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Assessment Title PBL Group Project

Learning Outcomes: L1,L2,L3,L4,L5

Programme Title: Bachelor of Business

Course No.: BSB 5007

Course Title: Introduction to Economics

Ayman AlGallaf, Khalid Alkhedri, Mustafa Aldhaifi, Sayed

Student Name:
Mahmood Alalawi

Student ID: 201400409, 201401115, 201400253, 201400231

Tutor: Saeeda Arain

Due Date: 2nd June 2016 Date submitted: 2nd June 2016

By submitting this assessment for marking, either electronically or as hard copy, I confirm the following:

 This assignment is my own work

 Any information used has been properly referenced.
 I understand that a copy of my work may be used for moderation.
 I have kept a copy of this assignment

Do not write below this line. For Polytechnic use only.

Assessor: Date of Marking:

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Contents
Cover page .................................................................................................................................................... 1
Executive Summary:...................................................................................................................................... 3
Introduction: ................................................................................................................................................. 3
Unemployment Rate: .................................................................................................................................... 4
Solutions for Unemployment Rate: .............................................................................................................. 5
Over Population: ........................................................................................................................................... 6
Solution for Over Population: ....................................................................................................................... 6
Budget Deficit: .............................................................................................................................................. 8
Solution for Budget Deficit............................................................................................................................ 8
Growing Debt .............................................................................................................................................. 10
Solution for Growing Debt: ......................................................................................................................... 11
Conclusion: .................................................................................................................................................. 13
References: ................................................................................................................................................. 14
Appendix: .................................................................................................................................................... 16

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Executive Summary:
This report presents the major economic challenges facing Bahrain such as unemployment rate,
overpopulation, budget deficit and public debt. Each problem is analyzed in depth and in detail
with examples. Different and variety of solutions are included in order to reduce the economic
problems such as tax revenues, fiscal policy, one-child policy, cut subsidies and monetary policy
in order to reduce the economic and social challenges in Bahrain. Some of the solutions have
implemented while others proposed. Every solution is explained and analyzed, in order to
reduce the major problems that Bahrain is facing. Graphs and tables are included in the report's
appendix to support and present important data. All information and data included are from
credible source from government websites, local newspapers and fact book.

Introduction:
The economic state of Bahrain has been unbalanced in the last couple of years since the
economic crisis. The size of the Bahrain Gross Domestic Product (GDP) is accounted by 0.05
percent in the world economy. In 2014, the GDP in Bahrain was valued by 33.85 billion US
dollars. From 1980 until 2014 the GDP is about 11.43 Billion USD, and it has reached the
maximum value ever by 33.85 Billion USD in 2014. The World Bank Group had stated for
Bahrain’s GDP. (Economics, 2016) As the economics of Bahrain is currently dealing with such an
issue, the current major issues that will be addressed within this report are: unemployment
rate, overpopulation, growing debts, budget deficit. In order to solve these problem, critical
analysis as well as theoretical concepts into the economics will be addressed in this report to
come up with possible solutions to stabilize the economy of Bahrain. The aim of this report is to
discuss important economic problems and challenges Bahrain is facing such as unemployment
rate, population, budget deficit and public debt. The report will also include variety of strategies
and solutions for each problem in order to overcome the economic challenges in Bahrain
(Tradingeconomics, 2016).

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Unemployment Rate:
The unemployment can be defined as a situation where someone of working age is not able to
get a job but would like to be in full time employment. According to the economic yearbook of
2013 for Bahrain, the Economic Development Board indicates that the total labor market
employment in the Kingdom has increased from 307,000 to 647,578 between 2002 and 2013.
In addition, the non-Bahraini employment outpaced Bahraini employment. Thus, has made the
share of Bahraini employees fell down from 34% to 23% over the period. (Economic Year Book ,
2013), (Appendix 1)

