Bahrain’s Difficult Yet Necessary Fiscal Turn

The Bahraini government has fiscally reformed amidst political consensus-building. The next challenge: improving credit ratings while maintaining business friendliness.

Introduction: Why Fiscal Reform Became Unavoidable

During the new year celebrations, the Kingdom of Bahrain announced a series of economic reforms. These measures respond to the country’s rapidly increasing public debt. According to the International Monetary Fund’s (IMF) latest Article IV consultation, Bahrain’s overall fiscal deficit reached 11 percent of GDP while gross government debt rose to more than 133 percent of GDP in 2024. Bloomberg has reported that the debt ratio makes Bahrain the most indebted Gulf country.

The political sensitivity of implementing these measures is notable for Bahrain given its complex political history. Bahrainis live in a region characterised by high standards of wealth, which they are keen to match, and any increase in living costs invites caution; particularly as internal and external pressures could shape or distort the narrative. Conversely, without narrowing the economic gap between the Kingdom and its neighbours, Bahrain continues a trajectory of fiscal decline that may risk social unrest: a dilemma that the government has likely considered carefully.

Managing Reform Through Consensus and Delay 

While easy to assume so, Bahrain has not been laissez-faire in addressing its rising public debt. For one, sustaining economic growth required borrowing, particularly  to finance development projects and social protection programmes. Second, Bahrain has never defaulted on its debt, signalling a firm commitment; even if, as suspected, it has occasionally taken on additional debt to repay earlier obligations. Third, long-term initiatives such as the Fiscal Balance Program faced significant challenges, including the global COVID-19 pandemic, which necessitated revisions to the original plan and the introduction of a parallel economic recovery strategy.

Besides this, the Kingdom has a vocal parliament that has never failed to remind the government—and by extension, the public—of the need to reform the economy while safeguarding the social safety net. In 2025, the government has taken deliberate steps to reach a consensus with the legislature about balancing fiscal priorities with the needs of the citizenry. Over two phases several months apart during 2025, government officials consulted parliamentary leadership. In March , the government proposed measures such as carbon emission fees, VAT increases, and an additional excise tax on unhealthy food categories, among other reforms aimed at raising non-oil government revenues, though many were later discarded. In December 2025, the government and parliament reconvened, with revised measures that eventually passed by consensus. This consensus was not easily achieved: the government and parliament may have agreed on the need to raise revenue, but not on the extent to which the public should bear the burden. The policy emphasis of the parliament was on maintaining the first and second electricity and water consumption tariffs for citizens’ primary residences, to which the government agreed. While the government compromised on that, discussions of a nation-wide cash support in return for wholly raising tariffs dissipated due to parliamentary opposition. The government appeared unwilling to increase expenditures unless the fiscal balance favoured revenues.

From Proposals to Policy: The Final Reform Package 

The last cabinet meeting of 2025 approved the following reforms: first, a 20 percent reduction in administrative expenses across all government entities. Notably, the state budget for 2025-2026 marked the recurrent expenditure of government entities at over BHD 2 Billion (US$5.3 billion). Reducing this expenditure will contribute significantly to manage the fiscal situation, but it also requires addressing Bahrain’s debt interest, which is nearly half that value at slightly more than BHD 1 billion (US$2.7 billion)—a substantial figure. The second reform announced was to increase the contributions of government-owned companies to the Kingdom’s general budget. For example, Bahrain’s Sovereign wealth fund, Mumtalakat, reported a consolidated net profit of BHD 363 million (approximately US$1 billion) in 2024, while its contribution to the latest budget was marked at nearly 10 percent of that only, approximately BHD 40 million (US$106.1).

The third reform is a 10 percent corporate tax on all companies whose annual net profits are above BHD 200,000 (US$530,000) starting in 2027. Notably however, companies already subject to 15 percent multinational tax announced last year are exempt from this additional tax. The fourth is increasing the current 50 percent excise tax on soft drinks, with details of the increase not out yet. Other dimensions of the reform agenda also remain unclear in their potential impact, for instance: undeveloped investment lands (that have access to infrastructure) being subject to a monthly fee of 100 Fils (US$0.27) per square meter, beginning in 2027; and fees for sewage services set at 20 percent of water consumption charges (excluding citizens’ primary residences). Some details are available, however,  and their impact can be inferred: gradual annual increases in expat labour costs (which may lead to more local recruitment in the private sector), and on the reform point of adjusting natural gas prices for companies and factories, reportedly reaching US$6 per Metric Million British Thermal Unit (MMBTU) by 2029, a 50 percent rise from current levels. This reform is considered necessary, particularly as domestic gas production declines and it is no longer feasible to heavily subsidise imported LNG.

Yet, the most impactful of these reforms for the average individual has likely been the new mechanism for determining fuel prices. Long queues were observed at gas stations on the eve before December 30, 2025, when the government’s newly formed committee (which will convene on a monthly basis similar to the UAE) raised the fuel prices to be “in line with global price changes, while ensuring economic efficiency and financial sustainability”.

The other most impactful of these reforms was likely the increase in electricity and water tariffs. Electricity tariffs have increased by 10 percent for all consumers who do not qualify for subsidies (such as expats). Meanwhile, for the subsidised citizenry, electricity tariffs doubled in the high-consumption tier (also known locally as the third consumption tier). Still, the electricity tariffs remained unchanged in the first two consumption tiers— serving as a strong government incentive for citizens to reduce energy use. The same exception applied to the first two categories, which remain exempt from the general 3.3 percent increase in water tariffs. Nonetheless, this rise in utility costs may not remain fixed during the intensive demand of the summer months, given its impact on living costs across the board.

On top of that possibility, and to balance this rise in living costs; while protecting the most vulnerable groups in society – Bahrain has ordered an increase in financial support for low-income families. This support ranges from BHD 75 (US$198.75) to BHD 130 (US$344.50) depending on the salary of the primary income earner of a household.  This complements recent procedures to proliferate housing services, and offering close to 10,000 job seekers “three opportunities each”.

The Private Sector as the Silent Stakeholder

Supplementing the prospective reforms is another key objective—boosting investment. This is likely because entities such as the Bahrain Economic Development Board, Bahrain’s national investment promotion agency, will now face greater challenges in presenting the cost competitiveness of doing business in the Kingdom. For example, Bahrain can no longer rely on the rationale of corporate tax exemptions, nor claim that its utilities and labour costs are low, unless free zones are better formulated to attract such investments.

Moving forward, this will conjunctly require close coordination with the Bahrain Chamber of Commerce and Industry. Whereas close consultations were held with the parliament, the private sector represented by the Chamber has been visibly absent from public and government discourse, despite seemingly being the most affected by higher gas, water, electricity, taxation and labour costs combined. The Chamber may yet be consulted on other reform plans in the pipeline, such as the long-pending mandatory health package roll-out for expats.

Conclusion 

Bahrain’s economic reforms are not about acceptance: the country has long accepted the uncomfortable truth of fiscal reforms being necessary, but the real question has been how to do this while safeguarding the families most in need. Bahrain also has an ambitious goal: it wants to become less dependent on external support. While the long-standing generous support from neighbouring countries for Bahrain was useful to buy time, it is not a sustainable long-term strategy.

Crucially, Bahrain’s innovative fiscal policies and political prudence in implementing them, may end up shaping the trajectory of its neighbours due to the courage it has shown in positioning itself as an agent of change. To achieve this effectively, and to garner both regional and international recognition, transparent and accessible government data on the progress of these reforms is needed to improve the country’s credit rating and gradually reduce the government debt interest costs.

Mahdi Ghuloom is a Junior Fellow at the Observer Research Foundation – Middle East