Wed, 13 Jun 2012 14:00 GMT

By Andrew Hammond

DUBAI, June 13 (Reuters) – Bahrain’s economic reforms – once hailed as the most ambitious in the Gulf – seems to have stalled as hardliners in the Sunni ruling family who see Shi’ite protesters as a threat to the state bring the programme under their wing.

Hawks within the Al Khalifa family asserted themselves after a pro-democracy protest movement led by the majority Shi’ite population erupted last year following successful revolts in Egypt and Tunisia.

They swept aside a political dialogue with opposition parties offered by Crown Prince Salman, introducing a period of martial law, detaining thousands and staging military trials.

But they also turned their attention to the economic reforms that the crown prince had championed since his father King Hamad took the reins in 1999, proceeding to reinstall the Gulf state’s parliament to end a 1990s uprising led by majority Shi’ites.

The idea of those reforms was to reduce reliance on foreign labour through comprehensive job training for Bahrainis, attracting investment to a financial services hub and creating a viable economy that could survive the dwindling of its oil resources – and resultant reliance on neighbour Saudi Arabia.

Saudi Arabia shares ones of its oilfields with Bahrain, providing around 70 percent of the budget revenue in a country of over 1.2 million people, including 660,000 foreigners.

“The idea was that through incremental political liberalisation and simultaneous improvement of citizens’ economic conditions, Bahrain could solve the problem of chronic unrest seen in the 1990s under the king’s father,” said Justin Gengler, a Bahrain researcher based in Doha.

But the authorities, in which Prime Minister Khalifa bin Salman, Royal Court Minister Khaled bin Ahmed and his brother Khalifa bin Ahmed who heads the army are powerful, have put a brake on political reforms demanded by protesters.

They appear to have taken control of economic reform and scaled back its ambitions too.

Their view, Gengler says, is that historically disenfranchised Shi’ites who stood to gain the most from the reforms have proven through the street mobilisation to be a security threat to the Al Khalifa-led state.

Stalling the reforms has involved replacing the heads of key institutions and altering their remits. And the process has the added advantage of reinforcing patronage networks stemming from resources under the control of powerful figures in the state.

 

‘PURGE’ OF REFORMERS?

Analysts as well as Bahrainis and foreigners working in some of those institutions, and who requested anonymity for fear of repercussions, pointed to a series of telling shifts that indicate new directions in economic reform.

The head of the Economic Development Board (EDB), who is a confidante of the crown prince, was removed in March and the body which was the most influential player in economic policy – hosting weekly ministerial meetings – has been reduced to an advisory body without executive power.

Senior officials have been removed in the Labour Market Regulatory Authority (LMRA) and job training and labour fund Tamkeen, which together oversaw labour market reforms that took taxes from firms on the basis of how many foreigners they hired and used them mainly to train Bahrainis for work.

The LMRA chief, a Shi’ite, was removed after callers on state television during last year’s crackdown accused him of discrimination against Sunnis. The government has stopped collecting Tamkeen taxes on businesses and wants to reduce the percentage set aside for job training.

There have also been personnel changes at sovereign wealth fund Mumtalakat, Bahrain Polytechnic – which some fear will reduce its student intake – and the Bahrain Teachers College.

The government Information Affairs Authority was not able to arrange interviews with officials in the LMRA and Tamkeen, but Jamal Fakhro, deputy head of the upper house of parliament, said economic reforms were still on track.

“The LMRA is still there and there are no changes in regulations. The idea is to make the Bahraini a more attractive individual for employers. We are increasing the cost of visas for foreigners and using that money to develop Bahrainis,” he said.

“I’m not worried: reform could be even quicker now. New initiatives will come directly from the cabinet instead of the EDB. I don’t see that things will go south – the money is there, the will is there, and the need is there.”

He said the LRMA head had ended his term of office, rejecting claims of sectarian motives to his departure, and he said Tamkeen would resume collecting labour fees from July.

But many worry about the sidelining of the crown prince.

“The only thing that remains in the crown prince’s hands is his scholarship programme, which is based on merit and is not sectarian or tribal, and the Formula One Grand Prix,” said one well-placed Bahraini observer who is close to official circles.

