Outlook for 2011-15

• Political unrest in Bahrain will continue as the king, Hamad bin Isa al-Khalifa, has decided to clamp down on protesters calling for political and social reform. Elections planned for 2014 are now unlikely to take place.
• Existing tensions over perceived discrimination against Bahrain's majority Shia Muslim community will be exacerbated by the recent unrest, with the marginalised Shias now even less likely to engage with state institutions.
• Fiscal revenue will be dominated by oil income. We expect the government to run deficits in 2012-15 as high subsidies and capital spending are used to address the economic demands of Bahrainis.
• Bahrain will continue to participate in the development of a Gulf monetary union, but we do not expect a single currency for several years. The Central Bank of Bahrain will keep the dinar pegged to the dollar in the meantime.
• We expect real GDP to grow by 3.8% over the forecast period as services, particularly those provided by the financial sector, perform poorly in light of the political and social unrest.
• The current-account deficit will widen in 2011 because of lower services exports and higher costs for non-oil commodities and industrial materials. We expect the deficit to average 6% in 2011-15.

Monthly review

• Political tensions have increased since the king called in troops from neighbouring Gulf Co-operation Council states to quell protests and return stability to Bahrain.
• Following the announcement of a three-month state of emergency, several opposition leaders have been arrested or detained by the security services.
• The death of at least four activists in custody has lent substance to rumours of suspected torture in Bahrain. The government has denied the use of torture, saying detainees died because of pre-existing medical problems.
• One of the king's younger sons, Nasser, has gained in prominence in recent weeks, appearing with security officials and heading a new military unit.
• Public-sector companies and institutions have fired hundreds of staff that participated or are believed to have participated in protests and strikes.
• Hotel occupancy rates were reportedly very low in March and April, and the opening of some new hotels has been delayed, as a result of the recent political instability.
• Total employment in Bahrain grew by 5.2% year on year and 4% quarter on quarter in the fourth quarter of 2010.

The Economist Intelligence Unit expects that Bahrain will experience persistent political unrest in the forecast period. The ruling Al Khalifa family faces a significant threat to its authority, and the response of the king, Hamad bin Isa al-Khalifa, will determine Bahrain's political landscape over the next five years. There were large protests early in 2011 inspired by events in Egypt, Tunisia and elsewhere in the Arab world, calling for political and social reform. The security services used force to disperse the protesters, and a number of deaths were reported. Tensions rose further after the arrival of the Peninsula Shield Force-the combined military force of the Gulf Co-operation Council (GCC)-which many Bahrainis view as an occupation force sent to crack down on opposition groups. The government will continue to use significant levels of violence and repression to quell the unrest-there have been reports of several opposition activists dying in custody and detentions are becoming more and more frequent. The king introduced a three-month state of emergency in March, which means Bahrain will be under martial law.

Bahrain has experienced protests in the past, and economic inequality, poor political representation and perceived sectarian discrimination have contributed to an already highly charged political climate by Gulf standards. Many of the country's Shia Muslims, who form a majority of the population, say that they are economically and politically marginalised by the Sunni Muslim ruling family, which holds most of the important cabinet posts, and the recent unrest will worsen relations between the two communities. There is a widespread belief among Shia Bahrainis that the government is fast-tracking citizenship for Sunni expatriates in order to alter the country's demographic balance. Such claims are hard to verify, but the perception will fuel social unrest.

Although parliament has not formally been dissolved, the resignation of 18 members of parliament (MPs) from al-Wefaq, a largely Shia-supported political society and the largest bloc in parliament, as well as the reported resignation of up to eight other MPs, brings the formalisation of the dissolution ever closer. The Ministry of Justice tried to bring a case forward to ban al-Wefaq, although it eventually backed off. The king is likely to rule by decree as the government will face immense difficulty trying to convince opposition factions to participate in (and therefore legitimise) the political process without making considerable concessions. The king may also face some resistance from his uncle, the prime minister, Sheikh Khalifa bin Salman al-Khalifa, who has held his position since the 1970s and is generally perceived to be less open to reform.

King declares state of emergency

The king, Hamad bin Isa al-Khalifa, declared a State of National Safety on March 15th, imposing martial law for three months. A group of pro-government members of parliament (MPs) had called on the king to introduce martial law, citing "an unprecedented disruption of security and hostile sectarian polarisation at health and educational institutions" and "orchestrated acts to disrupt the traffic on Bahrain's main highways", according to the official Bahrain News Agency.

