LONDON: Reverberations of the conflict in the Middle East are being felt across the region both physically and metaphorically. The booms and jolts of missile interceptions over Gulf cities and industrial sites may have halted since President Donald Trump announced a two-week ceasefire on April 8, but the economies are hurting, some sectors more acutely than others.
Gulf central banks have moved quickly to keep money flowing through their economies, no matter how long the conflict lasts. They have pumped extra liquidity into banks, made it easier for banks to access funds, and temporarily relaxed some rules so lending to businesses and households can continue despite the disruption.
The approach is to act early to steady the economy — helping firms stay afloat, protecting jobs, and avoiding a deeper downturn caused by what is seen as a temporary shock.
In Bahrain, the strain is falling disproportionately on small and medium-sized businesses and the workers they employ, even as the Gulf state rolls out policies to cushion the blow for citizens.
Emergency personnel work to extinguish a fire in a building after an Iranian strike in the capital Manama on February 28, 2026. (AFP)
Between Feb. 28, when US and Israeli forces launched a combined military campaign against Iran, and April 9, the Iranian regime retaliated with daily missile and drone strikes on Israel, the Gulf states and Iraq. Bahrain, home to the US Navy’s Fifth Fleet, was drawn directly into the conflict.
In addition to hotels and residential buildings, the Iranian strikes targeted and damaged the kingdom’s energy and industrial facilities. Bahrain’s Defense Force said in mid-April it had intercepted 194 missiles and 523 drones since the war began, but several projectiles still struck their targets.
Aluminium Bahrain, also known as Alba, confirmed on March 29 that its facilities were targeted in an Iranian attack. Alba said two people were mildly injured in the attack, a day after Iran’s Revolutionary Guards said they targeted Alba and Emirates Global Aluminium in the UAE capital, Abu Dhabi.
Just as damaging, however, has been Iran’s blockade of the Strait of Hormuz, which has been countered by the US with its own naval blockade of Iranian ports. Bahrain faces mounting pressure on exports, tourism and public finances at a time when it is already fiscally stretched.
On April 18, Moody’s Investors Service revised Bahrain’s outlook to negative from stable, citing a “persistent deterioration in Bahrain’s underlying credit metrics” and warning that the war could further weaken its credit profile.
Vehicles move on a road in Bahrain's capital Manama on March 11, 2026. Iran's Revolutionary Guards said on March 11 that they had targeted several US bases in Kuwait and Bahrain during the war with the United States and Israel. (AFP)
“The disruption of maritime shipping through the Strait of Hormuz and air travel around the Gulf is affecting Bahrain’s hydrocarbon and aluminium exports because of the inability to reroute trade, as well as the tourism sector,” Moody’s analysts said.
The economic fallout of the conflict and uncertainty has become especially painful for small and medium-sized enterprises.
On March 17, lawmakers advanced an urgent proposal calling on the Labor Fund, known as Tamkeen, to pay the salaries of Bahraini employees at SMEs.
Hassan Bukhammas, and MP and chairman of Parliament’s Foreign Affairs, Defense and National Security Committee, urged the government to launch an emergency support program under what he called the “exceptional circumstances” created by the war.
The government soon moved in that direction. On April 13, Crown Prince and Prime Minister Salman bin Hamad Al-Khalifa ordered the referral of draft legislation to guarantee April salaries for insured Bahraini workers through the Unemployment Insurance Fund.
Bahrain Crown Prince Salman bin Hamad al-Khalifa meeting with Pope Leo XIV din The Vatican on September 29, 2025. (AFP)
This came as part of a broader effort to protect jobs, support the private sector and preserve growth, Khaleej Times reported.
Economists say the move is notable because it uses unemployment insurance not only as a safety net after layoffs, but as a tool to prevent them.
Mehmet Ali Soytas, a Riyadh-based labor economist, said the policy reflects a more mature form of economic resilience by trying to preserve employer-worker ties during a temporary shock instead of waiting for those relationships to collapse.
“Once workers become unemployed, re-employment probabilities often decline with duration,” Soytas told Arab News. “It is usually better to preserve labor-market attachment early than to try to rebuild it later.”
Similarly, Anthony Hobeika, managing partner at MENA Research Partners, said Bahrain’s response shows a “proactive approach.”
As the country tries to diversify its economy, he told Arab News, protecting private-sector job stability is becoming as important as maintaining growth itself.
He said an unemployment insurance fund can be effective as a preventive tool because it allows quick, targeted intervention.
“By temporarily covering wages, it gives companies breathing space during short-term disruptions and reduces the need for immediate layoffs,” Hobeika said. “This helps preserve the employer-employee relationship and avoids longer-term labor market disruptions.”
Still, he cautioned that such measures work only if they remain selective and time bound.
