Bahrain has less fiscal flexibility than other Gulf oil producers, and its revenue will remain linked to oil prices during the forecast period. The two-year budget for 2011-12 envisages deficits in both years as capital expenditure is budgeted to increase by 42% compared with 2009. Current spending, of which wages have historically accounted for over 50%, will be more than 2% lower on average in 2011-12, according to the budget. Oil revenue will account for 87% of revenue in 2011-12. We expect the government to post a small surplus this year, as oil prices remain high, but to register deficits in 2012-15 as oil revenue will not be sufficient to cover the government's spending programmes, with the shortfall averaging over 6% of GDP in 2011-15. Subsidy expenditure will increase in 2011 following a one-off payment of BD1,000 (US$2,660) to each Bahraini family in an attempt to address economic grievances in the wake of political unrest. Reform of the subsidy system has been highlighted as a priority by the Economic Development Board, Bahrain's strategy and planning organisation, but is unlikely to proceed quickly given how politically sensitive the issue can be.

The government's overall debt burden is increasing as it seeks to finance development projects and refinance debt by borrowing from both domestic and foreign sources, through sharia-compliant and conventional securities. The government has announced that it is seeking to return to international markets in 2011, but the yields on Bahrain's previous US$1.25bn ten-year bond, issued last year, have risen dramatically because of the unrest, making any new borrowing much more expensive. Bahrain will also receive half of a US$20bn GCC fund for housing and infrastructure financing.