Bahrain

Growth will inch up in 2026, led by non-oil activity amid heightened regional tensions

Bahrain’s economic growth is expected to improve moderately in 2026, although at a slower pace than previously anticipated amid increased regional geopolitical tensions. Expansion in refined petroleum capacity, resilient aluminum exports (metals accounting for 40% of total exports), and steady growth in financial services (around 17% of GDP) are expected to support activity. Tourism and related services (Around 10% of GDP) should also remain important contributors, although regional instability is expected to weigh on visitor flows. Oil production is expected to record a limited increase of 1% to around 195.000 barrels per day (bpd), reflecting the combined effect of OPEC+ production management and structural constraints in the upstream sector such as the maturity of existing oil fields, modest reserve additions and limited capital investments. While higher refined oil output will contribute positively to industrial production and exports, this impact will be offset partly by rising crude oil imports. Bahrain’s downstream-focused strategy is based on importing crude oil, processing it and exporting refined products. Non-oil sectors (around 85% of GDP) will remain the main drivers of activity in 2026. Financial services, logistics and tourism are expected to benefit from favorable regional financial and economic conditions, and Bahrain’s position as a regional financial hub. Aluminum production will continue to support industrial production, although weaker demand could drag on export momentum. However downside risks to growth have increased aming elevated regional geopolitical tensions. Bahrain remains particularly exposed to disruptions in the Strait of Hormuz, through which all of its hydrocarbon exports transit, increasing vulnerability to shocks affecting maritime trade routes. Regional instability could also weaken investor confidence, tourism flows and financial inflows, while potentially affecting the willingness or capacity of Gulf partners to provide additional financial support if needed. Bahrain has historically relied on significant fiscal support from its neighbours. In 2018, Saudi Arabia, the UAE and Kuwait pledged a USD 10 billion support package to be delivered in tranches over time to help stabilise the country’s fiscal and external balances.

Inflationary pressures are expected to remain relatively contained in 2026, although risks have increased amid heightened regional geopolitical tensions. Higher transportation and logistics costs linked to disruptions in maritime trade routes could puch up importe pricfes, particularly for food and other essential goods, givcne Bahrain’s high dependence on imports. At the same time, moderate monetary easing in line with the US Fed’s decision due to the currency peg regime is likely to support credit growth and private consumption, thereby generating limited upward pressure on prices. Excess capacity in the housing market and subdued wage dynamics will further restrict price growth.

Fiscal deficit will persist while external buffers face rising regional risks

Bahrain’s fiscal position in 2026 is expected to remain constrained, reflecting high dependence on hydrocarbon revenues (50-55% of total fiscal revenues), limited expenditure flexibility, and elevated public debt service, despite the authorities’ ongoing consolidation efforts. Fiscal policy will continue to focus on containing the deficit through gradual revenue enhancement and expenditure rationalisation. Measures aimed at broadening the tax base, improving non-oil revenues and strengthening fiscal governance are expected to support consolidation efforts. However fiscal performance will remain highly sensitive to oil price developments and regional geopolitical conditions. While higher refined output and stable aluminium exports should provide some support to government revenues, disruptions to regional trade routes or weaker external demand would limit government fiscal revenues. On the expenditure side, rigid spending structures will constraint adjustment capacity. Wages, subsidies and social transfers account for around half of total government expenditure, which limits the scope for rapid consolidation. In addition, social and political considerations are expected to discourage deep cuts in current spending. While borrowing requirements are projected to ease slightly from BHD 1.4-1.5 bn in 2025 to about BHD 1 bn in 2026, a stubborn fiscal deficit will continue to contribute to the increase in the public debt load. Nevertheless, continued backing from GCC partners, assets in sovereign wealth funds (around 10% of GDP) and access to domestic and international capital markets are expected to mitigate short-term financing risks. At the same time, external support may be increasingly conditional on the realisation of progress in fiscal reforms, which will incentivise further consolidation.

The external position is expected to remain in surplus in 2026, although the current account balance may narrow amid increased regional geopolitical tensions. Services exports, particularly financial services will continue to provide support, while hydrocarbon-related receipts and aluminum exports would remain important sources of external revenues. Yet the closure of the Strait of Hormuz will be a drag. Tourism flows could also weaken as regional uncertainty would weigh on travel demand.

Regional geopolitical tensions and the war in Iran will shape the investment climate

Bahrain has a functioning parliament. The National Assembly, established under the 2002 Constitution, consists of two houses: the king-appointed Shura Council and the elected Council of Representatives. Legislation must be approved by both houses and the King. The next parliamentary elections will be held by November this year. No major political instability or change is expected in the near term.

Bahrain’s regional risk outlook in 2026 will be increasingly shaped by the geopolitical tensions following the war in Iran. As a small and highly open economy, Bahrain remains particularly exposed to developments affecting regional trade routes and energy markets. Security risks in the Strait of Hormuz are especially important as all of Bahrain’s hydrocarbon exports pass through the waterway. Any sustained disruption to maritime trade flows would deter investment confidence. On the other hand, Bahrain also continues to rely on financial support from regional partners, notably Saudi Arabia and the United Arab Emirates, making it vulnerable to shifts in their policy priorities. The country’s protection will continue to be closely tied to US military presence and agreements.

Last updated: March 2026