Bahrain entered the crisis with some signs of resilience. Data released on April 14 by the Ministry of Finance showed GDP grew 3.5 percent in 2025, driven by 4.1 percent growth in non-oil sectors even as oil activity edged lower.
Non-oil industries accounted for 85.8 percent of output, with professional services, hospitality and financial services among the fastest-growing areas.
Even so, the war has prompted a much broader policy response. On April 14, the Central Bank of Bahrain said retail banks and finance companies would allow individuals and businesses to defer loan instalments and credit card payments for three months, covering both principal and interest.
Head office of the Central Bank of Bahrain in Manama. (WIkimedia Commons)
Banks were also given more flexibility in classifying affected loans, easing pressure on balance sheets as uncertainty rises.
Backing the measures is about $18.6 billion in liquidity support, with the central bank making unlimited dinar funding available to retail banks against eligible collateral for six months.
Bahrain’s wage-support plan is not without precedent. According to Justin Alexander, director of Khalij Economics and a nonresident fellow at the Arab Gulf States Institute, the proposal mirrors steps taken by several Gulf states during the COVID-19 pandemic and could be replicated again if the conflict drags on.
Indeed, Bahrain itself used the Unemployment Insurance Fund in 2020 to pay private-sector Bahraini salaries for April, May and June as businesses struggled through the pandemic. Saudi Arabia adopted a similar approach that year, covering 60 percent of private-sector salaries for three months.
Soytas, the Riyadh-based labor economist, says regional precedents matter because they show how Gulf labor policy is evolving.
“Saudi Arabia, for example, used the SANED unemployment insurance system during COVID-19 to support private-sector Saudi wages on an exceptional basis, while Oman and the UAE have also expanded unemployment-protection arrangements in recent years,” he said.
Similarly, according to MENA Research Partners’ Hobeika, Bahrain’s latest move could offer a useful model for other Gulf states, particularly those trying to increase national participation in the private sector.
What stands out, he said, is “the use of the fund before layoffs occur, which shifts the focus from compensation to job preservation.”
But both economists stress that the policy works only if it remains temporary, targeted and tied to preserving productive jobs rather than subsidizing inactivity.
Over time, Soytas said, Gulf governments will have to balance short-term job protection with incentives for job search, efficient reallocation and productivity growth.
“The broader lesson is that labor market policy in the Gulf is gradually moving beyond a focus on compensating job loss toward a more proactive approach centered on labor market stabilization and transition management, commonly referred to as Active Labor Market Policies (ALMPs),” he added.
Saudi-based labor economist Mehmet Ali Soytas. (Supplied)
“The key challenge for policymakers is to design these interventions in a way that protects employment in the short term while preserving incentives for job search, efficient reallocation, and productivity growth over the medium term.”
For now, the ceasefire has offered Bahrain some relief and helped calm markets. Bloomberg Intelligence strategist Basel Al-Waqayan saying Bahraini bonds, especially medium- and long-dated debt, have rallied, with spreads in that segment tightening beyond prewar levels, Investing.com reported on April 16.
The outlook, however, is likely to remain unsettled until the US and the Iranian leadership reach a sustainable peace deal.
As the region waits for a second round of talks between the two sides, Bahrain is left navigating tentative market relief, active government intervention and a crisis whose economic aftershocks may outlast the fighting itself.
Alexander, of Khalij Economics, cautions that while using public money to preserve jobs and businesses through a short-term crisis is “much more sensible” than, for example, energy subsidies, deeper vulnerabilities remain.
“For Bahrain the challenge is always limited fiscal space,” Alexander told Arab News.
“I’m coming to the end of a week of meetings with investors, officials and academics in Washington, and was feeling reasonably optimistic about the prospects for a robust peace deal even before the latest announcements,” he said.
But even if that holds, he said, “Bahrain had deep challenges excluding the physical and economic damage from the war, including oil production in January falling to just 62,000 barrels per day, barely a third of the 2025 average.”
A photograph shows the damage in the aftermath of a drone strike in the Seef district of Manama on March 10, 2026. (AFP)
Bloomberg has reported that Bahrain is the Gulf’s most indebted country, carrying debt equal to about 140 percent of GDP before the conflict, with limited reserves to fall back on.
If history is any guide, other members of the Gulf Cooperation Council will stand by Bahrain in this hour of crisis. On April 13, UAE President Sheikh Mohammed bin Zayed Al-Nahyan led a high-level delegation to Bahrain where he met with Bahrain’s King Hamad bin Isa Al-Khalifa.
Earlier this month, the UAE and Bahrain signed a five-year currency swap agreement worth about AED20 billion ($5.45 billion) to strengthen financial ties and support local currency liquidity, according to the Emirates News Agency, WAM.
The agreement between the two countries’ central banks allows for the exchange of UAE dirhams and Bahraini dinars to facilitate cross-border transactions and enhance monetary cooperation.