The number of unemployment rate in Bahrain is measured based on the people who are
actively looking for a job as a part of a percentage of the labor force as mentioned above.
According to Jassim Hussain Mahdi, he stated, “unemployment has become one of the major
challenges that Bahrain’s economy is suffering from in 2015; due to interrelated causes of
falling oil prices and the continuation of the political crisis as well as the disturbing current
population statistics.” (Mahdi, 2015) In addition, the unemployment rate in Bahrain has
reached 7.4 percent by 2012; which it made Bahrain becomes the second worst amongst the
GCC after Oman, which suffers an unemployment rate of 8.1 percent according to the Youth
Employment Month back in October 2014 by the World Economic Forum. (Mahdi, 2015),
(Appendix 1.1)

Not only Bahrain has faced some negative developments since February 2011; but also it led to
a reduction in the financial organizations activities and to be relocated them to Dubai. As a
result, the national labor preferred to work in the financial sector outside the Kingdom because
it is considered the second largest contributor to GDP after the oil sector due to the working
conditions and salary bracket. The unemployment rate of Bahrain youth sector has reached
27.5 percent, which it is the second worst in the GCC, after Saudi Arabia, where it is 27.8
percent. These data of youth unemployment are realistic, as it has significantly shifted ever
since the incident back in 2011. In contrast, they hired different nationalities such as Yemen,
Jordan, Syria and Pakistan to work in the security sector from that period. (YCHARTS, 2016),
(Appendix 1.2)

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Solutions for Unemployment Rate:
As mentioned earlier, the unemployment rate of Bahrain has been significantly shifted for the
past few years. However, there are some strategies to be reconsidered in order to solve this
economical problem.

First, the government of Bahrain could benefit from demand side policies to reduce the
demand deficient unemployment. Demand side policies considered important as it will be a
great assets to the country where recession and expansion in cyclical unemployment since 2011
will be significantly reduced by applying this factor.

The second factor to be considered to solve the unemployment rate problem in Bahrain is the
fiscal policy. Fiscal policy can decrease the unemployment by helping to increase aggregate
demand and the overall rate of economic growth. Hence, the government needs to start cutting
taxes and increase its spending in order to pursue expansionary fiscal policy. In addition, the
government could help increase the consumption by lowering their taxes in order to increase
the disposable income, which it will lead to a higher aggregate demand (AD).

With an increase in aggregate demand, there will be an increase in Real Gross Domestic
Product (GDP) as long as there is spare capacity in the economy. In other words, if firms
produce more, there will be an increase in demand for workers and therefore lower demand-
deficient unemployment. Furthermore, fewer firms will go bankrupt meaning fewer jobs will be
lost if the aggregate demand and a strong economic growth were high enough. (Pettinger,
2011), (Appendix 1.3)

The final factor recommended as a solution for the unemployment rate in Bahrain is the
monetary policy. Although the monetary policy would involve cutting interest rates, people
would most likely are going to be encouraged to spend and invest, if they saw the borrowing
cost has been significantly decreased. As a result, the demand deficient unemployment would
reduce as long as the increase of aggregate demand increases the GDP of the country.
Moreover, exports would be more competitive once again if the lower interest rates managed
to reduce the exchange rate in the same time.

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Over Population:
The over population growth rates would be difficult on the country to raise their standards of
living and protect their environment because the greater number of people, the more demand
on food, houses, land, health care, jobs, energy and education will occur . (Economic Year Book
, 2013) The more people added to the population of the country means that the wealth must
be distributed towards furthermore people which will affect the Gross National Product (GNP)
per capita that it will be reduced at least in short term (DEP web, 2001). This problem occurred
in Bahrain as the population have increased sharply. In 2008, the population is about 780,000
and in 2014, it is approximately reached 1.20 million (appendix 2). As a result, in six years, the
population increased for half million. Moreover, with this amount of people added in short
time, Bahrain has affected towards their economy, because the government is providing for
their citizen's free education and health treatment. Thus, will require more budget for hospitals
and schools for them as well (Onaisi, 2010). (Appendix 1.4 and 1.5)

Currently, Bahrain's population has reached 1.3 million people. From this amount of
population, approximately 48 percent of them are citizens constitute and others are foreigners.
Most of these foreigners are from Asian countries such as Pakistan, Indonesia, Philippines,
Bangladesh and India. Moreover, Bahrain is not capable to receive a high amount of foreigners
because of the small capacity and limited resources to be provided to the citizens (Hussain,
2015).

