With the IMF forecasting an 11.3% contraction, economists call for debt restructuring, fiscal reform and productive investment as Bahrain seeks further Gulf financial support.
Bahrain faces an 11.3% economic contraction in 2026, according to the International Monetary Fund’s October forecast, as prolonged disruption to Gulf shipping compounds the kingdom’s heavy public debt burden, drains foreign-exchange reserves and intensifies pressure for further financial assistance from its wealthier neighbours.
The IMF’s latest projection marks a sharp deterioration from the 0.5% contraction anticipated in April. Public debt is forecast to reach 162.8% of GDP this year, while the general-government deficit is projected at 11.4% of national output.
The financial warning intensified on October 21, when Capital Economics said Bahrain would probably require additional Gulf support to sustain confidence in its dollar-pegged currency and refinance maturing external debt. In an October 29 update, the consultancy cited reports that Bahrain was in discussions with the United Arab Emirates over a fresh financing package, although no new agreement had been confirmed.
Bahrain has not defaulted on its sovereign debt. Nevertheless, mounting borrowing requirements, high interest costs and declining foreign-currency reserves have exposed structural weaknesses that predate the regional conflict.
The deterioration has prompted a growing debate among Bahraini economists, business leaders and parliamentarians over how to stabilise public finances without undermining economic growth, investment or household purchasing power.
Their proposals provide the foundations of a comprehensive recovery strategy, but their effectiveness will depend on whether they can be translated into a coherent, measurable financial programme.
How Bahrain’s Debt Became a Financing Crisis
Bahrain’s fiscal difficulties intensified after the 2014 oil-price collapse, when declining petroleum revenues increased government borrowing requirements.
In 2018, Saudi Arabia, the UAE and Kuwait agreed to provide a $10 billion assistance package linked to Bahrain’s Fiscal Balance Programme, which originally aimed to eliminate the budget deficit by 2022.
That target was not achieved. The pandemic, subsequent economic disruptions and continuing fiscal imbalances left the government increasingly dependent on debt financing.
The scale of the challenge is evident in Bahrain’s 2025 final government accounts, published in September 2026.
Government revenue reached BD2.688 billion ($7.15 billion), against expenditure of BD4.454 billion, producing a deficit of BD1.766 billion.
Interest payments alone totalled BD1.052 billion, absorbing approximately 39% of government revenue. Even excluding interest costs, government expenditure exceeded revenue by BD714 million.
This distinction is fundamental: Bahrain is facing both the accumulated cost of previous borrowing and a continuing structural imbalance between revenue and expenditure. Refinancing existing debt could reduce interest costs but would not, by itself, eliminate the underlying deficit.
National accounts placed public debt at BD22.166 billion at the end of 2025, equivalent to approximately 120% of GDP under Bahrain’s reporting framework. The IMF’s broader debt measure stood at 144.3% of GDP for 2025, rising to a projected 162.8% in 2026. The figures differ in coverage and should not be treated as directly comparable.
The latest regional conflict has aggravated these pressures.
Disruptions to the Strait of Hormuz have constrained exports, shipping and industrial activity, affecting petroleum, aluminium, logistics and tourism.
Foreign-exchange reserves declined from approximately $6.67 billion in March to $3.08 billion in August, according to figures cited by Capital Economics, narrowing Bahrain’s capacity to absorb external financial shocks.
Although the IMF forecasts a 13.9% economic rebound in 2027, the projection depends heavily on a recovery in regional trade and economic activity, rather than an already assured restoration of financial stability.
What Prolonged Financial Pressure Could Mean
Bahrain’s immediate risk is a financing squeeze in which rising borrowing costs create additional pressure on government finances.
Higher sovereign bond yields increase the cost of refinancing debt, diverting public resources from infrastructure, essential services and productive investment.
A prolonged deterioration could also restrict financing for private businesses, particularly construction, property, manufacturing, logistics and small enterprises. Companies facing reduced demand, delayed payments and expensive credit may postpone expansion, cut employment or encounter repayment difficulties.
Households could experience higher utility charges, additional fees and weaker purchasing power if fiscal adjustment places a greater burden on consumers.
Continued depletion of foreign reserves would also increase pressure on Bahrain’s currency arrangement. The dinar has long been pegged to the US dollar at approximately BD0.376 per dollar, providing monetary stability and supporting international commercial confidence.
A devaluation remains a risk scenario, not an announced or inevitable outcome. The IMF has continued to regard the peg as an important monetary anchor, while emphasising the need for stronger reserves and fiscal discipline.
Bahrain’s banking sector remains an important financial buffer. The IMF has previously described commercial banks as profitable and well-capitalised, although prolonged sovereign stress could eventually increase funding costs and credit risks.
The economy also possesses significant strengths.
Non-oil activities accounted for 85.8% of real GDP in 2025, growing 4.1%, according to the Finance Ministry. Financial services, manufacturing, tourism and professional activities have become established components of national output.
However, hydrocarbons still generated approximately 48% of government revenue.