The government has also banned reporting on actions taken by the security forces. Hundreds of political activists and suspected activists had been arrested by mid-April, often taken from their homes violently in the middle of the night and brought to secret locations. These included the leaders of two hardline opposition groups that had called for the overthrow of the monarchy, Hassan Mushaima of Haq and Abdelwahhab Hussain of al-Wafa. They also included Ebrahim Sharif, the head of Waad, a legally recognised, secular, liberal political society that has campaigned against sectarianism and corruption and that has always opposed violence. Mr Sharif, a former investment banker, was taken from his home in the early hours of the morning by 40 masked men. Neither his family nor his lawyers were informed of his whereabouts. The authorities also revoked the licence of a telecommunications company in which he was a shareholder, 2Connect. Subsequently, the Waad's licence to operate was suspended, its headquarters were raided and its deputy leader arrested. The authorities said that he had broken the law by publishing an article that criticised some of the security forces' actions, breaking the ban on reporting on these. At least three well-known bloggers, Mahmood al-Yousif, Redbelt and Emoodz, were detained temporarily. Rather than seeking to isolate the more hardline opposition activists, the government appears to be using its opportunity to crack down on a wide range of critics, regardless of their views or their record on violence or revolution.

By early April four detainees had died in custody, including a Shia businessman and bookstore owner, Abdul-Kareem Fakhrawi, whose relatives said that he had disappeared after going to the police to complain about a raid on his home, and who was later found in a morgue. The authorities said that the detainees had died because of pre-existing medical conditions, but human rights groups reported signs of torture. The vice-president of the banned Bahrain Centre for Human Rights, Nabeel Rajab, was summoned to the military prosecutor for questioning after posting a photo on Twitter and Facebook that appeared to show the body of one of the detainees, Ali Isa Saqer, with marks of torture. (The authorities said that the photo was fabricated, although it was very similar to one published by AFP, a French news agency, and a visiting observer from US-based Human Rights Watch reported seeing possible signs of torture on the body.)

The Ministry of the Interior said that it found three shotguns and Molotov cocktail equipment at a Shia mosque in the village of Malkiya. There were also reported firebomb attacks on the house of Munira Fakhro, Bahrain's most prominent female academic, who had stood as a Waad candidate in the October parliamentary election, and on the house of Jawad Fairooz, a former MP for al-Wefaq, the main Shia-supported political society.

A general election for the Chamber of Deputies (the lower house of parliament) was held in October 2010. Al-Wefaq emerged as the largest group in parliament, although it fell short of a majority, winning 18 of the 40 seats. All of al-Wefaq's MPs have since withdrawn from parliament, in protest over the violence used against protesters. Pro-government independents won 17 seats. The next parliamentary election was scheduled for 2014, although this is likely to be pushed back, and the king is expected to rule by decree.

The US will remain a key international ally, and the US Navy's Fifth Fleet is doubling the area of its onshore facilities in Bahrain. Good relations with European partners like France and the UK are also a priority, although these will be harmed if the government continues its use of repressive tactics to put down internal dissent. The US will be keen to maintain its alliance with Bahrain as the presence of its naval base is used as a deterrent against assertive Iranian foreign policy but will also quietly criticise the government's violent response to protests. The main foreign policy concern will be Iran's nuclear programme. Tensions in the Gulf will rise as major international powers increase pressure on Iran to suspend uranium enrichment. Iran's recent public statements condemning the use of force against protesters in Bahrain, and Bahrain's consequent summoning of the Iranian ambassador, will strain the relationship between the two countries. The government will continue to maintain publicly that it harbours no ill will towards the Islamic Republic, but the credibility of this stance has been further undermined by the release of US diplomatic cables by WikiLeaks, a whistle-blowing website, quoting King Hamad as calling for decisive action to prevent Iran from developing nuclear weapons.

