Bahrain’s Budget Deficit Disappears as Russia Sanctions Send Oil Prices Sky-high

Cost of essential goods in kingdom remains stable despite global surge

Bahrain, like other oil-exporting countries, is benefiting from high oil prices caused by sanctions on Russia. Its government, which had forecast a budget deficit of almost $3 billion for 2022, is now expected to balance its books.

If energy prices continue at current levels as the countries of the Gulf Cooperation Council − Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates − will achieve a large budget surplus.

The Bahraini government budget for 2022 was drawn up based on oil going for $50/barrel, and the deficit was projected at 1.1 billion Bahraini dinars ($2.9 billion).

The budget, published on the Finance Ministry website, showed the government expected oil and gas revenues to reach 1.5 billion dinars ($4 billion) this year. Bahrain exports about 150,000 barrels per day. It also sells 50,000 barrels per day in the domestic market, at fixed prices.

Economic analysts estimated that a price of $106/barrel is required to bring the kingdom’s budget to the break-even point.

Ahmed al-Salloum, the head of the Financial and Economic Affairs Committee in the Council of Representatives, the lower house of the Bahraini National Assembly, told The Media Line, “We expect an increase in government revenues by up to 140%, due to the rise in oil prices, especially since the price of a barrel of Bahraini oil has crossed the $120 barrier.

“The rise in oil prices will contribute to a decrease in the deficit in the state’s general budget, and there are minor damages due to the rise in commodity prices inside Bahrain,” Salloum said.

Bahrain has been working since 2018 on a plan to balance the budget by 2022, but due to the increased spending during the coronavirus pandemic, including providing free medicines, treatments and tests, and financial support for the sectors affected by the closures, the target date has been pushed to 2024.

The country has witnessed a rise in prices since the start of the pandemic, with shipping costs rising fivefold, but inflation was 0.3% in 2021, the lowest in the Gulf.

The rise in Bahrain’s value-added tax from 5% to 10% at the beginning of this year contributed to a general rise in prices, but 94 categories of goods and services are exempt from VAT, the most important of which are medicine, education, unprocessed foods, and dairy products.

Economists emphasize that the rise in the price of goods comes mainly from their producers, in addition to the rise in the cost of freight, and the increase in VAT has had a limited impact.

Zayed Al Zayani, the Bahraini minister of industry, commerce, and tourism, responded to MPs’ questions about the rise in prices, at the legislature last Tuesday.

“The pandemic has caused shipping prices to rise, but certainly prices will not remain high, and we do not know when shipping prices will decrease,” he said.

Bahrain imported goods from Ukraine worth $12.5 million in 2020, the most important of which were wheat, eggs, and chicken, according to public customs data. The kingdom’s Chamber of Commerce was quick to issue a statement to consumers, confirming that “there are alternative sources of Ukrainian goods, and the consumer will not be harmed” by the war in Europe.

The government provides wheat subsidies to bakeries, in the amount of 10 million dinars ($26.5 million) annually. It does not subsidize any other commodity.

Bahrain sets the price of fuels such as natural gas, gasoline, diesel, and kerosene, without linking them to international prices. Bahrain has the 12th lowest prices for fuels in the world, and gasoline prices have not changed for more than three years. Aviation fuel prices are not fixed.

A well-informed government source told The Media Line that “the government will not change its policy of subsidizing wheat and flour for popular bakeries, the prices of bread will remain at 20 fils per loaf, and traders will provide alternative sources for Ukrainian wheat.”

The Bahraini dinar is divided into 1,000 fils, so 20 fils is about $0.05.

As for fuel prices in light of the rise in global prices, “There is no change in the price policy,” the source said.

Prices of vegetables, fruits, and meat have seen slight increases in Bahrain, while the cost of other products, such as electronics and furniture, have risen to high levels. Official data has not yet been published.

Businessman Khaled al-Amin, former chairman of the Chamber of Commerce’s Food and Agriculture Sector Committee, told The Media Line that “Bahrain imports less than 10% of its needs of frozen chicken and eggs from Ukraine and Russia, and since Bahrain’s share is small due to the small market, this can be replaced from other markets.

“There will be no significant impact on prices, as other alternatives are available at the same cost and quality,” he said.

Economic analyst Ayman Mohammed told The Media Line, “What will be achieved due to the rise in oil prices in positive terms for the Bahraini economy, and achieving financial balance, outweighs the simple damage as a result of the rise in commodity prices due to the Russian-Ukrainian crisis.”

“Commodities have been high in price since the start of the corona pandemic, with supply chains affected and freight prices rising, yet prices remain affordable, and an ordinary citizen can pay for his needs without any problem,” he continued.

The reduction of the government budget deficit “will reflect positively on the economy, and the rise in global commodity prices will not exact significant damage,” Mohammed said.