Solution for Over Population:

Bahrain currently is looking forward to solve their issues in order to improve its economy. First,
the population has increased sharply in a short period of time, which has affected the economy
because the government does not have a prepared budget for this amount of people, which it
has been mentioned previously. In order to solve this problem, the government should limit the
foreigners especially for those who are considered to be a part of Bahrain workforce. Hence,
this would give the opportunity to the Bahrainis to be a part of that sector. For instance, when
foreigners change their nationality to Bahrainis, they also demand for their children to have

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free education and they want to get free treatment from the hospitals as well. In addition, they
need to be stabilized for their living, so the government intends to build for the citizens more
schools, hospitals and more units of houses. Consequently, if the government had limited or
even stopped bringing foreigners to be Bahraini, they will be able to catch up with the entire
citizens.

Secondly, the government should be more aware of the foreigners such as Indians who has
expired resident. There are many Indians in Bahrain who have expired visas on their passport.
In the law of Bahrain, if a foreigner is working in Bahrain the individual should have an annual
residence and it should be renewed on a yearly basis. The fees that should be paid from a
resident worker in Bahrain are BD100 annually. (LMRA, 2008) There are thousands of resident
who have an expired residence in Bahrain and if the government starts to catch all these
residence; they will get some revenues, which could help the government to cover up their
expenses. For example, if there are 2000 of expired residence and each resident has a salary of
BD100, the government can get from one side of collecting money, where they will get from
these 2000 resident BD200 thousand. As a result, the government can accumulate money from
one side and can decrease the amount of population from other side, because they might not
get money from some of them. So they will be enforced to be back to their national country
(My Bahrain, 2016).

Thirdly, Bahrain government should use the exact strategy that China is developing in their
country, by limiting their population and to be more stabilized. The strategy illustrates the one-
child policy, which means that a new family who are recently married should not have more
than one child. Even though Bahrain can use a similar idea instead of one child policy, it can be
limited between one to two children per family. Furthermore, if a family have the third birth,
they should pay the government a small fund. For example, the family should make a plan to
consider consequences of overpopulation (Rinkesh, 2016). Moreover, the government should
consider making educational programs to create overpopulation awareness to their citizens.
As a result, the government will be able to decrease the amount of population growth and they
can cope with the overpopulation situation in Bahrain.

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Budget Deficit:
Budget deficit is a situation where the country’s expenditures exceed country’s revenue.
(Jassim Hussain, 2015) Bahrain faced a major problem with budget deficit during 2014 mainly
because of drop in oil prices with price of 30BHD a barrel. The amount of budget deficit during
2014 was 914 Billion BHD. Even though there is a diverse in the economy of Bahrain, the petrol
acts as a major income to the country and with its low price makes it difficult for the country to
achieve a balance in the budget. In 2013, the deficit was 833 Billion BHD since the oil price was
higher than in 2014 and less reduction in costs. However, in 2014 the expenses were more than
in 2013, which made it crucial for the country. (TradeArabia, 2014) Furthermore, inflation rate
also rose about 3.8% because of the increase in housing and utility prices and rise in food
prices. The inflation affects the customer since the value of money decreases. (Appendix 1.6)

