The Kingdom of Bahrain has launched the largest financial and tax reform package in its history, liberalizing fuel prices and linking them to global markets for the first time.
The move aims to address a soaring $50 billion public debt, equivalent to 109% of Bahrain’s GDP.
Announced by the Bahraini government on December 29, 2025, the reform package includes higher electricity and water tariffs, with an exception for citizens’ first homes, which will continue to receive subsidized rates up to a specified limit. It also includes a new 20% wastewater fee, to be implemented in January 2026.
Additionally, the government is working on legislation to impose a 10% tax on local companies with annual net profits exceeding 200,000 Bahraini dinars ($530,000), scheduled to take effect in January 2027.
Natural gas prices for companies and factories will be adjusted to reflect the actual cost of consumption starting in January 2026, then increased annually by $0.50 (about 190 Bahraini fils) per cubic meter for four years.
The package includes 11 initiatives, including a 20% reduction in administrative expenses across all government entities.
The government also decided to impose a monthly fee of 100 fils (about $0.27) per square meter on undeveloped, fully serviced land, effective January 2027. The fee will be collected upon an owner's application for a building permit or upon the sale of the property.
Bahrain will also raise taxes on soft drinks, increase fees for bringing in foreign workers gradually over four years, and raise health insurance fees for foreigners.
Bahrain credit rating drops, debt rises
The kingdom has faced annual credit rating downgrades. Last November, S&P Global Ratings lowered Bahrain’s sovereign credit rating from B+ to B due to rising government debt and increasing pressure from interest payments.
S&P projected a fiscal deficit of 7.6% of GDP in 2025, compared with 7.1% in its previous forecast.
In November 2025, the International Monetary Fund urged the Bahraini government to adopt structural fiscal reforms, including a general corporate income tax and reduced energy subsidies, while redirecting social support toward the most vulnerable families. The Fund said the steps would boost non-oil revenues and strengthen long-term fiscal sustainability, following the conclusion of its 2025 Article IV consultation mission to Bahrain.
The Fund said Bahrain’s government debt has climbed to 133% of GDP, while the budget deficit has widened to 11% of GDP, underscoring the urgency of broad fiscal reforms to support economic stability. It added that Bahrain’s economy showed resilience in 2024, recording 2.6% real GDP growth despite volatile global and regional conditions.
In 2018, Bahrain launched a program to balance government revenues and expenditures. Initially set to run until 2022, it was later extended to 2024 after the COVID-19 pandemic triggered a drop in oil prices. The government provided substantial support to address the pandemic’s economic and health challenges.
Since 2019, Bahrain has levied a 10% value-added tax on goods. Earlier this year, it also introduced a 15% tax on the profits of multinational corporations.
Over the past decade, the Bahraini government has raised electricity and water prices for non-citizens, beginning in 2016. Fuel prices also rose twice over the past 11 years before being liberalized and linked to global prices.
At a press conference announcing the decisions, Sheikh Salman bin Khalifa Al Khalifa, Bahrain’s minister of finance and national economy, said that “the fiscal deficit for 2024 reached approximately 1 billion Bahraini dinars ($2.65 billion), according to the state’s final accounts.”
“All government initiatives include improvements, and the first step is to achieve a primary surplus before moving on to financing plans that contribute to the continuity and sustainability of the financial situation and funding,” he said.
“The aim of the current developments is to reduce the overall deficit and increase the primary surplus and then work on improving the Kingdom of Bahrain’s financing plans,” he added.
Al Khalifa said that “the Kingdom of Bahrain’s economy has witnessed growth over the past two decades, from approximately $9 billion to nearly $50 billion. Current efforts are focused on developing and strengthening the economic base. The economy has grown fivefold over the past 20 years, with even greater growth expected over the next two decades thanks to strong partnerships with the private sector.”
Bahrain, the smallest Gulf state and the one with the fewest natural resources, has the most diversified economy in the Gulf Cooperation Council (GCC), according to official data. The non-oil sector accounts for about 87% of the economy, yet more than 75% of the government budget depends on oil revenues.
The financial sector is Bahrain’s most active, as the Gulf state has positioned itself as a destination for international banks since the 1970s. Foreign investment reached BD17.5 billion (about $46.5 billion) as of October 2025, according to government data, with most of it coming from GCC countries.
Tourism has also grown, attracting about 14 million tourists annually, mostly from GCC countries. The sector contributes 6.7% of GDP.
Even so, the latest reform package is likely to affect Bahrain’s market, which is relatively small compared with neighboring countries. Bahrain has a population of about 1.6 million, including around 780,000 citizens; the remainder are residents, including foreign workers.
Ali Fardan, an economic expert, told The Media Line, “Such decisions will certainly have an impact, but the Bahraini economy is capable of overcoming them more quickly,” adding that the taxes are relatively reasonable and apply to medium and large companies.
“Some small sectors may be affected initially, but they are capable of absorbing these changes in the medium and long term,” he said.
He said competition with other countries in the region for economic growth is fierce. “Despite Bahrain being the smallest Gulf state, it has managed to withstand and grow in the Middle East, which is considered one of the most volatile regions,” he noted.