Question

Imagine that you are asked to advise the government on ways of increasing investment in the economy during this time of pandemic. What advice would you give and why? What measures might Bahrain adopt to improve its attractiveness to foreign investors? (Answer in depth) *600 words

Answer 1

I would advice the government to invest in local infrastructure and services so that money gets circulated within the population force and the economy gets to reap the benefits of additional investments locally. By increasing investments in labor incentive sectors so that the money is circulated among the lowest earners and this is able to drive the level of aggregate demand in the economy in the long run as the lowest earners constitute the majority of the workforce in an economy. Thus increasing the level of capital expenditure by investing in local industries and workforce so that money is spent on building future capacities and there is a multiplier effect in the economy.

The government could also increase the flow of funds by releasing their liabilities to businesses so that state governments and firms are able to reap the benefits from governments repaying on time and increasing their working capital capacity to drive output in the economy. It could borrow extensively from the household and investor community in order to drive output and enhance access to capital. It could tell the central bank to lower the interest rates so that the economy borrows more and invests in the economy, this will ultimately drive output and employment.

It could lower the tax rates so that households and firms have more net income and thus enhance their marginal propensity to consume in the sector. Thus opting for expansionary fiscal policy and monetary policy in order to propel growth and increase liquidity in the economy. This will ultimately increase the aggregate demand in the economy and help the local economy grow on its own. It could increase the borrowing limits especially in times of such crisis as money is necessary during such times of distress. Access to working capital has to be high and thus advising the banks to increase the working capital limits and providing moratoriums to businesses who are not able to function due to the pandemic so that their costs of capital do not increase leading to less distress.

Bahrain could adopt tax credit measures and initiate free flow of investments so that investors find it lucrative to invest in the local economy. It could increase trading activities and reduce the reliance on oil and gas revenues by creating a sovereign fund so that the money is invested in building the local economy and other activities where returns are higher. It could make the economy more stable and propound economic freedom so that the investment climate is safe and healthy for future investments.

It will have to maintain sustainable budget deficits and maintain fiscal prudence in order to make the macro environment stable and build on existing infrastructure to drive growth. By increasing the relevance of it being the banking and financial services hub so that multinational firms continue to invest. It should also ensure stable regulatory and law environment so that investors are assured that their investments are safe and have a greater chance of growth.

The government should reduce the level of public debt and decrease the reliance of economic growth being by driven majorly by government expenditure. Personal consumption should increase for goods and services as foreign investors would find it lucrative to invest in local industries and services in light of increasing consumer demand and low concentration of government sponsored growth. All these measures could make the country lucrative for foreign investors by ensuring a stable regulatory environment, financial conditions and making the returns lucrative to drive future economic growth in the long run so that investors continue to invest and help propel the domestic economy.