Bahrain’s central economic weakness is therefore not the absence of diversification, but the failure of that diversification to generate sufficient fiscal revenue to finance government obligations sustainably.
Addressing this imbalance is becoming as important as securing the next financing package.
Bahraini Economists Propose Structural Reforms
Recommendations published in Bahraini newspapers and discussed in business and parliamentary forums point towards five interrelated priorities: professional debt management, expenditure discipline, broader government revenue, productive private investment and stronger economic resilience.
Debt Restructuring and Fiscal Sustainability
Economist Dr Hassan Al Aali, writing in Al Bilad on February 7, argued that Bahrain must move beyond managing the volume of public debt towards managing its long-term sustainability.
He proposed a legally enforceable debt-management framework, a specialised unit within the Finance Ministry, longer repayment maturities and refinancing expensive debt with lower-cost instruments wherever feasible.
He also called for limiting borrowing used to finance recurring expenditure and directing new debt more closely towards productive investments capable of generating future economic returns.
Redha Faraj, economist and Shura Council member, advanced a complementary approach in an April 21 interview with Al Bilad. He advocated balancing fiscal restraint with continued growth, improving government revenue collection, extending debt maturities and strengthening investment in productive economic sectors.
Both approaches recognise that debt management is not simply a question of extending repayment dates. The objective must be to reduce future borrowing requirements, improve financing terms and restore market confidence.
Oman’s experience offers a relevant regional comparison. Its successful reduction of public debt combined fiscal restraint, active debt management and the use of stronger oil revenues to repay obligations. Bahrain’s more constrained fiscal position makes implementation difficult, but the underlying principles remain applicable.
Public Expenditure, Taxation and Financial Accountability
Bahrain has already initiated fiscal reforms.
In December 2025, the government approved a 20% reduction in administrative expenditure across public entities, alongside increased contributions from state-owned companies and adjustments to selected fees, subsidies and utility prices.
However, the announced administrative-spending reduction does not represent a 20% cut in total government expenditure. Its contribution to deficit reduction depends on the actual expenditure affected and the savings delivered.
Dr Al Aali has proposed additional measures, including restructuring inefficient government entities, limiting growth in recurrent expenditure, reviewing low-return projects and targeting subsidies towards the households most in need.
His revenue proposals include progressive taxation on higher-income groups, selective levies on luxury consumption and environmentally harmful activities, charges on unused investment land and more efficient electronic collection of government fees.
A proposed 10% corporate income tax, expected to apply to qualifying companies from 2027 subject to legislative approval, represents another potential source of non-oil revenue.
The draft framework targets companies exceeding specified revenue or profit thresholds, with the proposed tax applying to profits above BD200,000.
Tax specialists, including those at BDO Bahrain, have stressed the importance of regulatory clarity and allowing businesses sufficient preparation time.
Ahmed Al Salloom, chairman of the parliamentary Financial and Economic Affairs Committee, has identified public debt, spending efficiency, non-oil revenues and protection of citizens’ living standards as major legislative priorities.
Financial oversight has also attracted attention.
During an October 25 Shura Council debate, Jamal Fakhro, First Deputy Chairman of the Council, questioned approximately BD376.9 million in government expenditure exceeding approved appropriations in the 2024 accounts and called attention to shortcomings in fiscal reporting.
His intervention reinforces the need for transparent public accounts, stronger expenditure controls and scrutiny of government liabilities.
The IMF has similarly called for a credible medium-term fiscal framework, reduced expenditure outside the regular budget, improved tax revenues and better-targeted subsidies.
The challenge is to strengthen government finances without triggering a contraction in consumption, employment and private investment that could ultimately weaken the revenue base.
Private Investment and Economic Diversification
Sonia Janahi, a board member of the Bahrain Chamber of Commerce and Industry, proposed establishing a national economic diversification fund through a public-private partnership during an Al Bilad economic roundtable in May.
She called for greater investment in downstream aluminium, titanium, pharmaceuticals, food manufacturing, financial technology and tourism.
Her proposals also included expanding procurement opportunities for smaller businesses, strengthening links between major corporations and emerging enterprises, and deepening trade and investment integration with Saudi Arabia and other GCC markets.
Janahi’s recommendations address a fundamental weakness in Bahrain’s economic model: non-oil growth needs to generate higher-value employment, stronger exports and sustainable fiscal returns rather than simply expanding economic activity.
Businessman Abdulhakim Al Shammari, chairman of Al Shammari Holding, called for more decisive economic reforms during an April interview on Al Bilad’s Diwan Al Tujjar programme.
He criticised the tendency of financial institutions to earn returns from government debt rather than directing more investment towards productive enterprise.
He also identified higher education, tourism and other services as opportunities to attract foreign expenditure and create employment.
In a separate April intervention, Al Shammari advocated stronger logistics connections with Saudi Arabia, including dedicated logistics facilities and maritime transport links.
Faraj has similarly supported expanding financial services, digital industries, tourism, industrial production and technical training.
