The total exports of <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Bahrain in 2004 stood at BD2.83bn and oil exports contributed BD2.08bn of the total exports during the period. The oil’s contribution to the total exports has been increasing gradually as it increased from 66% in 2001 to 73.8% in 2004. Despite the rigorous diversification efforts by the Bahraini government, the gradual growth indicates Bahrain’s continued dependence on oil. On the other hand, the total non-oil exports stood at BD0.74bn or around 26.2% of the total exports in 2004. The non-oil exports reported an increase of 0.8% in 2004 and hence the contribution to the total exports has been the lowest since 2000. The total exports in 2004 were up by 13.4% to BD2.83bn, on account of both the increase in production as well as higher oil prices in the year 2004.

Table 1: Trade Balance

Source: Bahrain Monetary Agency, * Provisional

The total imports increased by 14.6% in 2004 to reach BD2.44bn. The total oil imports during 2004 stood at BD1.04bn, witnessing a sharp increase of 33.8% in 2004. Oil imports contribution of 42.6% to the total in 2004 is much higher than that in 2002.  On the other hand, non-oil imports stood at BD1.39bn, reported an increase of 3.6% in 2004 as compared to 7.5% in 2003. As a result, the non-oil imports contribution to the total imports declined from 66.6% in 2002 to 57.4% in 2004. The resultant trade balance in 2004 stood at BD388.8mn, an increase of 6.1%. Thus on an external front, higher oil prices allowed maintaining a healthy balance of trade. The country is expected to have posted current account surplus in 2005 as oil prices have remained firm.

In the non-oil sector, base metals and articles thereof constitute the largest items of exports, followed by textile & textile articles and products of chemical and allied industries. The top three non-oil import items constitute machinery and appliances, transport equipment and base metals and articles. Bahrain’s major worry continues to be its higher dependence on oil for its exports. We believe that with its thrust on manufacturing industries, Bahrain will be able to develop its non-oil exports in the years ahead; however, it will take some time before its non-oil exports contribute substantially to the total revenue.

Bahrain continued to develop trade agreements with other countries to boost its exports. The Kingdom has signed free trade agreement (FTA) with the US in Sep 2004. The FTA aims at achieving extensive liberalization across a wide spectrum of trade issues, both in terms of goods and services. The US accounts for around 25% of Bahrain’s non-oil exports, which is expected to be further boosted by this FTA. With this FTA, 96% of Bahrain’s industrial and agricultural products will immediately have the duty free access to the US market. In return, Bahrain will provide immediate duty free access to all except 80 US industrial and agricultural products. For those 80 items duties will be phased out in the next 10 years.

Bahrain’s trade with other GCC member countries was about 37.5% of non-oil exports and 16.9% of non-oil imports in 2004. Saudi Arabia has been the major export destination for Bahrain with exports worth BD180.0mn in 2004, representing 65% of total non-oil exports with the GCC member countries. The other important export destinations were UAE and Kuwait representing 14.1% and 9.5% respectively of the total non-oil exports with the GCC countries.  Saudi Arabia has been among the major import and export destination even when compared to all the countries that deal with Bahrain. Other major destinations are Germany, Taiwan, India, Japan, China and USA. In 2004, Japan took the leading position from Saudi Arabia as the top exporter to Bahrain with imports worth BD150.0mn. The other major exporters to Bahrain included Germany, France and USA.

The higher trade surplus in 2004 contributed to a sharp improvement in the current account, which increased the surplus from BD75.5mn in 2003 to BD156.1mn in 2004. Bahrain would have had  a higher current account surplus in 2005 too due to higher trade balance as oil prices continued to remain high during the year 2005 on the back of natural disasters in the western world. However, the transfers abroad from the large expatriate community are also expected to grow with the increasing number of expatriates in the country.

Table 2: Capital & Financial Account

Source: Bahrain Monetary Agency, *Provisional

As shown in the table, the capital account surplus remained at the same level as compared to 2003, whereas it had declined by more than half to BD18.8mn in 2003 as compared to the previous year. Financial account could not hold its upbeat gain witnessed in 2003 and net outflows declined from BD169.0mn in 2003 to BD-206.3mn in the year 2004. The decrease in net outflow was largely on account of the substantial increase in portfolio investments, which saw net outflow of BD905.1mn in 2003 as compared to a net outflow of BD1.32bn recorded in 2004.

