Bahrain tackles war fallout with $19bn economic support

• Banks get $18.6bn liquidity help
• Lenders to allow loan deferrals
• Steps ease balance-sheet pressure

Bahrain has moved to shield its economy from the fallout of the US-Israeli war with Iran, with a sweeping package of loan deferrals and liquidity support for the financial sector.

The Central Bank of Bahrain said retail lenders and financing companies will allow both individuals and corporates to defer loan installments and credit card payments for three months, covering both principal and interest. 

Banks will be given flexibility on how they classify affected loans, easing pressure on balance sheets at a time of rising uncertainty.

The measures are backed by BHD7 billion ($18.6 billion) in liquidity support, with the central bank offering unlimited dinar funding to retail banks against eligible collateral for six months.

It has also extended its repo facility to three months and cut reserve requirements from 5 percent to 3.5 percent, freeing up additional capital to support lending.

Liquidity ratios have also been relaxed. The minimum liquidity coverage ratio and net stable funding ratio have both been reduced from 100 percent to 80 percent, a move aimed at injecting more cash into the banking system and supporting economic activity.

The intervention follows directives from Bahrain’s Crown Prince and Prime Minister Prince Salman bin Hamad Al Khalifa, as authorities step up efforts to cushion businesses and households from the economic shock of the regional conflict.

Bahrain’s economy had shown resilience heading into the crisis. Official data released on Tuesday by the Ministry of Finance and National Economy shows GDP grew 3.5 percent in 2025 in real terms, driven by a 4.1 percent expansion in non-oil sectors, even as oil activity edged lower.

Non-oil industries accounted for more than 85 percent of output, with professional services, hospitality and financial services among the fastest-growing segments.

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Even so, the smallest economy in the Gulf Cooperation Council entered the conflict with limited fiscal buffers and a challenging balance sheet. 

The International Monetary Fund warned in January that Bahrain’s fiscal position had “continued to deteriorate”. Its deficit reached 11 percent of GDP in 2024 and public debt climbed to 134 percent, above pandemic-era peaks.

Debt has risen further since the start of hostilities, while foreign exchange reserves, at $4.7 billion, remains under three-months import cover, according to Justin Alexander, director of US-based consultancy Khalij Economics.

Even before February, Bahrain was expected to run a double-digit deficit, largely because oil prices remained well below its fiscal break-even level – around $125 per barrel, the highest in the region. Servicing that gap is increasingly costly, with roughly a third of government revenue already absorbed by interest payments.

“Bahrain definitely stands out as the GCC country with the most challenging balance sheet,” Rachel Ziemba, founder of geoeconomics advisory firm Ziemba Insights, previously told AGBI.