Bahrain, the small island country in the Middle East has had an interesting past. Home to the famed Dilmun civilisation in the Bronze Age, it served as an important trade route between Mesopotamia and the Indus Valley civilisations (circular, stamped seals, believed to be originating in Dilmun have been found at Lothal in Gujarat and in Mesopotamia). Ancient Greeks referred to this country as Tylos, the centre of pearl trading.
At one brief time around the 10th century, Bahrain was at the peak of its power, when the Qarmatians, an Ismaili Shia sect (intermixed with elements of Persian mysticism, and surprisingly, pure vegetarians) ruling over Bahrain revolted against the Abbasid Caliphate, rampaged through the Middle East and sacked Mecca. They stole the black stone at Mecca and desecrated the Zamzam well with corpses in the holy Haj season of AD 930.
This revolution by a tiny state outraged the Muslim world and humiliated the mighty Abbasids. For most of the 10th century, the Qarmatians were the most powerful force in the Persian Gulf and the Middle East, collecting tribute from the Baghdad Caliph and the Abbasids.
A multitude of empires later, the British recognised the Al Khalifa tribe as the rulers of Bahrain, and placed Bahrain under British protection. After independence in 1971, there have been multiple civil unrest occasions, ranging from a failed coup in 1981 (similar in nature with the Iranian revolution, to install a Shia Cleric as supreme leader), to uprisings between 1994 and 2000. More recently, the Arab Spring in early 2011 led to a brutal crackdown and imposition of a three month emergency by the government.
Ironically, in the GCC (Gulf Cooperation Council comprising the countries of Saudi Arabia, Kuwait, the UAE, Qatar, Bahrain and Oman), the current beleaguered Bahrain was the first mover in diversifying its economy beyond hydrocarbons. Given its limited oil resources (Bahrain produces only about 50,000 barrels per day in its sole onshore field, and has share in an offshore field controlled by Saudi), under the leadership of its Prime Minister, Bahrain took up major investments in mega infra projects, developed a strong system of Islamic banking and had public debt at less than 10% of GDP till pre 2009.
It was lauded as an ideal Gulf state by global watchers and suggested the pilot case(along with Oman) of how the Gulf could proceed in an era of low oil dependence.
However, a closer look at the key reason for Bahrain being a financial hub is not so impressive, given it being more of providence than design. The Lebanese Civil War led to a majority of Lebanese bankers seeking refuge and engagement in Bahrain, which fuelled its financial sector. Uniquely in the Gulf, Bahrain’s single biggest economic sector is financial services, not oil and gas.
Despite its potential to becoming a thought leader in the Gulf, Bahrain has mostly played second fiddle to Saudi, which has led to some of its greatest complications. Bahrain’s pitch for global investments has mostly been based around to its tax free access to Saudi (owing to GCC customs union), and though Saudi is 20 times the GDP size of Bahrain, the Saudi excuse crops up in both economic and political decisions. This dependence only worsened after the 2011 Arab Spring, when Saudi military played a crucial role in the crackdown on pro-democracy forces in Bahrain.
Bahrain is a unique demographic case in the Arab world. It is a Shiite majority nation ruled by a Sunni monarchy. Though the exact demographics are disputed, it is estimated that Shias constitute anywhere between 60-70% of the Bahraini Muslim population.
The irony in the name of this country is hard to miss. In Arabic, ‘Bahrayn’ is the dual form of Bahr (sea), and it seemed to suggest the Persian Gulf on one side and a freshwater lake on the Arabic mainland. Bahrain’s current ethnic unrest has similar form.
The Sunni monarchy has vacillated between confidence building measures for the Shia’s, while also undermining these with brutal crackdowns. Deepened perceptions of Shia neglect because of Saudi leanings have become commonplace in Bahrain.
Adding to this, the Arab Spring and ethnic security fears prompted the increase in the naturalisation of foreign Sunni recruits into the Bahraini security forces. Though disputed, a majority of the naturalised 30,000 Pakistanis in Bahrain are believed to work for the police or the military in Bahrain. These naturalsed Sunni officers are given free homes, guaranteed jobs and other extravagant indulgences in such times of economic crises, thereby denying the Bahraini Shia population a share in the massive salary bill.
The Arab Spring’s political unrest, undeniably sparked by the domino rebellion across a majority of the authoritarian states had something in common across the Gulf — the distribution of oil proceeds and perceptions of crony capitalism. Oil incomes have typically allowed a gravy train of doles, subsidies and services go unimpeded to a majority of the population. Add to that, the employment opportunities and contracts which come with political loyalty and ethnicity.
Political unrest, largely concentrated in Shia dominated settlements, is explained by the government using the all-too-familiar Iran bogeyman, which were perceived largely as a distraction from real causes of disaffection.
Instead of addressing the long standing issues and perceptions of ethnic neglect, Bahrain, aided by Saudi and launched such a violent crackdown on the pro-democracy protestors that it rattled even some of its closes Western allies. (USA banned security assistance to Bahrain in 2011, which was recently lifted in 2015).
In December 2015, Fitch downgraded Bahrain’s rating from stable to negative, followed soon by a bleak economic outlook by Moodys, which warned: “Economic policymaking is hampered by a still unsettled domestic political situation in the country. The experience of public unrest in 2011 suggests that the government will face continuing pressure to keep current spending growing.”
Every year after 2011 (Arab Spring) has had Bahrain’s fiscal status worsening. Budget deficits have been increasing since each year since, with a ballooning public debt too. As if economic disruption was not enough, public spending to preserve loyalty has been at a regular rise.
More than 25% of public spending is now on defence and security. Keeping the Iran bogeyman alive and buying leverage with the Western powers by large scale military hardware purchases, seems to be top priority for this country.
With a budget deficit at 7% of GDP, it is estimated that Bahrain will need an oil price of $125 per barrel to break even. With oil at sub $50 levels, and no foreseeable future at stratospheric oil price levels, Bahrain is staring at a continuously increasing budget deficit.
Public debt as a percentage of GDP which crossed 45% in 2015, is staring at reaching 60% levels soon. This would be a dangerous anomaly in the Gulf as avenues of government earning are limited and oil threatens to stay at sub price levels to allow any foreseeable debt repayment. (Oil contributes about 70% of the Bahrain Government’s revenue).
Saudi has always been the fall back option, but given the current predicament in the Arab world, there are larger problems for Saudi than to bail Bahrain out.
Ethnic pampering to stay in power comes at serious cost. Bahrain gave a pay rise of above 35% to the civil service, military and pensioners post the Arab spring. A subsidy burden exceeding 25% was the least of their priorities then.
One common trait that one sees across the Arab world is the propensity to indulge in high cost external wars when in-house itself needs serious attention. Regionally, Bahrain has embroiled itself in two wars with no foreseeable ends: the US coalition against Islamic State and Saudi Arabia's unnecessary war against Yemen.
Apart from buying leverage with Saudi and the Western powers, there is little to gain from these wars for Bahrain.
First signs of this political and economic tightrope coming undone have started showing. Petrol prices were hiked by 50% in January this year, subsidies were cut on meat, while electricity and water rates were increased across certain sectors.
With the re-arrest of some key moderate pro-democracy leaders and economic woes only multiplying for the Shia population, it is only a matter of time before the ethical cauldron starts simmering again.
Saudi and Western bailouts can keep the gravy train running for a few years more. But then, the fundamental rail tracks ahead seem to be disappearing.
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Avijit Goel is a Senior Director with Flipkart. An alumnus of the Oxford University
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