Maintaining good relations with the rest of the GCC will be a priority as Bahrain comes to rely on its regional partners both for security and for economic stability. Saudi Arabia is an important ally, as most of Bahrain's crude oil comes from a Saudi-operated, shared offshore field, and the causeway to Saudi Arabia is Bahrain's only land link. This relationship has become even more integral since the deployment of Saudi troops (part of the Peninsula Shield Force) in Bahrain. Relations with Qatar have been more difficult than those with Saudi Arabia, owing, in part, to disputes over maritime boundaries and, according to the leaked US diplomatic cables, the king's "strong annoyance" over Iranian military personnel visiting Qatar. However, there is little reason to believe that there will be a serious deterioration in diplomatic relations between the two neighbours. In fact, Bahrain stands to benefit in the long run from the tourism effects of Qatar's hosting of the 2022 football World Cup. The construction of a causeway between Qatar and Bahrain is a long-term project and faced some delays last summer, but it could receive a fillip from investment for the World Cup.

Economic policy in the short term will be focused on restoring confidence in Bahrain's economy. The political unrest will weaken foreign investment and tourism and may prompt financial institutions to seek to shift operations to other regional centres like Dubai or Doha, the Qatari capital. Throughout the forecast period Bahrain will try to diversify the economy away from oil, stimulate private-sector growth and foreign investment, and address unemployment among nationals. "Bahrainisation" quotas for employing nationals have not solved the unemployment problem, and the government is therefore pursuing other initiatives, including a 1% levy on salaries to fund an unemployment insurance scheme and a levy on employers for each expatriate they employ, which finances training for nationals. (The levy on employers has been suspended because of the political unrest to support the private sector.) Since 2009 expatriate workers have had greater legal freedom to change jobs, which should slowly contribute to narrowing the cost gap between them and nationals, although there are questions about implementation.

The privatisation programme has lost some momentum and is likely to mark time as long as the political unrest continues. Large firms such as the Bahrain Petroleum Company (Bapco) will remain state-controlled. Aluminium Bahrain (Alba), which operates a large smelter and is majority-owned by Bahrain's sovereign wealth fund, Mumtalakat, has sold a block of shares through an initial public offering. However, the fund retains a majority stake. Gulf Air, the loss-making national carrier, will remain on Mumtalakat's balance sheet despite earlier speculation that it was going to be returned to the government. Demand for privatised companies will largely be from regional investors or banks, many of whom will have an indirect link to the government.

Bahrain's reputation as a safe, stable financial hub will be severely damaged by the political unrest. The financial sector contributes a similar share to GDP as hydrocarbons and Bahrain had traditionally served as a regional financial centre. The recent regional unrest has also increased pressures on international firms dealing with repressive regimes, and many companies may reconsider their dealings with Bahrain as part of efforts to manage risks to their reputation. Bahrain will try to promote its "business friendly" image and stress the transparency of its financial regulations and the track-record of the Central Bank of Bahrain to encourage foreign financial institutions to set up in Bahrain rather than in its GCC peers, and extra concessions are expected to be offered to offset the damage done by the recent unrest. We believe that the government would support any of the major Bahraini retail or wholesale banks were they to encounter financing difficulties, but this support would be contingent on the state's own ability to borrow easily.

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.

To protect the currency peg, the Central Bank needs to keep its key policy rate, the one-week deposit rate, roughly in line with US rates. As a result, and given concerns about a slowdown in local bank lending, the policy rate is likely to remain low until the Federal Reserve (the US central bank) raises its rates, which we believe is likely in 2012. The Central Bank will try to keep rates low in 2011 to help to stimulate the economy and has pledged to provide liquidity to the retail banking sector should the need arise. Bahrain could start raising rates ahead of the US if it judges that growth is recovering and inflationary pressures are building. However, any such moves would be taken slowly to avoid creating speculative pressure. The Central Bank has announced plans to develop sharia-compliant money-market instruments to provide liquidity to an increasingly important subsector of the finance industry.

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Bahraini GDP growth will average 3.8% a year in 2011-15. Regional economic recovery and higher average oil prices in 2010 pushed growth up to 4.5% after a slowdown to 3.1% in 2009. Bahrain's financial sector, the cornerstone of the country's diversification strategy, will suffer as a result of the recent unrest, which will take a toll on Bahrain's long-cultivated "business-friendly" image. Services credits are expected to dip this year, harming the country's growth prospects. However, we expect hydrocarbons to continue to be a major contributor to growth, and efforts to move its hydrocarbons exports up the value chain (through higher-value-added refining for example) will secure the importance of oil despite the country's low reserves. Private consumption may be boosted in 2011 by the government's one-off payment to Bahraini families, but the increasing political instability will be very damaging to the country's tourism industry, particularly tourism associated with events such as the Formula One Grand Prix. The government will increase spending on subsidies and housebuilding in 2011, but we expect private financing to supplement public investment later in the forecast period.

