2009 Index of Economic Freedom

Quick Facts

Population:

• 0.7 million

GDP (PPP):

• $22.4 billion
• 6.5% growth
• 6.5% 5-year compound annual growth
• $29873 per capita

Unemployment:

• 15.0%

Inflation (CPI):

• 3.4%

FDI Inflow:

• $2.9 billion

Bahrain's economic freedom score is 74.8, making its economy the 16th freest in the 2009 Index. Its overall score is 2.6 points higher than last year, mainly because of labor market reform measures in recent years. Bahrain is ranked 1st out of 17 countries in the Middle East/North Africa region, and its economic freedom score is well above the world average.

Bahrain's economy is well equipped and competitive in several respects, including low taxation, openness to global trade, and financial market development. The government has focused on diversifying the economy in non-oil areas, and the country is the least oil-dependent of all Gulf Cooperation Council (GCC) states. Levels of business freedom, fiscal freedom, monetary freedom, and especially financial freedom are high. The absence of income or corporate taxes in all industries except oil gives Bahrain a competitive commercial advantage globally. With its rapidly growing young population, Bahrain has gradually moved toward more flexible employment regulations to establish a more dynamic labor market.

Bahrain's economic freedom, however, would be enhanced if the government would strengthen property rights and deal with corruption.

Background Back to the top

Bahrain has become one of the Persian Gulf's most advanced economies and most progressive political systems since gaining its independence from Great Britain in 1971. Under a constitution promulgated by Sheikh Hamad bin Isa al-Khalifa, the country became a constitutional monarchy in 2002, and the government has sought to reduce dependence on declining oil reserves and encourage foreign investment by diversifying the economy. Because of its communications and transportation infrastructure, regulatory structure, and cosmopolitan outlook, Bahrain is home to many multinational firms that do business in the region. In 2006, the U.S. and Bahrain implemented the first free trade agreement between the U.S. and a Gulf state.

Business Freedom 79.6 Back to the top

Bahrain's commercial law system is relatively straightforward, but starting, operating, and closing a business can be slowed by an uncoordinated regulatory environment. The government is working to streamline regulations and create the necessary infrastructure in partnership with the private sector.

Trade Freedom 80.0 Back to the top

Bahrain's simple average tariff rate was 5 percent in 2006. There are few non-tariff barriers, but a limited number of products are subject to import and export prohibitions or restrictions. Enforcement of intellectual property rights also remains a concern. Ten points were deducted from Bahrain's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 99.9 Back to the top

Historically, Bahrain has imposed no taxes on personal income. However, the government levies a 1 percent tax on the salaries of Bahraini nationals working for companies with more than 50 employees as a way to fund job training. Most companies are not subject to corporate tax, but a 46 percent corporate tax is levied on oil companies based on net profits generated in Bahrain. A small stamp duty is collected on property transfers. As of July 2008, employers must pay a new tax for each expatriate employee. In the most recent year, overall tax revenue as a percentage of GDP was 2.4 percent.

Government Size 79.4 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 26.2 percent of GDP. The government is implementing structural reforms and continuing to work on a scheme to deregulate public services. Strengthening fiscal management through program-based budgeting is an ongoing goal.

Monetary Freedom74.0 Back to the top

Inflation is relatively low, averaging 3.0 percent between 2005 and 2007. Fifteen points were deducted from Bahrain's monetary freedom score to account for extensive price controls and subsidies that distort domestic prices for many food products, electricity, water, and petroleum.

Investment Freedom60.0 Back to the top

The government generally welcomes foreign investment, but certain sectors are restricted. Bahrain permits 100 percent foreign ownership of new industrial entities and the establishment of representative offices or branches of foreign companies without local sponsors. Wholly foreign-owned companies may be established for regional distribution services and may operate within the domestic market if they do not pursue domestic commercial sales exclusively. Gulf Cooperation Council nationals may own 100 percent of the shares of firms listed on the stock exchange, but non-GCC nationals are limited to 49 percent. There are no restrictions on the repatriation of profits or capital, no exchange controls, and no restrictions on converting or transferring funds, whether associated with an investment or not. In 2006, the Cabinet passed an edict opening ownership of “free hold” properties being constructed throughout the kingdom and allowing all nationalities to own commercial or investment (but not residential) properties.

Financial Freedom80.0 Back to the top

Bahrain is a regional financial hub, and both foreign and local individuals and companies enjoy access to credit on market terms. With more than 400 banks and financial institutions in 2008, the financial sector accounts for over 25 percent of GDP. The banking system provides a wide range of financial services for foreign and domestic investors. Financial regulation has become more flexible and comprehensive. With passage of the Central Bank of Bahrain and Financial Institutions Law (CBB Law) in September 2006, the CBB became a single regulator of the financial services industry, with more enforcement powers and operational independence. As of 2007, the Bahrain Stock Exchange listed more than 50 companies.

Property Rights60.0 Back to the top

Property ownership is secure, and expropriation is unlikely. The judiciary is not fully independent because the king has the right to appoint judges and amend the constitution, but the legal system is well regarded, and foreign firms can resolve disputes satisfactorily through the local courts. There are no prohibitions on the use of international arbitration to safeguard contracts. Bahrain acceded to the World Intellectual Property Organization's Patent Cooperation Treaty in 2007.

Freedom From Corruption50.0 Back to the top

Corruption is perceived as present. Bahrain ranks 46th out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption affects the efficient and equitable management of scarce water resources.

Labor Freedom85.1 Back to the top

Bahrain, with its rapidly growing population, needs more flexible labor regulations to establish a more dynamic labor market. There is no national minimum wage, and the government has begun a four-pillar labor reform process to enhance productivity and create more private-sector job opportunities.