Bahrain's development as a major financial center has been the most widely heralded aspect of its diversification effort. Bahrain is a regional financial and business center; international financial institutions operate in Bahrain, both offshore and onshore, without impediments, and the financial sector is currently the largest contributor to GDP at 24.2%. More than 100 offshore banking units and representative offices are located in Bahrain, as well as 65 American firms. Bahrain has also made a concerted effort to become the leading Islamic finance center in the world, standardizing regulations of the Islamic banking industry. It currently has 28 Islamic banks--the largest concentration of Islamic financial institutions.

Bahrain is working to develop other service industries such as information technology, healthcare and education. The government has used its oil revenues to build an advanced infrastructure in transportation and telecommunications. The transport and communications sector grew by almost 9% in 2002 and is likely to expand as the government proceeds with liberalization of the state-owned telecommunications industry. The state monopoly--Batelco--was broken in April 2003. Bahrain's international airport is one of the busiest in the Gulf. A modern, busy port offers direct and frequent cargo shipping connections to the U.S., Europe, and the Far East.

The government of Bahrain moved toward privatizing the production of electricity and water by licensing Al Ezzal to construct an independent power plant that will cost $500 million. It is expected to start operating at full capacity in April 2006. In January 2006, the Finance Minister announced that Al Hidd Power Plant will be sold for $738 million to consortium of British, Japanese, and Belgian companies.

Regional tourism is also a significant source of income. The government continues to favor large-scale tourism projects. It opened the only Formula One race track in the Middle East in 2004, and has awarded tenders for several tourist complexes.

Government revenues continue to be largely dependent on the oil industry. Bahrain has received significant budgetary support and project grants from Saudi Arabia, Kuwait, and the United Arab Emirates. The reconstituted parliamentary process has produced spirited debate over government spending, particularly defense spending, but no actual reductions. Ministry of Defense spending will account for 18% of current spending in 2005 and 2006 based on the budget approved by parliament in July 2005. The Ministry of Education and Ministry of the Interior are the second and third largest spenders. The bulk of capital outlays have been allocated to improving housing and infrastructure in line with government efforts to raise the standard of living of the Shiía population and to attract foreign investment.

The government has also started to extend protections to workers. Private sector employees won permission to form unions in late 2002; King Hamad has given his tentative approval for the formation of unions in government departments. As part of the governmentís labor reform program, it presented legislation to parliament to form the Labor Market Regulatory Authority (LMRA) and establish a fund to support the training of Bahraini workers.

Bahrain and the United States signed a free trade agreement in September 2004. The Bahraini parliament ratified it in July 2005, and the U.S. Congress followed in December 2005. President Bush signed the agreement into law in January 2006. Entry-into-force is pending as Bahrain completes implementing legislation.