Bahrain government seeks deal with parliament on new subsidy system

DUBAI, May 24 (Reuters) - Bahrain’s cash-strapped government is in talks with parliament on a new subsidy system that would redirect some of the financial aid the government provides to its citizens, officials said.

It is not yet clear whether the new system would reduce the state’s overall subsidy burden, they said.

Bahrain, much poorer than most of its Gulf neighbours, runs a big state budget deficit which the International Monetary Fund estimates at 11.6 percent of gross domestic product this year, and is rated “junk” by major credit rating agencies.

The IMF has warned it to take urgent action to cut the deficit, but opposition to austerity is strong. In January, officials said they would not impose fresh austerity steps until parliament agreed on a new system to compensate citizens for a higher cost of living.

Under the proposal being discussed, the government would include meat subsidies and a cost of living allowance in a single package and increase the size of that package for both working and retired Bahrainis.

The system would provide 150 dinars ($398) for Bahrainis earning less than 400 dinars a month, 100 dinars for those earning up to 750, and 75 dinars for those earning up to 1,000, the officials said.

Officials said the new system would be simpler than the old, by consolidating multiple payments, and direct a bigger proportion of subsidies to the poorest citizens.

Some lawmakers are pushing for an additional allowance of 50 dinars for citizens earning between 1,001 and 1,500 dinars.

The officials declined to be named because they were not authorised to speak to media. A government spokeswoman did not respond to a request for comment.

Jamal Fakhro, head of the technical commission in the Shura Council, parliament’s upper house, declined to comment on the new system and said talks were still under way. “We think we will have an agreement in two weeks or so,” he said.

An agreement between the government and parliament could clear the way for fiscal reforms, including further cuts to gasoline subsidies and the introduction of a 5 percent value-added tax.

Bahrain originally planned to impose VAT at the start of 2018 under an agreement with neighbouring countries, but it did not go ahead with the plan. The finance minister said in February that authorities aimed to complete preparations for the tax by the end of this year.

According to the original state budget plan, general subsidies will total 644 million dinars this year, plus 25 million dinars of energy subsidies. The government expects to run a deficit of 1.32 billion dinars, equivalent to over a third of state spending.

Most of the Shi’ite opposition groups which have led unrest in Bahrain in recent years are not represented in parliament as they boycotted 2014 elections in protest against what they call an unfair electoral system.

Earlier this month, parliament approved a bill barring members of that opposition from running in elections, the latest step in a crackdown against dissent ahead of parliamentary polls this year. (Editing by Andrew Torchia and Andrew Roche)