Together, these proposals favour an economy in which productivity, private capital and exports progressively reduce dependence on public expenditure and government borrowing.
Yet investment incentives must be carefully structured. New state-backed funds and public-private partnerships should be evaluated according to measurable commercial returns, with transparent governance and safeguards against accumulating additional contingent public liabilities.
Business Liquidity and the Risk of Further Indebtedness
The debate over supporting struggling enterprises illustrates the difficulty of balancing economic stimulus with debt reduction.
A parliamentary proposal advanced by MP Hassan Ebrahim, reported in Bahraini media on October 31 and November 1, seeks to channel BD200 million through local banks to provide affordable loans to businesses facing financial difficulties.
The Bahrain Businessmen’s Society supports additional liquidity to sustain commercial activity and employment.
However, the Bahrain SME Development Society warns that further borrowing could worsen company indebtedness without addressing weak demand or high operating costs.
The Bahrain Chamber of Commerce and Industry has called for coordination with existing financing schemes, while the Industry and Commerce Ministry has highlighted an SME funding facility exceeding $185 million.
The disagreement exposes a crucial distinction between liquidity and solvency.
A commercially viable business suffering a temporary cash shortage may benefit from affordable credit. A business facing persistent losses may instead require restructuring, direct assistance or an orderly exit.
Economic support should therefore target viable enterprises, employment preservation and productive activity rather than indiscriminately expanding credit.
Trade Resilience and Regional Integration
Bahrain’s dependence on imported goods and vulnerable maritime routes has added another dimension to the economic debate.
At the May Al Bilad roundtable, businessman Darwish Al Mannai stressed the importance of more resilient supply chains, stronger regional integration and greater domestic production.
The discussion highlighted strategic inventories, alternative logistics routes, food security and expanded Gulf cooperation as essential measures for reducing the impact of external disruptions.
These initiatives cannot resolve the sovereign debt problem directly, but they could help stabilise industrial production, contain supply costs and create opportunities in logistics, manufacturing and related services.
Gulf Financial Support: A Bridge to Reform
Regional assistance remains central to Bahrain’s near-term financial outlook.
The 2018 support arrangement demonstrated the willingness of Saudi Arabia, the UAE and Kuwait to back Bahrain’s financial stability in exchange for fiscal reforms.
In April 2026, the UAE and Bahrain central banks also signed a five-year currency-swap agreement worth AED20 billion, equivalent to approximately $5.4 billion.
The arrangement supports monetary cooperation and liquidity management. It is not equivalent to an unconditional dollar-denominated government bailout.
Capital Economics’ October 29 reference to reported discussions over fresh UAE financing suggests that the search for additional support may already have intensified. However, the existence, size and terms of any new package have not been officially established.
Regional financing could help Bahrain refinance upcoming obligations and maintain confidence in its currency.
But additional borrowing or external assistance would provide only temporary relief unless accompanied by reforms that reduce the government’s continuing financing requirements.
Conclusion: A Three-Year Recovery Programme Is Essential
Bahrain’s immediate priority is to preserve financial stability while avoiding an adjustment so severe that it further damages growth, employment and government revenue.
The country’s substantial non-oil economy, established financial institutions and regional partnerships provide important foundations for recovery. Nevertheless, its large fiscal deficits, heavy interest expenditure and limited reserve buffers require more than isolated spending cuts, new taxes or additional credit facilities.
The proposals advanced by Bahraini specialists can be consolidated into a coordinated economic programme that addresses both immediate liquidity requirements and the underlying sources of fiscal weakness.
MEO’s proposed resolution is a binding three-year fiscal and financial restructuring programme, rather than another cycle of borrowing sustained by temporary external assistance. The immediate priority should be to negotiate a conditional GCC financing facility, sized against verified foreign-currency needs and debt maturities over the next 18–24 months, while establishing a professionally independent debt-management unit with authority to publish a comprehensive sovereign debt schedule, extend repayment maturities and refinance expensive obligations on demonstrably better terms.
Simultaneously, Bahrain should adopt a credible, independently assessed target of eliminating its primary budget deficit within three years through enforceable controls on recurrent expenditure, restructuring inefficient public entities, increasing returns from state-owned assets, broadening non-oil taxation and replacing poorly targeted subsidies with direct protection for vulnerable households. New borrowing should progressively be restricted to efficient refinancing and economically justified investment as the primary deficit narrows, while private capital is mobilised towards export-oriented manufacturing, financial services, logistics, tourism and technology. The programme should publish quarterly indicators covering the primary balance, debt-service costs, reserve adequacy, refinancing requirements and productive private investment, supported by independent fiscal scrutiny and annual stress tests against weaker growth and prolonged trade disruption.
The proposed timetable would require detailed modelling and agreement with financing partners, but its objective is clear: Bahrain’s success should be measured not by the size of its next rescue package, but by its demonstrable ability to reduce borrowing requirements, restore investor confidence and achieve sustainable growth without recurring emergency assistance.
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