Export growth will be driven mainly by goods, as services income will suffer as a result of the unrest. An additional aluminium production line in 2011 could raise capacity at the Alba smelter to 1.5m tonnes/year; there is a risk, however, that demand may not be strong enough to support the higher capacity, particularly since the Gulf Aluminium Rolling Mill Company (Garmco) has announced that it will diversify its sources away from Alba after 2012. Moreover, the regional aluminium market is becoming more competitive, with new smelters in Saudi Arabia and the UAE. Logistics services operated through a major port and a regional airline, Gulf Air, will also contribute to the export of services. Bahrain is particularly well-placed to take advantage of a growing Iraqi market, which it can service via Gulf Air or its port facilities. Import growth will remain strong, given Bahrain's limited domestic production base and high level of capital investment. As ever, risks stem from prices for Bahrain's main exports, oil and aluminium.

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Inflationary pressures will creep up in 2011 as international commodity prices rise. Grain and oil seed prices are forecast to rise significantly in 2011 (by 41% and 26% respectively), increasing the rate of inflation in Bahrain as it relies on imports of both. We expect inflation in Bahrain to average 4.5% in 2011, up from only 2% in 2010. It will moderate to 3% in 2012 as commodity prices decline and will average 3.4% over the remainder of the forecast period. Bahrain will have to manage imported inflation from both the US (against whose currency the Bahraini dinar is pegged) and Saudi Arabia (its largest trading partner). The official consumer price index is widely believed to understate price pressures. The government has introduced a one-off grant of BD1,000 for each Bahraini family in 2011 to lessen the impact of increased commodity prices, which will add to Bahrain's already costly subsidy bill. Proposals to change the subsidy system would probably cause public anger, so inflation will remain artificially low.

Bahrain intends to enter into a currency union with Kuwait, Qatar and Saudi Arabia, and a first meeting of a joint monetary council was held in the first quarter of 2010. The introduction of a single currency is likely to be delayed as the member states pursue convergence on inflation and seek a consensus on the functions of the planned central bank. The single Gulf currency will probably initially be pegged to the dollar, but this arrangement could be reviewed at a later stage. It is likely that the currency will eventually be pegged to a basket of currencies in order to give the joint central bank more leeway to alter interest rates. Meanwhile, the Central Bank of Bahrain will maintain the dinar's peg to the dollar at the rate of BD0.376:US$1, which has been in place for over two decades.

Bahrain relies on adding value to raw material imports, and exports refined hydrocarbons products and aluminium. Oil prices are forecast to rise in 2011, because of renewed growth in demand for hydrocarbons, which will support the current account; but because Bahrain imports crude from Saudi Arabia (oil imports are roughly half of the import bill), higher prices do not necessarily improve the trade balance. A weaker euro:dollar exchange rate over the forecast period will help to keep the costs of other imports down but may prompt more purchases from abroad, cutting into the trade surplus. (Imports from France and Germany accounted for nearly 15% of total imports in 2009.) We expect the current account to register an average deficit of 6% over the forecast period, as income from services suffers because of the unrest. The income account will remain in deficit, as profit repatriation and debt interest payments outweigh dividends from foreign assets.

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For a period of three weeks in late February and early March, talks between the government and opposition groups stalled and protests escalated. An initial meeting between government and opposition representatives took place on February 20th but did not lead to a fully-fledged national dialogue. Al-Wefaq, the main legally recognised Shia opposition group, has tended over the past few years to seek dialogue and take a conciliatory approach, but it now faces pressure from a range of other opposition groups and protesters that said that the government was not serious about reform and should step down. Al-Wefaq therefore said in mid-February that the government should accept the idea of a constitutional monarchy as a precondition for dialogue. Later, on March 4th, al-Wefaq and six other opposition societies demanded the resignation of the government-including the long-serving prime minister, Sheikh Khalifa bin Salman al-Khalifa-before taking part in the dialogue.

It appears that the demand for the departure of Sheikh Khalifa was the main stumbling block. Several other Arab countries, including Oman and Kuwait, have changed their cabinets this year. However, Sheikh Khalifa, the uncle of King Hamad bin Isa al-Khalifa, is one of the most powerful figures in Bahrain, as well as one of the most senior members of the Al Khalifa family, and is the only prime minister Bahrain has ever had.