Moreover, the GDP (Gross domestic Product) in 2015 had continued to decrease because from
oil prices and stated that the combined deficit for both 2015 and 2016 will reach about 5 Billion
BHD. Moreover, government spending is increasing and it is mainly focusing on oil sector rather
than on non-oil sector. There is also less investment in the country due to lack of confidence of
the people because of decrease in petrol price. The GDP of Bahrain will also fall to 2.2 percent
in 2016 from 3.2 percent in 2015 and 4.5 percent in 2014. This major issue caused the
government of Bahrain to fail and not achieving its fiscal policy objectives and goals (Gulf Daily
News, 2016)

Solution for Budget Deficit

First, Bahrain agreed to introduce Value Added Tax (VAT) as a way to get money and to cover
up budget deficit, which was faced since 2013 (Al-Arabiya, 2016). Value Added Tax is tax on
goods and services. The VAT is agreed to be introduced from 2018 as a way to battle with the
budget deficit and economic problems and increase GDP by 2%. Nevertheless, key factors such
healthcare and education will not be VAT charged. (TradeArabia, 2016) Furthermore, less
government spending is considered in order to focus more on exporting petrol and developing
the non-oil sector such as tourism. Bahrain has already started developing major project plans

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in tourism such as Marassi Al Bahrain, which is, helps Bahrain to attract tourists and to increase
in investment opportunities. In addition, Bahrain is also expanding its airport for making more
visitors travel to Bahrain for tourism and projects like creating four beaches and developing
sport activities. The government plan to make tourists spend more per day from 121 BHD to
200 BHD. This is perfect strategy since it will not only act as a way to reduce budget deficit, but
Bahrain is also developing other source of income instead of only petrol.

Since January 2016, Bahrain has made a decision, which was shocking as it raised the price of
petrol that was unchanged for 33 years (GulfNews, 2016). This major decision happened due to
the fact to making a balance in the budget of the country. The price of 95 Octane raised to 160
fils per liter while the price of 91 Octane raised to 125 fils per liter. The decision was also made
in order to promote efficient use of energy sources and care for environment. Other GCC
countries are also doing the same thing as KSA increased the petrol price by 50% since
December 2015 and UAE and Kuwait removed subsidies from petrol since Beginning of 2015.
Moreover, the government of Bahrain also started to cut subsidies beginning of 2016 for goods
and services such as meat, electricity and water (DilmunTimes, 2016). Since then meat has
doubled in its price and electricity and water prices already began to rise. Government services
will also cost to the people of Bahrain as way to achieve economic development in the country.
However, the government decided to apply the water and electricity subsidies cut to only
expatriates and not to the citizens.

Other solution is income tax revenue. Income tax is tax on a person’s income. The tax rate can
be up to 10% since increasing the tax rate more than that will affect the employee point of view
in working. The reason is that if government decides to increase the tax more than 10%,
employee will feel discouraged to work hard since most of his salary is gone to the government.
Which is why, 10% is reasonable amount of income tax to consider making both parties agree.
Example of this is France raised the income tax to the rich people to a rate of 70%, which is an
average of €140,000, many rich people complained about the high rate and it demotivates
them to work in the country. Even though it is a great source of income to the government to
face budget deficit, the country need to consider some factors before making income tax and
should keep it reasonable in order not to create conflict between people (Pettinger, 2016).
Lastly, the country can apply for a bailout, which means borrow money from international

9
organizations to deal with debts and deficit situation. This gives more time for the country to
survive budget deficit and makes investors less afraid to invest in the country. For instance, in
1970s UK had borrowed money from IMF (International Monetary Fund) because it was having
budget deficit problem (Pettinger, 2016).

Growing Debt

Bahrain has experienced a very serious problem since the past few years. One of the problems
that have to be considered is the debt to GDP in Bahrain. The debtor to the creditor uses
growing debt to describe the increase of liabilities that require payments of interests and the
promises for an amount of money at a specific date in the future. In addition, the debt to GDP
refers to the ratio between the country’s GDP and the government debt. Thus, the debt in
Bahrain rose in the past 10 to 15 years very sharply (Bahrain Public debt, 2015).