Monetary Policy

Interest on interbank deposits in Bahrain has increased from 1.2% (3-6 month offered rate) in 2003 to 2.8% in 2004, which is in line with the increasing interest rate environment in the US (because of the currency peg). In Q2-2005, the interbank deposit rate continued to increase further to reach 3.7% by the end of June 2005. Following the same trend the deposit rates for the 3-12 months period also inched up sharply from 0.64% in  the first quarter of 2004 to 1.96% by the end of fourth quarter of 2004, where as it moved up to 2.86% by the end of second quarter of 2005. The US Fed is expected to continue to bump up the interest rates next year and if that happens we might see further increase in interbank deposit rate in Bahrain in the coming year. The interest rates for construction and real estate sector lending jumped from 5.47% in the fourth quarter 2004 to 6.02% for the second quarter of 2005. The interest rate for the manufacturing sector also increased from 4.60% in 2004 to 5.14% in the second quarter of 2005, though it dropped from 5.53% in the first quarter of 2005. These trends suggests that gradually domestic interest rates are moving northwards, however, the rise in rates will be a measured one rather than any drastic surge, which shows the competition in the banking sector.

The broad money supply as measured by M2 has exhibited consistent positive trend during the past few years. M2 has grown at an exceptionally high rate in terms of both YTD growth as well as Y-o-Y growth, which is primarily attributed to the increase in private sector time and savings (Quasi Money) as well as demand deposits. The currency in circulation fell marginally in the first quarter of 2005 as compared to Dec 2004 level, but rebounded quite handsomely in the second quarter of 2005.

Table 3: Money Supply

Source: Bahrain Monetary Agency

Mostly keeping in line with the rising demand deposits, the money (M1) increased by 14.9% in the first six months of 2005. The quasi money witnessed an increase in 2004, whereas it dropped in 2003. In the first six months of 2005, the quasi money witnessed an increase of 8.2% compared to the 2004 ending level. The broad money supply (M2) had increased from BD2.76bn at the end of 2003 to BD2.88bn at the end of 2004, an increase of 4.1%. Most of this increase actually happened in the second quarter of the year 2004 and 2005, especially in the time and savings deposits (Quasi Money). There has also been a consistent rise in the money supply as measured by M3, which was primarily due to a substantial rise witnessed in deposits from the government in the year 2004. However, deposits from the government slightly dropped in the first six months of 2005, but M3 still witnessed an increase of 8.2% to reach BD3.84bn.

The conventional borrowings by the government continued to drop since 2000. By the end of 2004, the government’s conventional borrowings dropped and stood at BD130mn. In the three quarters of 2005, the government’s conventional borrowings witnessed an increase and stood at BD180mn, which could be attributed to the new issuance of short-term treasury bills in the second and third quarter of 2005. It is worth noting that by the end of the third quarter of 2004, the government had completely wiped off the development bonds.

Since 2001, the Government has started depending on Islamic instruments to fund its requirements, instead of the conventional financial instruments. Since 2000, it can be witnessed that the government borrowing has been hovering between the BD500mn and BD600mn, but the bulk of borrowing has shifted from the conventional financial instrument to the Islamic instruments. The government’s dependence on Islamic bonds has increased substantially, which has more than doubled in 2003 from its 2002-year end levels. Islamic leasing securities which are long-term instruments with maturity of three to five years witnessed substantial jump from BD293.3mn in 2003 to BD427.3mn in 2004. It further rose to BD430.8mn at the end of second quarter of 2005. Al Salam Islamic securities, which are short-term instruments with a maturity of 91 days remained at BD28.2mn since 2001. However, it increased in the third quarter of 2005 and stood at BD45.1mn. Thus, the total borrowings from Islamic instruments far exceeded that from the conventional borrowings. At the end of the third quarter of 2005, Islamic borrowings accounted for almost 76.2% of the total government borrowings because of the government’s efforts to make Bahrain an Islamic financial hub.