On March 13th the crown prince, Salman bin Hamad al-Khalifa, said that a wide range of issues would be on the table for discussion, including corruption, fair electoral representation and naturalisation policy. This was the closest he had come to using the opposition's language and recognising their demands. But Sheikh Salman's call for a wide-ranging dialogue was undermined both by protesters and by other parts of the government: on the same day that he made his statements, street protests escalated and the decision was taken to call in troops from member states of the Gulf Co-operation Council.

Protesters and opposition groups had been divided over the issue of negotiating with the government, with many saying that they needed to see actions rather than promises. The opposition groups are also split over whether to seek the overthrow of the monarchy (favoured by Haq and al-Wafa, two hardline opposition groups) or a constitutional monarchy (favoured by al-Wefaq). Some of the street protesters hardened their tactics to put further pressure on the government. Two days before Sheikh Salman's address, they had already marched to the Royal Court, which is located in the wealthy Sunni area of Riffa, where many royals live. Many residents of the area saw the march as an act of aggression. The marchers were in turn met by vigilantes who said that they would defend their neighbourhood. Serious clashes were averted, but the incident created fears of sectarian violence. After this point, many government supporters lost sympathy with the protesters, with Bahrainis polarised into "pro-government" and "anti-government" blocs. The political split has also become increasingly sectarian as fears spread among the Sunni community that the protesters were following an Iranian agenda, as alleged by the government.

Also on March 13th, protesters began to set up roadblocks to disrupt traffic and business in the diplomatic area of Manama, the capital. They blocked access to the Bahrain Financial Harbour, a high-profile property development by the sea where many international financial institutions have their operations. Meanwhile, pro-government vigilante groups emerged and a few violent incidents stoked fears of more serious sectarian conflict. In addition, at least four Asian migrant workers were murdered in March. Mona Almoayyed, the president of the Migrant Workers' Protection Society, said that it thought that anti-government youth protesters had attacked them, mistaking them for members of the security forces.

On Sunday March 13th it was announced that GCC troops would enter Bahrain. Around 1,000 Saudi forces and 500 UAE policemen were initially deployed. The deployment was officially at the invitation of the king. The government cited the GCC's Peninsula Shield agreement, which includes a clause stating that the GCC will defend any of its members against an external threat or external interference in internal affairs. It is the first time that GCC forces have been used in the face of an internal uprising, but the government justifies this by arguing that the protesters have a foreign agenda. Kuwait had a fierce internal debate over whether its forces should participate, and eventually compromised by sending three naval ships, in line with the principle of defence against external threats (while being unlikely to come into contact with any protesters).

Bahraini society became yet more polarised over the deployment of the GCC troops, largely reflecting sectarian identities. Al-Wefaq called the deployment an invasion. Meanwhile, government supporters have tended to argue that the GCC troops were needed because the country was on the brink of anarchy or civil war until they arrived. This view appears to conflate the deployment of the GCC troops with a U-turn in the tactics used by the Bahraini security forces, which took place at the same time. Having held back since the first raid on Pearl Roundabout, the focal point for protests, in mid-February, the security forces launched a second crackdown on March 16th to clear protesters from the area in which two policemen (according to the government) and five protesters (according to opposition groups) were killed and hundreds more were injured. The GCC forces are not believed to have been directly involved. The roundabout itself has since been bulldozed.

Gulf Co-operation Council deployment demonstrates regional tensions

The deployment of Gulf Co-operation Council (GCC) forces to Bahrain appears to be largely a symbolic, political gesture. Bahrain's own security forces are nearly 20,000 strong, and are well equipped, so it is doubtful that they would need reinforcements in order to have enough personnel or equipment. Rather, the involvement of the GCC sends a strong political message that the Al Khalifa are part of a larger grouping of inter-related tribal monarchs and that those that call for revolution are in effect opposing the monarchical systems across the Gulf.

