Well-off Bahrainis soon may feel sting of taxes, subsidy cuts

MANAMA, Bahrain — You could say that Bahrainis have it all — low inflation and unemployment; free housing, health care and college tuition; and discounts on gas, food and utilities. They soon could have one more thing: taxes.

Bahrain’s finance minister says his country might need to introduce taxes — and subsidy cuts — to avoid future shortages. “We have to work the numbers, and we have to work with our people on the numbers,” Sheik Ahmed bin Mohammed Al Khalifa told The Washington Times.

The Sunni-ruled island kingdom’s budget has felt the stress of the global recession and of a largely Shiite uprising that briefly paralyzed the local economy. The government incurred more debt when it raised salaries of public workers and gave money to every family.

Mr. Khalifa said the Gulf Cooperation Council’s (GCC) recent pledge of $10 billion over 10 years will not suffice to meet Bahrain’s needs.

He said he was encouraged by the “many ideas” that emerged from the recent “national dialogue” and cited two: an overhaul of the lavish subsidy system and a corporate tax.

The finance minister said “subsidies go to everyone, and the whole idea is to direct that to the most needy,” and a corporate tax, which would require parliamentary approval, would not cripple the economy.

“Taxation is a well-known system of generating income for governments,” Mr. Khalifa said. “You can have very high taxes, which are completely not helpful to business growth, or you can have lower ones. I think we are at the stage of debating such an issue.”

All three major rating agencies have downgraded Bahrain’s debt status in recent months over fears that a prolonged political crisis would degrade the nation’s growth prospects. “The current strife will likely inflict damage to Bahrain as a tourist destination and, more importantly, as an offshore financial center,” the Standard & Poor’s wrote in March.

But all routes to improving the fiscal picture carry political risks.

Subsidy cuts would be “very unpopular” and a corporate tax would drive foreign investment to Bahrain’s GCC neighbors unless the tax were levied at a “pan-GCC” level, said Jasim Husain, an economist and recently resigned member of parliament from the opposition Wefaq National Islamic Society.

Yet Mr. Husain agreed that Bahrain is on a perilous fiscal course: “It’s not sustainable, what we are doing now,” he said, adding that reliance on the GCC remains Bahrain’s “best option.”

One reason for Bahrain’s budget strain: Its population has grown from the naturalization of thousands of foreign workers from other Arab states and the Asian subcontinent — a process that the opposition says is aimed at diluting the nation’s Shiite majority.

“This is a crime,” said former Wefaq lawmaker Khalil Marzooq, adding that his bloc estimates that Bahrain has naturalized “up to 69,000” people in the past decade, reducing Bahrain’s Shiite majority from 70 percent to 60 percent.

Mr. Khalifa denied any sectarian bias in the naturalizations, saying they had helped Bahrain’s economy. “Many countries around the world have used naturalization to bring in qualified people to make sure that they continue to enhance the competitiveness in sectors where they don’t have these competencies,” he said.