Middle East

Bahrain struggles to get economy back on track

Bahrain Financial Harbour (BFH) is a striking landmark built on seafront reclaimed from the Gulf - two elegant towers in the capital, Manama, that leap into the sky, green clad and shimmering in the heat.

Image caption Bahrain Financial Harbour commands the Manama skyline

The Financial Harbour was supposed to kick-start a bid to locate Bahrain as a key hub for the multi-billion dollar regional banking industry.

The project, begun in 2004 and completed five years later, was controversial from the beginning. It was built at a cost of $1.5bn (£980m) on land that the Prime Minister Sheikh Khalifa bin Salman al-Khalifa had allegedly acquired for 1 Bahraini dinar.

Sheikh Khalifa is the world's longest serving prime minister. Unelected, he has been in place since 1971.

In return for the land, the prime minister was given a 50% stake in BFH. He took full control of the project in 2010.

Seen from a distance the towers seem to offer reassurance that Bahrain's economy, despite more than two years of unrest and frequently violent protest, remains strong.

Appearances, however, are deceptive. In a shopping centre between the two towers, only a mini-mart and a coffee shop are open.

The towers are mostly empty too. A senior Manama businessman told the BBC "rents were grossly mispriced and they have never been adjusted to reality".

He described BFH as a place where "the steel is rotting and the concrete falling off. It's a national disgrace."

The project's timing could not have been worse. Bahrain Financial Harbour was coming on stream just as the Gulf real estate bubble burst in spectacular fashion in 2008.

Overbuilt and oversold high-rise office towers around the region stood empty, but where other countries were able to ride the crash out and begin a slow recovery, Bahrain was hit by another crisis.

Tourism downturn

In February 2011, thousands of peaceful demonstrators occupied an iconic Manama landmark, Pearl Roundabout. They were demanding democratic reform and an end to discrimination.

In a country where the Shia Muslim majority has long complained of unfair treatment at the hands of its Sunni Muslim rulers, the al-Khalifas, many but by no means all of the protesters were Shia.

Pearl Roundabout was cleared by force and in the months that followed, more than 50 people, including five police officers died. Hundreds of Shia were arrested, thousands were arbitrarily sacked from their jobs and at least three were beaten to death in custody.

Amid allegations of police brutality and torture in detention centres, the popular Bahrain F1 race was cancelled that year over security concerns.

The tourism industry, which had long thrived on Bahrain's reputation as an open and tolerant society, was hard-hit. Businesses large and small were disrupted by the sackings and by ongoing street protests.

Efforts at containing the damage included the banning of protest marches in Manama. Peace activists and opposition politicians were rounded up and jailed as martial law was imposed. That was coupled with harsh police measures including the heavy and often indiscriminate tear gassing of Shia villages.

Formula 1 returned in 2012 but it is only recently that tourism has shown a modest increase with most visitors coming from neighbouring Saudi Arabia where, unlike Bahrain, tough religious laws prevent the sale of alcohol and cinemas are not allowed.

As the economy limps along, the violence in the villages continues, as do peaceful protests. And though the government insists it has embarked on a series of far-reaching police reforms, critics say that the police violence has not ended.

A dialogue intended to find a resolution to the crisis is stuck in stalemate, with the opposition charging that the ruling al-Khalifas have no intention of making serious reforms.

And with no political solution in sight, increasingly angry Shia youth have stepped up their attacks. Major roadways are blocked on an almost daily basis with burning tyre barricades.

When the police arrive they are showered with Molotov cocktails and hit by projectiles fired from homemade guns. They respond with tear gas, stun grenades and birdshot blasts. For ordinary Bahrainis as well as the country's large expat population, being caught between rioters and the security forces can be a terrifying experience.

Small businesses hit

Small businesses cite the ongoing unrest for a significant downturn. One owner who runs a car maintenance service estimates that he has lost 40-50% of his income in the past two years.

"Business is very bad. People are afraid, they never know when something will happen so they'd rather stay at home then bring their car for servicing," he told the BBC.