The close relationship between the GCC ruling families was further highlighted by the engagement of the youngest son of King Hamad, Sheikh Khaled bin Hamad al-Khalifa, to Sheikha Sahab bint Abdullah bin Abdel-Aziz al-Saud, a daughter of the Saudi monarch, King Abdullah bin Abdel-Aziz al-Saud, on March 6th. Another of King Hamad's sons, Sheikh Nasser bin Hamad al-Khalifa, is married to a daughter of the ruler of Dubai, Sheikh Mohammed bin Rashid al-Maktoum. Sheikh Nasser, who heads the General Organisation for Youth and Sport and is the president of the Bahrain Olympic Committee, has been increasingly prominent in recent weeks, first brokering a "youth dialogue" (albeit with few identifiable results) and subsequently being photographed in military uniform meeting Sheikh Khalid bin Ahmed al-Khalifa, the commander-in-chief of the Bahrain Defence Force, in his role as commander of the Rapid Intervention Force, one of five new military units. In mid-April it was announced that an event would be held under Sheikh Nasser's patronage where young Bahrainis could sign a pledge of allegiance to the country's leadership, culminating in the award of four symbolic "swords of allegiance to the wise leadership", to be presented to the king, the crown prince, Salman bin Hamad al-Khalifa, the prime minister, Sheikh Khalifa bin Salman al-Khalifa, and a special "youth sword", to Sheikh Nasser himself. It is possible that hardliners within the ruling family view him as a useful counterweight to the crown prince, who has been a notable advocate of political reform in the past.

The king said in March that an "external plot" had been fomented over the past 20 to 30 years but had now failed, in remarks widely understood to be referring to Iran. The foreign minister, Sheikh Khalid bin Ahmed al-Khalifa, also said that the government had evidence that Bahraini activists had been trained by Hizbullah, an armed Lebanese Shia political group. He noted that Hassan Mushaima, the leader of Haq, a hardline opposition group, had visited Beirut, the Lebanese capital, on his return to Bahrain from self-imposed exile in London. However, the supposed evidence of Hizbullah's involvement in Bahrain's protests does not yet seem to have been shared with the country's Western allies. In mid-April the US defence secretary, Robert Gates, reiterated his earlier comments that the US did not believe that Iran was behind the protests in any Arab country, but expressed concern that Iran was seeking to exploit the unrest, "particularly in Bahrain". These remarks were wrongly reported in some quarters as proof that Iran was interfering. Other Western diplomats also told the Economist Intelligence Unit that they were sceptical about the allegations of Iranian or Hizbullah involvement.

Iran has criticised the crackdown in Bahrain, and been strongly opposed to the GCC troop deployment, but has denied any interference. One Iranian member of parliament called for an Iranian troop deployment to Bahrain. Separately, a website was set up calling for volunteers to sign up to fight in Bahrain. Iranian-owned media channels have stridently denounced the crackdown and have praised the opposition. All of this has only added to the sectarian tensions in Bahrain and has fed long-dormant Sunni anxieties about supposed Shia disloyalty to the state. The tensions between Iran and Saudi Arabia over Bahrain are likely to have ramifications elsewhere in the region. Arab News, a Saudi newspaper, reported that firebombs were thrown at the Saudi embassy in Tehran, the Iranian capital, during a demonstration against the deployment of Saudi troops in Bahrain. Meanwhile, Bahrain has suspended flights by its two airlines, Gulf Air and Bahrain Air, to Iran, Iraq and Lebanon and has reportedly deported a number of Lebanese and Iraqi expatriate workers.

Public-sector companies and institutions have fired hundreds of staff that participated or are believed to have participated in protests and strikes. Workers at the Bahrain Petroleum Company (Bapco) and the Khalifa Sea Port, operated by Denmark's APM Terminals, have been sacked, as have employees at Aluminium Bahrain (Alba), Gulf Air (around 40) and taxi companies. Sackings also included 200 athletes, including four members of Bahrain's national football team who were fired and banned from international games because they were deemed to be "against the government", according to a sports official who spoke to Associated Press. One of the footballers, Al'a Hubail, had attended a protest as a volunteer nurse, being a trained paramedic, according to The Times, a UK-based newspaper. The University of Bahrain suspended a college dean, seven teachers and 25 administrators that it said had been involved in vandalism during the unrest; it also expelled 62 students and cancelled the scholarships of five PhD students. Several overseas students have also had their scholarships rescinded after participating in protests. The Bahraini government has begun to advertise in the UK for nurses after 30 doctors and nurses were sacked, and around 150 more are under investigation. The government has also been recruiting in Pakistan for the security forces, according to Pakistani recruitment websites and newspapers. The sackings are likely to increase Bahrain's dependence on foreign workers. Anecdotal evidence suggests some private companies are already replacing fired Bahraini staff with expatriates.

