Bahrain

Sharp economic contraction in 2026 due to the war

Bahrain’s economy is expected to contract sharply in 2026 due to disruptions in the oil and non-oil sectors caused by the war and to the subsequent closure of the Strait of Hormuz through which Bahrain exports most of its goods. Although Bahrain has a road connection to Saudi Arabia, which facilitates trade with Saudi Arabia, the UAE and other countries in the region, the country remains heavily dependent on maritime routes. Over half of its exports and around 70% of its imports transit through the Strait of Hormuz, making Bahrain highly vulnerable to any disruption in traffic there. The oil sector (around 10% of GDP) is expected to contract due to an estimated 15% decline in crude and refined petroleum products production in 2026 compared to the previous year amid production shutdowns forced by missile strikes. Following Iran’s direct attacks on Bahrain’s aluminium facilities (metals account roughly for 12-16% of GDP and 40% of total exports), the combination of physical damage to the plants and the ongoing naval blockade stopping most bauxite and alumina imports, as well as aluminum exports, is projected to reduce Bahrain's total metal output by an estimated 20–25% in 2026. Tourism revenues (around 7% of GDP) are expected to fall in 2026 and drag on growth amid heightened regional geopolitical tension that is disrupting air travel, increasing costs and eroding international visitor demand on top of the cancellation of key events such as the Formula?1 Grand Prix. The drone strikes on a data centre in March also risk harming digital transformation objectives and investor confidence.

Inflationary pressures are expected to increase in 2026 on back of rising food prices driven by persistent supply chain disruptions and higher energy prices. Bahrain’s transport costs (around 18% of the CPI basket) are projected to rise further as the authorities continue to roll back fuel subsidies due to mounting fiscal pressure. Nevertheless, inflation is expected to remain subdued as the dinar's peg to the US dollar will continue to act as an effective control on inflationary pressures.

Budget deficit will widen and external surplus will decline

Bahrain’s fiscal deficit is set to widen in 2026, a result of its high dependence on hydrocarbon revenues (between 50-55% of total fiscal revenues), limited expenditure flexibility and elevated public debt service despite the authorities’ ongoing consolidation efforts. Revenue performance will remain highly sensitive to oil price developments and export volumes. This vulnerability is severely amplified by the ongoing closure of the Strait of Hormuz. As long as this vital maritime chokepoint remains blocked, Bahrain's ability to physically export its crude oil and refined products will come to a virtual standstill and deal a direct blow to state revenues. On the expenditure side, rigid spending structures will restrict adjustment capacity. Wages, subsidies and social transfers account for around half of total government expenditure, limiting the scope for rapid consolidation. In addition, social and political considerations are expected to discourage deep cuts to current spending. Under these circumstances, financing needs will continue to be met mainly through borrowing, which will further deepen the public debt. 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. Currently, the disbursement of funds may be delayed because donor nations are also facing the negative impacts of regional tensions. However, continued structural support, particularly Saudi Arabia's investment in Bahrain's sovereign wealth fund (around 10% of GDP), should mitigate the risk to stability in the short term. In addition, a 5-year currency swap agreement worth AED 20 billion (USD 5.4 billion) between the central banks of Bahrain and the UAE should help boost liquidity.

Bahrain’s current account surplus will narrow in 2026, mainly on back of low hydrocarbon (50% of total exports) and metal exports. Despite state initiatives to ease the burden on the tourism sector via optional first quarter fee deferrals, total tourism earnings are anticipated to decline. Low financial buffers (i.e., international reserves covering only 1.5 months of imports) leave the country, making the country highly vulnerable to external shocks and forcing it to place greater reliance on external financing to maintain the currency peg and meet debt obligations.

Regional geopolitical tensions weigh on security outlook

After the US-Israel attack on 28 February 2026 and before the ceasefire on 13 April, Iran launched a series of missile and drone attacks on several Gulf countries, including Bahrain. The strikes targeted key infrastructure, such as energy facilities, as well as areas near military bases, thereby increasing Bahrain's security risks. Bahrein was targeted on 5 June during sporadic back-and-forth attacks during the ceasefire. From the start of the war, Iran also blocked shipping traffic through the Strait of Hormuz. If a durable ceasefire or broader regional peace agreement is reached, Bahrain’s overall risk environment will likely improve, albeit only partially. Significant internal unrest in Bahrain tends to intensify during periods of conflict involving Iran as such developments strongly resonate with the country’s Shia majority. A more stable and less confrontational regional environment would reduce the likelihood of protests and support social stability, thereby making it easier for the authorities to maintain control. Additionally, the fragmented nature and absence of structured political representation of the opposition to the royal family and government curb the ability to organise large-scale and coordinated challenges to the ruling authorities, which helps cushion social unrest.

Bahrain maintains close relations with Saudi Arabia, the US and the UK, reflecting its strong alignment with Western and Gulf allies, as well as its reliance on external security guarantees. Were it not for the war, Bahrain would maintain a cautious stance towards Iran, mirroring regional rivalries and domestic sensitivities alike. Second, Bahrain and Israel normalised their relations under the Abraham Accords (2020) in a bid to strengthen economic cooperation and regional stability. However, progress continues to be hindered by geopolitical tensions and implementation-related constraints.

Last updated: June 2026