Prince Salman brought the Grand Prix to Bahrain in 2004, but it has failed to attract investment and create jobs as envisioned, while becoming a lightning rod in April this year for the protest movement.

Though the scholarship programme has not fallen victim to anti-Shi’ite sentiment, some Bahrainis say it is not getting the same attention from state media and company sponsors as before. And some prominent family firms seen as soft on the uprising have also lost government contracts to staunch loyalists.

“The sense is that political and security issues are taking precedence over any economic reform,” said Farouk Soussa, Middle East chief economist for Citigroup.

“The government’s energies appear to be focused more on restoring stability and dealing with the political fallout of the unrest we have seen over the last 18 months.”

Hits to the crown prince’s development projects could backfire on the street. Impoverished Shi’ite villagers have formed the kernel of a protest movement that has continued unabated despite nearly three months of martial law last year.

EDB officials have been proud of efforts over the past decade to end marginalisation of many Shi’ite villages with no proper paved roads and other services.

“There is a huge difference in recent years in villages where there was no development at all and there is political space for them too,” one government official said.

 

GROWTH TAKES A HIT

An oil state with dwindling supplies, Bahrain imposes no personal income tax and some Bahrainis enjoy a high standard of living, but inequalities have been a major spur to discontent.

Bahrain’s economic growth slowed in the final three months of 2011, a sign that political unrest is continuing to weigh on businesses as the government tries to crush the uprising.

Inflation-adjusted expansion in gross domestic product decelerated to 1.3 percent quarter-on-quarter from 2.2 percent in the third quarter of 2011, data showed in March.

Some in the financial sector argue that these figures could have been worse and point to a latent strength in Bahrain’s economy that is due to the decade of reforms.

One Western banker in Manama said current sluggishness was partly due to the world financial crisis that began in 2008. Some banks have quit the country while some office space including the Bahrain Financial Harbour remains unoccupied.

“It’s not just the uncertainty of last year; the migration of Western banks started before those events,” he said, adding that the efforts to reform the labour market were running into problems already for other reasons.

“It was a good idea – you would open up the labour market and have money to train people – but they would have had to relook at those reforms,” the banker said, though he rejected the notion that it was powerful players in the business community who objected most strongly.

“There was pressure from lower down the chain, like fishermen who hire Indian fishers. It was opposition from smaller outfits that didn’t have access to Bahraini labour, who didn’t want to do those jobs.”

 

BETTING ON SAUDI

The government appears to be betting on Saudi backing to sustain the country in the absence of a political resolution with opposition groups who want democratically-elected governments, legislative clout for the elected parliament and removal of the prime minister, in his post since 1971.

“Everybody is talking about Saudi money. The hardliners are the gatekeepers of the new system, and everything that comes in will go through them,” said the Bahraini observer. “If you tell people that the financial system will collapse, they say ‘yes, but we have Saudi Arabia’.”

Riyadh and other Gulf countries last year promised Bahrain and Oman $10 billion each over ten years for socio-economic spending to bolster their governments in the face of unrest.

“It begins with budgetary support – the $1 billion a year that the GCC is providing to Bahrain is an extremely important part of that and it extends beyond that into the hydrocarbons industry,” said the Citigroup economist Soussa.

Soussa said the fall in global oil prices over recent weeks was worse for Bahrain’s economy than for other Gulf states since Bahrain needed a higher oil price to balance its budget – analysts estimate that price at above $100 a barrel, compared to around $80 or lower for other Gulf states. That could further drive the country into the arms of Saudi Arabia.

Saudi state oil firm Aramco gave Bahrain all of the Abu Safa field during low oil prices in the 1990s but since 2004 a 50-50 split has been in place. The 150,000 bdp to Bahrain has accounted for some 70 percent of its budget in past years.

But Jassim Hussein, an economist and senior member of leading opposition party Wefaq, said the Saudi option was not a viable alternative.

“The support from Saudi Arabia is not clear and not sustainable. It’s not the right way for the country to move forward, we have to live within our means,” he said, though he praised efforts to encourage small- and medium-sized enterprises and foreign trips by the crown prince to attract investment.

“The crown prince’s initiatives made changes but time was not on his side. The hardliners have all but stolen his programme and they don’t care about the consequences for the country.”