US embassy cable - 05MANAMA280

C O N F I D E N T I A L SECTION 01 OF 02 MANAMA 000280 
 
SIPDIS 
 
STATE FOR NEA/ARPI DBERNS 
STATE PLEASE PASS USTR JBUNTIN 
COMMERCE FOR ITA/MAC/ONE CLOUSTAUNAU AND THOFFMAN 
 
E.O. 12958: DECL: 02/26/2015 
TAGS: ECON, EFIN, EPET, ENRG, MARR, PREL, BA 
SUBJECT: BAHRAIN FACES BUDGET CRUNCH FOLLOWING SAUDI OIL 
GRANT CUTBACK 
 
REF: MANAMA 0064 
 
Classified By: AMBASSADOR WILLIAM T. MONROE 
REASONS 1.4 (B) AND (D). 
 
1.  (C) Summary.  Although often lumped together with its 
richer GCC neighbors, Bahrain is in fact a modest oil 
producer and is now facing an unexpected budget crunch - 
despite continuing high international oil prices.  Robust 
spending on much-needed capital projects (deferred when oil 
prices were low) combined with a 50,000 barrel per day (bpd) 
cut in Saudi oil aid, resulted in a debt of $1.57 billion, or 
16 percent of GDP, in 2004.  2005 looks no better.  To 
compensate, the government has reportedly approached Kuwait 
for an increase in grant aid and a hefty loan, and has 
reportedly also approached the UAE government.  GOB officials 
continue to hope that Saudi Arabia will restore the 50,000 
bpd grant, and are counting on the U.S.-Bahrain FTA to boost 
the economy in the short- to medium-term.  End Summary. 
 
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State of the Budget 
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2.  (C) The GOB establishes its budget biannually.  Despite 
expectations that the 2005-2006 budget would be ready January 
2005, the GOB has yet to release it.  Apparently the GOB is 
having a difficult time balancing the budget due to the 
decision by Saudi Arabia to end its 50,000 bpd oil grant in 
mid-2004 (reftel).  This resulted in a 20 percent cut in oil 
revenues, or 14.6 percent of total government revenues, and 
is affecting the 2005-2006 budget.  In the past, oil revenues 
accounted for some 73 percent of government revenue, based on 
40,000 bpd of domestic production, 150,000 bpd from the 
jointly held Bahrain-Saudi Arabia Abu Sa'afa oil field, and a 
50,000 bpd grant from the Saudis. 
 
3.  (C) Based on an estimated $41 per barrel of oil, 
Bahrain's government revenue for 2004 was roughly $4.37 
billion.  A 14.6 percent loss in government revenues, due to 
the cut in the Saudi oil grant, is estimated at $638 million. 
 Although per capita GDP is relatively high ($16,900 in 
purchasing power parity terms per the CIA World Factbook) and 
the infrastructure is modern, a loss of $638 million was a 
major shock for the relatively small Bahrain economy, roughly 
equivalent to the value of new projects proposed during the 
last budget cycle. 
 
4.  (C) The Kuwaiti Ambassador to Bahrain told the Ambassador 
February 28 that the GOB recently requested a $700 million 
loan from Kuwait to cover the budget deficit, and he thought 
Kuwait will most likely offer a loan in the $300-350 million 
range.  The Kuwaiti Ambassador also noted Kuwait provides $50 
million in budgetary support annually, a figure that may 
increase to $75 million, as well as $15 million to fund 
projects, mostly construction of schools.  We understand that 
a major focus of the King's and Prime Minister's recent trip 
to the UAE was financial assistance. 
 
5.  (C) Despite the generosity of its neighbors, Bahrain's 
high government recurrent expenditures (roughly 70-80 percent 
of the total budget) coupled with the loss of the oil grant 
will lead to greater accumulation of domestic debt, which 
accounted for an estimated 16 percent of the GDP in 2004 
($1.57 billion), a figure the IMF considers manageable.  Any 
past budget windfalls due to high oil prices have been used 
to retire debt or maintain major infrastructure projects. 
 
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Comment 
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6.  (C) Bahrain's small economy is highly dependent on its 
supply of oil from Saudi Arabia and the revenues this 
generates.  Although it seems small, the shock of losing the 
50,000 bpd Saudi oil grant has caused budgetary strain, 
limiting the country's flexibility on supporting 
non-essential programs.  In a public statement, Speaker of 
the Council of Representatives Khalifa Al Dhahrani stated a 
tighter budget may affect government salaries, causing an 
uproar in parliament and the press.  The Bahrain military is 
starting to feel the budgetary heat, as the Ministry of 
Finance has restricted funding for new military purchases. 
In a conversation with the Ambassador, Bateleco Chairman 
Hassan Ali Juma said despite efforts to diversify, Bahrain is 
still a single-product economy over-burdened with white 
elephant projects and a welfare system that it can no longer 
support.  Rumors have surfaced suggesting that the GOB may be 
considering a national tax to support social service 
programs.  Finance Minister Shaikh Ahmed bin Mohammed Al 
Khalifa requested the Ambassador's support in promoting the 
FTA as a best way to boost Bahrain's economy in the short- to 
medium-term. 
MONROE