January 23, 2018 / 12:56 PM / 10 months ago

Bahrain puts fresh austerity on hold as it mulls subsidy system

* King ordered talks with parliament

* Joint committee to decide on new subsidy system

* Introduction of value-added tax may be delayed

* Bahrain is financially one of weakest states in Gulf

* But other countries face similar political pressures

By Aziz El Yaakoubi

DUBAI, Jan 23 (Reuters) - The government of Bahrain will not go ahead with fresh austerity measures to cut its budget deficit until parliament agrees on a new system to compensate citizens for a higher cost of living, officials said on Tuesday.

The decision illustrates the political difficulties faced by many Gulf governments as they try to shrink budget deficits caused by low oil prices. Like the other states, Bahrain subsidises goods and services such as fuel, electricity and water, keeping prices low to ensure social peace.

After oil prices fell in 2014, pressuring state finances, Bahrain began to cut the subsidies and raise taxes and fees to control its deficit. But the austerity has angered some Bahrainis and prompted a backlash in parliament.

Any delay to the austerity drive could worry credit rating agencies, which already assess Bahrain’s sovereign debt as junk. However, the rebound of oil prices to about $70 a barrel in recent weeks has been positive for Bahrain’s finances, so financial markets may remain calm.

Future austerity steps, such as additional subsidy cuts and the introduction of a five percent value-added tax, will be suspended until a joint committee involving the cabinet and parliament agrees on a new structure to distribute aid to lower-income Bahrainis, the sources said.

“Any project related to new government fees and taxes will not be implemented until the joint committee finishes its work and agrees on how to restructure the subsidies so that aid reaches the ones really needing it,” a government official said.

“It is about the whole policy - it is not related to a specific tax,” said the official, who declined to be named because of the sensitivity of the issue.

King Hamad bin Isa al-Khalifa ordered the prime minister to suspend austerity plans in a meeting on Sunday, in order to keep open a dialogue between the cabinet and parliament, the officials told Reuters.

“It was our demand and we are very happy His Majesty ordered the cabinet to do so,” Ali al-Aradi, a lawmaker and head of the joint legislative committee that will discuss subsidies with the cabinet, said by telephone.

“We have formed smaller technical committees and we are waiting to receive the data from the government to proceed,” Aradi said, adding that he was confident the dialogue would not take long. He did not give details of the new system to compensate citizens.

Bahraini officials had previously indicated VAT was likely to be introduced around the middle of 2018.

Bahrain raised gasoline prices closer to global levels this month to save the government money, and in December it imposed a tax on sugary drinks and tobacco. But the International Monetary Fund has projected the government will run a huge deficit of 11.9 percent of gross domestic product this year. (Editing by Andrew Torchia, William Maclean)

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