Sunday, Sep 25, 2011

(This story was originally published Saturday.)

By Anjali Cordeiro and Sudeep Reddy

WASHINGTON--Bahrain's economy, hit by political unrest earlier this year, has returned to growth but faces new headwinds from Europe's crisis and turmoil in global markets, the head of its central bank said Saturday.

"The global picture is not very conducive to growth," Rasheed Al Maraj, governor of the Central Bank of Bahrain, said Saturday in an interview with The Wall Street Journal and Dow Jones Newswires on the sidelines of the International Monetary Fund's annual meeting in Washington.

The central bank would be "happy to see" growth of 3%, he said. Over the last few years, the economy has been growing at 3% to 5%. It contracted in the first quarter as protests and upheaval across the region spread to the tiny kingdom of 1.2 million people, leading to days of sometimes bloody political demonstrations.

Oil and financial services, which each account for a quarter of the kingdom's economic activity, have both come under pressure. "As an open economy, we will always feel this turbulence from the global economy," al Maraj said.

Al Maraj said Bahrain's banks haven't been hit too hard by the global rush to safety. As European banks face higher costs to raise dollars, Al Maraj said dollar funding costs have gone up globally, but added that his banking system hasn't felt much of an effect because they have little urgent need for dollar-denominated funding.

Banks are generally well capitalized and have been through stress tests, he said, but local bank-lending activity has fallen, he said.

Bahrain is maintaining its currency's peg to the U.S. dollar because a large part of the country's export transactions take place in dollars. The dinar is currently pegged at BHD0.377 per dollar. "The relationship with the dollar has built our economy, given us a lot of resilience," he said.

The euro-zone turmoil dominated discussions at the IMF's meetings, where most of the 187 members faced some effect from the currency bloc's upheaval. Al Maraj said it is difficult for the global body to draw up new solutions for what are essentially local political problems.

"Every time you have a crisis, everybody focuses on it," he said. "We have to be realistic and practical. I think the Europeans know what is required. There will be no magic solution."

(END) Dow Jones Newswires

25-09-11 0358GMT