahrain 2017