* Cash-strapped Bahrain relies on debt
* Gulf states approved $10 bln aid package
* Legislators to approve more austerity measures
* Opposition barred from parliamentary vote
By Aziz El Yaakoubi and Nafisa Eltahir
DUBAI, Nov 28 (Reuters) - Bahrain’s new parliament is expected to swiftly pass sensitive austerity measures needed to secure a Gulf aid package, but the U.S.-allied government may implement the belt-tightening in stages to avoid provoking public anger.
The Sunni-led authorities have kept a lid on dissent since a Shi’ite uprising in the island kingdom in 2011 was quelled with the help of neighbouring Saudi Arabia, which fears instability in Bahrain will encourage unrest among its own Shi’ite minority.
But Bahrain, a cornerstone of U.S. military power in the region, could face a fresh test of its ability to curb opposition unrest as it implements reforms to subsidies and pensions required by Gulf Arab donors to avert a debt crisis.
Authorities are expected to phase in the changes, hoping to soften the impact, to prevent protests by opposition forces who see the assembly as illegitimate after they were barred from contesting last week’s elections, analysts said.
Bahrain, which lacks the vast oil wealth of other Gulf states, needs to slash state spending because its finances have been hit by an oil price slump since 2014. Bahrain has struggled to curb outlays while avoiding public anger over fiscal reforms.
“The economy will be the biggest issue for the new House of Representatives,” said Jamal Fakhro, deputy president of Bahrain’s upper house. “The new parliament has to be aware that there are some issues that can’t be delayed, because any delay won’t be in Bahrain’s interest.”
Saudi Arabia, Bahrain’s main backer, along with the United Arab Emirates and Kuwait, offered Manama a $10 billion aid package over five years to 2022 to bail out the government if it pushes through fiscal reforms to achieve budget balance.
The austerity measures are likely to face resistance from Shi’ite Bahrainis who say they are already deprived of jobs and government services and treated as second class citizens in the country of 1.5 million, home to the U.S. Fifth Fleet.
The authorities deny discrimination and accuse Iran of fomenting unrest that has seen protesters clash with security forces, who have been targeted by bomb attacks. Tehran denies the charges.
Activists have described the elections as a “farce” after the government dissolved the main opposition groups and barred their members from running.
The opposition may use austerity measures to challenge the legitimacy of the new parliament.
“We are studying calling for protests and moving the street against austerity and new taxes,” said Ali Al Asawad, a leader of closed opposition group al-Wefaq, who lives in self-imposed exile in London and has been sentenced in absentia to life in prison on espionage charges, which he denies.
Al-Wefaq, Bahrain’s biggest opposition group, once controlled almost half of Bahrain’s lower house with 18 seats in 2010. Opposition groups boycotted the 2014 elections.
While Bahrain may see rallies against rising costs, anti-austerity protests are unlikely to be widespread, said Glen Ransom, a senior analyst at Control Risks Middle East, noting that previous subsidy cuts, the introduction of excise tax and approval of value-added tax did not cause significant unrest.
“The government will attempt to reduce any public backlash by easing the impact on Bahraini nationals, which may include targeted subsidies and a phased approach to austerity measures.”
Most candidates running in last week’s elections defended the economic reforms as necessary to maintain stability.
“The VAT has to do with the political will and is part of the obedience to our guardians... and in everybody’s interest,” Jamal Daoud, a lawmaker and candidate said on social media.
Bahrain released a 33-page fiscal plan last month after signing the Gulf aid agreement to fix its finances and abolish its budget deficit by 2022. Manama had projected a $3.5 billion budget deficit in 2018.
Bahrain is due to receive up to $2 billion by the end of the year as a first aid package installment after legislators approved introducing value-added tax (VAT) in 2019.
Bahrain’s parliament has limited power but the two houses approve the state budget and economic policy.
“The new parliament will be involved in every step of the government’s Fiscal Balance Program,” a government spokeswoman told Reuters.
Ali Al Aradi, deputy president of the outgoing House of Representatives, said the government plan would be approved in January, and the state budget for 2019 and 2020, which are expected to see more cuts, by next April.
Other wealthier Gulf states have passed similar subsidies and tax reforms after oil prices plunged in 2014.
Bahrainis are being asked to accommodate austerity measures at a time when their incomes and opportunities are stagnant, said Elizabeth Dickinson, Senior Analyst for the Arabian Peninsula at the International Crisis Group.
“These trends align with growing sentiment among many Bahrainis, particularly the communities that backed the government in the 2011 uprising and its aftermath, that the pace of economic change and the improvement of social services is just too slow.” (Reporting By Aziz El Yaakoubi and Nafisa Eltahir, editing by Ghaida Ghantous, William Maclean)