In 2006 Bahrain legalised strikes and officials expressed pride in having relatively advanced laws on labour and trade unions. Under the law, it is possible for a court to require firms to reinstate workers that were fired simply for striking. However, later in 2006, a prime ministerial decree banned strikes in strategic sectors (including airports, seaports, hospitals and health centres, educational establishments, electricity, bakeries, oil and gas) in a move that was criticised by trade unions. The country has a long tradition of trade union activism, dating back to the 1930s when workers at Bapco began to organise. The International Labour Organisation (ILO) reported that several members of the board of the General Federation of Trade Unions had been fired by the government, even though, it said, the federation had encouraged workers to voluntarily return to work. The ILO called the situation "extremely alarming". The president, vice-president and four other members of the Teachers' Association have been arrested, and the government has dismissed the board of the Bahrain Medical Society.

In mid-April the prime minister and the crown prince made a joint announcement saying that the levy that employers normally pay for each foreign worker they employ would be suspended for six months to help ease the burdens businesses were facing. Usually employers have to pay a monthly fee of BD10 (US$26.50) for each foreign worker, which is collected by the Labour Market Regulatory Authority (LMRA), which then channels most of the funds raised to Tamkeen, another government body that provides training for Bahrainis. The fees are part of a programme of labour-market reforms introduced by the Economic Development Board over the past few years in an attempt to begin narrowing the gaps between foreign and local workers in terms of both cost and skills. Bahrain's nationals are more willing to work in private-sector jobs than most other Gulf nationals but it is still the case that the vast majority of private-sector jobs are held by foreign workers, who are much cheaper to employ and in many cases have more marketable skills. The EDB, a body chaired by the crown prince, has overarching authority for economic policy and has focused its work on labour-market reforms, education reforms, broader business-environment reforms and overseas investment-promotion. It has sometimes faced resistance from entrenched interests in the local business sector and it was forced to water down the labour fees from an original proposal (which would have meant higher fees) in the face of objections from the construction sector, which is accustomed to paying very low wages to foreign workers that have few rights. Some of these firms may lobby for the six-month suspension to be made permanent.

The prime minister and the crown prince also directed the LMRA and the Ministry of Labour to streamline the visa-issuance procedure in order to help firms that are recruiting new foreign workers (which some firms are now doing to replace local staff fired for protesting). They also ordered the Ministry of Finance to clear any unpaid invoices, said that the awarding of government contracts should be speeded up and urged the Central Bank of Bahrain to work with local banks to boost lending to the private sector, as part of efforts to stimulate the economy. Nonetheless, the continuing state of martial law and the persistence of travel advisories will remain a hindrance to business. In the longer term there are concerns that Bahrain's reputation as a stable financial hub has been badly damaged, making it harder for it to compete with Dubai and Qatar.

Hotel occupancy rates were reportedly very low in March and April, and the opening of some new hotels has been delayed, as a result of the recent political instability and the indefinite postponement of the Formula One Grand Prix. A report by CB Richard Ellis, a consultancy, in mid-April said that occupancy rates had fallen to between 5% and 10% at Bahrain's hotels. The report also said that some new hotels that had intended to open in time for the Formula One weekend had delayed their planned start dates until after the summer. The consultants also noted that the retail sector had suffered from the unrest, but that it was beginning to pick up again as curfew hours were relaxed. The state media's reports on the economic damage have varied between blaming the opposition for major economic damage and trying to instil confidence. On April 7th the Bahrain News Agency published a report titled "Bahrain tourism and hospitality sector is on track", noting that 37 European tourists had entered the country, saying that this was the first such visit since mid-February. The UK reiterated its advice against all but essential travel to Bahrain, saying that the situation had not yet returned to normal.