He said that many small and medium sized businesses are in a similar predicament.

But it is not just Bahraini owned businesses that are feeling the pain.

Image caption Small businesses have suffered as clashes between police and protesters continue

Betsy Mathieson is the secretary general of the Bahrain Federation of Expatriate Associations. She said that "a lot of expat businesses have suffered".

She claimed this was particularly the case in Shia villages where she says "vulnerable Asian businesses are being threatened and attacked" by violent protesters.

For several years the Ministry of Interior has recruited Sunni Muslims from Pakistan and elsewhere to serve as riot police. Among those hired are officers who have faced charges for the torture deaths of detained Shia protesters. Others stand accused of beating protesters on the streets and in jail cells.

That appears to have stoked anger and innocent Asians have become targets.

Still Ms Mathieson says that she remains optimistic: "If the violence stops, the economy will recover."

And contrary to what the opposition says, she believes that King Hamad bin Isa al-Khalifa is seeking solutions. "He apologised for what happened [in 2011]. He is serious about reform but things cannot happen overnight."

Some good news

There are signs that despite the continuing unrest, the economy is improving. In the first quarter of 2013 gross domestic product (GDP) rose by 2.5%, due in large part to an increase in oil output,

Although Bahrain has the most diversified economy of all the Gulf states, like them it continues to rely heavily on the hydrocarbon sector. Oil accounts for a quarter of the country's $30bn economy.

And the country's sovereign fund, Mumtalakat, cut its losses from a staggering $717m in 2011 to a more manageable 2012 figure of $482m.

Robert Ainey, who heads the Bahrain Association of Banks told the BBC that though there has been a downturn in some areas of banking the overall sector is sound.

That is despite two years of upheaval and the scaling down of offices by foreign banks like BNP Paribas, one of the few tenants in Bahrain Financial Harbour.

Mr Ainey, an American who has lived in Bahrain for 30 years, says the banks are in good shape because the Central Bank of Bahrain, the country's financial regulator, has been "extremely vigilant."

"Bahrain has the best regulatory environment [in the Middle East]. It is right up there with Germany, Canada or Australia."

Like Ms Mathieson he is optimistic that an economic turnaround is on the cards. However, at least part of that turnaround will have to include an acknowledgement that the Financial Harbour is a distressed asset.

He said that creditors need to accept a big haircut "something like 15 pence on the pound" and the asset has to be valued much lower than it currently is to enable a buy out.

If that were to happen "It [BFH] could make it, it could be profitable. Look at what happened to Canary Wharf."

London's Canary Wharf project replaced a rundown docks district with high rise office towers. The ambitious project quickly ran into trouble but it emerged from bankruptcy in 1992 to lead a regeneration of the city's east end.

Bumpy ride

Bahrain still faces a long journey to full economic recovery. And the shape of the country's national airline, Gulf Air is a good measure of just how turbulent the ride may be.

Gulf Air is one of the Middle East's oldest airlines but it has lost significant ground to Gulf rivals Etihad and Qatar Air. The biggest blow was the closure of its Iran market which accounted for some 30% of its revenue.

That happened because the country's rulers blame Shia Iran for much of the upheaval that has marred Bahrain since early 2011.

A company employee who asked not to be named said the airline is currently operating at a massive loss of $583m a year.

The employee cited both bad management decisions and political interference for the poor shape Gulf Air is in.

"Bahrain is an island. Gulf Air should be connecting us to the world. Instead we are shutting routes down, and losing more than 25% of our work force. The situation is very bad."

But as with other Gulf states it is hydrocarbon revenues that may come to Bahrain's rescue.

With new drilling technologies in play, previously shut down oil fields are being reactivated. There is even talk of a gas field bigger than that of neighbouring Qatar which, thanks to its huge gas reserves, is per capita the wealthiest country in the world

Still, the solution to Bahrain's ailing economy is not to throw more hydrocarbon revenues at it.

The first order of business will be to end the unrest.

And that, given the resentment of the Shia at what they see as the continuing intransigence of the government will be a tall order indeed.