In Bahrain, the public debt has reached the limit in the past few years, which concern the
Bahraini government and the citizens. Bahrain’s public debt increased by 575% between 2001
and 2012; this statistic shows how the country is going to brink of danger. Back in 2008, only 10
percent of GDP is represented as public debt; however, things immediately exacerbated during
a short period, without parliamentary control after the withdrawal of dissent MPs in 2010. By
end of 2012, there was a big shift in the amount of public debt with an amount reaching nearly
4.2 billion dinars, which was accounted for 40 percent of the total value of the GDP in Bahrain.
In addition, the public debt continued to increase and rose to more than 4.92 billion dinars but
it fell down to 4.88 billion by the end 2014. This limited descend in the public is referred to the
reimbursement of some bonds. However, it is not far-fetched that 2015 has witnessed the
issuance of advancement bonds with substantial development to achieve the 30 years’ vision in
light. Due to the availability of and moral support from Saudi Arabia and the United Arab
Emirates, the scariest fact that the International Monetary Fund fears a high loan to the value
of greater than 7.5 billion dinars (20 billion dollar) between the years 2018 and 2019,
accounting for 61 percent of the size of GDP (Hussain, 2015).

The below graph shows the debt to GDP in Bahrain from the period of 2000 to 2016.

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As clearly seen above, the debt in Bahrain has increased dramatically since the year 2000. In the
beginning of 2000, the government debt contribution to GDP was 21.48%. However, it then
decreased to 11.4% in 2006, which then suddenly rose to 29.6% in 2010 and kept on rising
significantly until 2014, which reached to 42%.

Not shockingly, the general spending plan bears the weight of debt services, as the estimation
of the interest amount on public debt in the year 2013 is nearly reached to 192 million dinars,
more than150 million dinars in 2012. Hence, it implies that the interest represented around 6
percent of the financial year costs in 2013, which it is one of the highest rates in the world
(Hussain, 2015).

Solution for Growing Debt:

In order for the government to reduce the debts in Bahrain, or be able to pay all its debts and
balance the payments in Bahrain. There are two policies that should be considered in this
situation. Fiscal and monetary policies could be used to help the government reach to an
economical solution.

Firstly, when considering fiscal policy, taxes could be used by the government to manipulate the
economy’s spending and the people’s spending as well. If the government issued taxes in the
economy, this will become a great source of income for the government to pay its debts.
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Otherwise, if the government does not want to increase taxes, it can issue bonds as a source of
income. This could prevent them from increasing taxes and enable the government to get
money to stimulate the economy by public spending. (Smith, 2016)

Secondly, monetary policy could be used by the Bahrain central bank to manipulate the interest
rates. Interest rates on the loans make loans expensive and reduce the number of people who
are ready to borrow money. Vice versa, if interest rates are reduced, this will make loans
cheaper and would encourage people to borrow money. Therefore, if the government followed
this monetary policy and reduced the interest rates from the central bank, this would make
loans cheaper and even would increase loans borrowing by people, which will eventually
increase investments and businesses in Bahrain that would result in more exports by the
domestic businesses as well as more tax revenues. On the other hand, people might take loans,
start investing abroad, and sending money with profit back to Bahrain, which will increase the
money deposited in the country that would help the entire economy to be stable and grow.
Thus, would balance the payments and even reduce debts in Bahrain. (Smith, 2016)

Thirdly, government spending in Bahrain has significantly increased in the quite few years at a
very high rate. Government spending refers to public expenditure on goods and services and it
is a major component of the GDP. In addition, this spending is preventing the government in
spending on other areas or paying its debts. Bahrain debts have increased due to the amount of
money the government borrows and spends in the economy.

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The following graph shows the government spending in Bahrain since 2002 to 2016.

As clearly shown the above graph, in 2002 the government of Bahrain spent 895 million BHD,
which increased dramatically to 1822 million BHD in 2014 and is still increasing. In order to
reduce the debts, the government should cut spending to save money and pay its debts.

