DUBAI (Reuters) – Saudi Arabia, Kuwait and the United Arab Emirates have agreed to give Bahrain $10 billion to support the country’s funding requirements as it embarks on a fiscal program aimed at eliminating its budget deficit by 2022.
Bahrain’s finances have been hit hard by a slump in oil prices in 2014 and the help from its neighbors is needed to prevent Bahrain’s rising public debt from triggering a financial crisis.
It also makes sense economically and politically for the three wealthy Gulf states, which are diplomatic allies of Bahrain. Any collapse of Bahrain’s currency or a potential credit crunch could undermine confidence throughout the region.
A package of reforms announced by the Bahrain government on Thursday are aimed at delivering 800 million Bahraini dinars ($2.12 billion) in annual savings and eliminate its budget deficit by 2022. Manama had projected a $3.5 billion budget deficit in 2018.
The fiscal balance program combined with the financial support agreement from Saudi Arabia, the UAE and Kuwait allows for a “swift and achievable” progress to continued economic growth and prosperity, Shaikh Khaled bin Abdulla Al Khalifa, Chairman of the Ministerial Committee for Financial Affairs, said in a statement.
The program includes reforms aimed at reducing public expenditure and inefficient spending while also simplifying government processes and increasing non-oil revenue.
The $10 billion financial support from Bahrain’s neighbors will be delivered through a long-term, interest-free loan, a source familiar with the agreement said. The financing will be provided gradually and according to an agreed schedule, the source added.
Saudi Arabia, connected to Bahrain on its eastern coast by a causeway, has for years provided political and economic support to its Sunni-ruled neighbor. Sunni Muslim Saudi Arabia and the UAE sent security forces to protect the government in Manama from a Shi’ite-led uprising in 2011.
Bahrain’s fiscal program also comes ahead of a November election, the second since 2011, when protesters took to the streets demanding more democracy.
The country has increasingly relied on international debt issues over the past few years but had to cancel a conventional bond sale in March as investors demanded higher returns, raising doubts over Bahrain’s ability to continue to access the international markets.
The $10 billion loan will not be sufficient to cover Bahrain’s funding needs until it balances its budget, but it will help the country to continue to raise external financing, said the source familiar with the agreement.
The Bahraini dinar touched 17-year lows this year and the cost of insuring Bahrain’s sovereign debt against default hit record highs in June before the country’s three rich Gulf neighbors reassured financial markets by announcing they were in talks about a major aid package that would be linked to the kingdom’s progress in reforming its finances.
Bankers and officials in the Gulf previously told Reuters that Bahrain has been discussing for more than a year the possibility of obtaining such aid from Saudi Arabia and other Gulf Cooperation Council countries.
The small size of the Bahraini economy makes it relatively easy for its wealthier neighbors to bail it out, protecting their own economies from the risk of contagion.
On Thursday Saudi Arabia, Kuwait and the United Arab Emirates also provided a $2.5 billion aid package to Jordan to help it to implement austerity measures that had sparked massive protests in June.
The help was pledged at the time of the protests because conservative Gulf states feared that instability in U.S. ally Jordan, which has long backed their foreign policy positions, could have repercussions for their own security.
Editing by David Goodman