Barriers and Opportunities for Enhancing Capital Flows
In the COMCEC Member Countries
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the development of its economy. As a result, it has served as a regional financial services centre
since the 1970s (when it displaced Lebanon) and has a long history of acting as a non-
hydrocarbons industry hub.
In the IMF’s 2012 Annual Report on Exchange Arrangements and Exchange Restrictions
(AREAER), Bahrain displays five restrictions on the movement of capital: bilateral payment
arrangements, controls on capital market securities, direct investment, real estate transactions
and specific provisions on commercial banks. Among its peers in the high-income country
group, Bahrain, the UAE, and Oman have the fewest capital account restrictions; the
restrictions that foreign firms face when operating in or trading across Bahrain’s borders are
relatively low and are unlikely to act as a significant deterrent to capital flows.
Furthermore, Bahrain displays strong adherence to the OECD’s Code of Liberalisation of Capital
Movements . In particular, the kingdom appears highly compliant with several of the Code’s
general undertakings; it allows the liquidation of non-resident owned assets without
restriction and seems unlikely to introduce any restrictions on the movement of capital. Still,
Bahrain is not fully compliant with the OECD Code’s assessment of operations in real estate or
capital market transactions given the country’s restrictions on non-Bahraini ownership of
property, or limitations on foreign ownership of equities on the local capital market.
Because of Bahrain’s high reliance on foreign capital flows for economic growth and a policy
commitment to continually improve regulations, the country appears unlikely to depart
significantly from its adherence to either the IMF’s or the OECD’s international standards and
guidelines for capital account liberalisation.
UAE
Free trade zones in the UAE, such as the Dubai International Financial Centre (DIFC), adhere to
many of the principles of the OECD Code of Liberalisation of Capital Movements, such as
unrestricted foreign ownership and foreign establishment of a business. Outside of these
designated areas, however, foreign ownership of UAE-registered companies is limited to 49%,
and in order to establish a business, foreign investors must find a local partner to hold a
majority share.
In some cases, limits on foreign ownership of certain companies may be below 49%; in the
case of a Dubai-based developer Union Properties, for example, the limit is 15%. Furthermore,
insurance companies must be 75% owned by a UAE national or 100% owned by a UAE
corporation, and a UAE national services agent or sponsor is required for branch offices and
representative offices of foreign companies.
A draft version of the new Companies Law had contained a clause relaxing foreign business
ownership limits, but this was removed by the Federal National Council in February 2013. The
final version of the legislation, approved in May 2013, places greater focus on legal
requirements for local businesses. A new investment law planned for debate in late 2013 is
expected to focus on foreign investment, and may address foreign ownership.