Total employment grew by 5.2% year on year and 4% quarter on quarter in the fourth quarter of 2010, according to full-year employment data released by the Central Bank in April. This took total employment to 551,559, or 41.4% of the total population. Private-sector employment rose slightly faster than that in the public sector, taking private-sector employment to 92% of all employment, compared with just under 90% four years ago. Most of the new jobs went to non-Bahrain workers, as has been the case for some years. Just over 3,000 new jobs created in the past 12 months went to Bahrainis, whereas over 22,000 new jobs went to foreign workers. This is partly because of significant wage differentials between the two groups, at least where private-sector employment is concerned. Non-Bahrainis working in the private sector earned an average of BD205 (US$545) a month in the fourth quarter of 2010, little changed from the average of BD197 one year earlier. By contrast, Bahrainis working in the private sector earned an average wage that was more than twice as high, at BD595 a month, compared with BD577 one year earlier. The opposite is true in the public sector, where non-Bahrainis earn higher wages than Bahrainis. The statistics do not include any figures for employment in the army or Ministry of the Interior.

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Land area

712 sq km

Population

1,039,297 (end-2007), of whom 527,433 are Bahraini nationals, according to the Central Informatics Organisation

Main towns

Population (April 2001, official census)

Manama (capital): 153,395

Muharraq: 91,939

Climate

Hot, very humid summer (April to September); temperate December to March

Weather in Manama (altitude 5 metres)

Hottest month, August, 29-38°C; coldest month, January, 14-20°C (average daily minimum and maximum); 70 mm average annual rainfall; driest months, June-October; wettest months, November, December, February

Language

Official language is Arabic; English also widely used

Measures

Metric system; also local measures including: 1 dhara=48.26 cm, 1 rafa=254 kg

Currency

Bahraini dinar (BD) = 1,000 fils. The dinar is pegged to the US dollar at a rate of BD0.376:US$1

Time

3 hours ahead of GMT

Fiscal year

January 1st-December 31st

Public holidays

The dates of Islamic holidays are based on the lunar calendar and are therefore approximate. New Year's Day (January 1st); Prophet Mohammed's birthday (February 15th 2011); Labour Day (May 1st); Eid al-Fitr (August 30th 2011); Eid al-Adha (November 6th 2011); National Day (December 16th); Islamic New Year (Muharram, November 26th 2011); Ashura (December 5th 2011)

Official name

Kingdom of Bahrain (known as the State of Bahrain until February 14th 2002)

Form of state

Constitutional monarchy

Legal system

Based on the 2002 amended constitution. The previous constitution was drawn up in 1973

Legislature

Bahrain's bicameral legislature, the National Assembly, consists of the Chamber of Deputies, which has 40 elected members, and the Shura Council, which also has 40 members but is appointed by the king

National elections

Municipal and legislative, October 2010. Next legislative election expected in 2014

Head of state

Hamad bin Isa al-Khalifa succeeded to the throne in March 1999 after the death of Sheikh Isa, Bahrain's ruler since 1961; he changed his constitutional status to king from emir in February 2002; Salman bin Hamad al-Khalifa, King Hamad's son, is the crown prince

Executive

Cabinet, headed by the prime minister, appointed by the king. Most recent reshuffle: 2011

Main political parties

Political parties are not permitted, but political societies have been legal since late 2001. The largest legal opposition group is the al-Wefaq National Islamic Society, an Islamist-leaning, Shia-based movement

The government

Prime minister: Khalifa bin Salman al-Khalifa

Deputy prime ministers:

;Mohammed bin Mubarak al-Khalifa

;Jawed bin Salem al-Arayyed

;Ali bin Khalifa al-Khalifa

;Khalid bin Abdullah al-Khalifa

Key ministers

Communications: Ali bin Khalifa bin Salman al-Khalifa

Culture & tourism: Mai bint Mohammed al-Khalifa

Education: Majid bin Ali al-Nuaimi

Energy: Abdel-Hussain bin Ali Mirza

Finance: Ahmed bin Mohammed al-Khalifa

Foreign affairs: Khalid bin Ahmed al-Khalifa

Health: Nazar al-Baharnah

Industry & commerce: Hassan bin Abdullah Fakhro

Interior: Rashid bin Abdullah bin Ahmed al-Khalifa

Justice & Islamic affairs: Khalid bin Ali al-Khalifa

Labour: Jameel Humaidan

Minister of state for cabinet affairs: Kamal Ahmed

Prime minister's court: Khalid bin Abdullah al-Khalifa

Public works: Esam bin Abdullah

Shura Council & parliamentary affairs: Abdulaziz al-Fadhel

Social affairs: Fatima Mohammed al-Beloushi

Head of the Royal Court

Ali bin Isa bin Salman al-Khalifa

Central Bank governor

Rashid al-Maraj