Conclusion:

To conclude, Bahrain government needs to follow the strategies and solutions proposed in our
report. In order to overcome the major social and economic challenges the country is facing.
The solutions and strategies that have been proposed will help the country to reach the balance
state and to achieve economic growth, development and to overcome the loss it faced during
the years.

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References:

My Bahrain. (2016). Retrieved from My Bahrain:

http://www.mybahrain.net/viewtravelnews.asp?ID=345

Bahrain Public debt. (2015, April). Retrieved 5 25, 2016, from indexmundi:
http://www.indexmundi.com/bahrain/public_debt.html).

DEP web. (2001). Retrieved from The World Bank Group:

http://www.worldbank.org/depweb/english/modules/social/pgr/index03.html

Economic Year Book . (2013). Retrieved from bahrainedb:

http://www.bahrainedb.com/en/EDBDocuments/Bahrain-Economic-Yearbook.pdf

Economic Year Book . (2013). Retrieved from bahrainedb:

http://www.bahrainedb.com/en/EDBDocuments/Bahrain-Economic-Yearbook.pdf

Economics, T. (2016, June). Bahrain GDP. Retrieved from tradingeconomics:

http://www.tradingeconomics.com/bahrain/gdp

Hussain, J. (2015, January 15). Retrieved from Bahrain Centre For Studies In London:
http://bcsl.org.uk/english/?p=381

LMRA. (2008, July 1). Fees. Retrieved from LMRA.bh:

http://lmra.bh/portal/en/page/show/133#.V0_x4U36jIU

Mahdi, J. H. (2015, January 15). Bahrain’s Economy in 2015: Expectations and Challenges. Retrieved from
bcsl.org.uk: http://bcsl.org.uk/english/?p=381

Onaisi, A. A. (2010, June 05). Retrieved from Alwasat News:

http://www.alwasatnews.com/news/433117.html#

Pettinger, T. (2011, Novermber 14). Policies for Reducing Unemployment. Retrieved from
economicshelp: http://www.economicshelp.org/blog/3881/economics/policies-for-reducing-
unemployment/

Rinkesh. (2016). Retrieved from Conserve Energy Future: http://www.conserve-energy-

future.com/causes-effects-solutions-of-overpopulation.php

Smith, L. (2016, February 24). Reduce Federal Debt. Retrieved 5 26, 2016, from investopedia:
http://www.investopedia.com/articles/economics/11/successful-ways-government-reduces-
debt.asp

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Tradingeconomics. (2016, June 02). Bahrain GDP . Retrieved from Trading Economics:
http://www.tradingeconomics.com/bahrain/gdp

YCHARTS. (2016, April 1). Saudi Arabia Youth Unemployment Rate. Retrieved from ycharts:
https://ycharts.com/indicators/saudi_arabia_youth_unemployment_rate

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Appendix:

1: Employment by nationality (2002 – 2012).

http://www.bahrainedb.com/en/EDBDocuments/Bahrain-Economic-Yearbook.pdf

1.1: Unemployment rate by 2012.

http://bcsl.org.uk/english/?p=381

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1.2:

https://ycharts.com/indicators/saudi_arabia_youth_unemployment_rate

1.3:

http://www.economicshelp.org/blog/3881/economics/policies-for-reducing-unemployment/

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1.4:

Year Population Percent change

2008 0.779 1.96 %

2009 1.039 33.38 %

2010 1.107 6.54 %

2011 1.129 1.99 %

2012 1.151 1.95 %

2013 1.174 2.00 %

2014 1.198 2.04 %

http://www.indexmundi.com/bahrain/population.html

1.5:

Bahraini and non-Bahraini population by gender (2001 and 2010)

http://www.bahrainedb.com/en/EDBDocuments/Bahrain-Economic-Yearbook.pdf

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1.6:

19