* Parliament, government debated plan for months
* Plan aimed to reform allowances paid to Bahrainis
* Bahrain has promised Gulf donors to balance finances
* Saudi, UAE and Kuwait pledged $10 bln bailout last year
By Aziz El Yaakoubi
DUBAI, May 7 (Reuters) - Bahrain has scrapped a plan to reform its cumbersome subsidy system, officials said on Tuesday, as authorities worry it could trigger more unrest in the Gulf island and complicate government efforts to repair public finances.
The plan, which has been under discussion between the government and parliament since last year, aimed to overhaul allowances paid to Bahrainis squeezed by years of austerity and rising prices.
Bahrain, which does not possess the bountiful oil reserves of other wealthy Gulf neighbours, has had to introduce austerity measures in recent years such as a value-added tax and higher prices for water and power consumption.
But the Sunni Muslim rulers are wary that austerity moves could bolster the majority Shi’ite-led opposition - whose main parties are not represented in parliament - and stir more of the unrest that has rattled the kingdom since Arab Spring uprisings of 2011.
“That reform is not the priority of both the government and parliament anymore,” said a Bahraini lawmaker who declined to be named. Another Bahraini official told Reuters that the plan had been “set aside”.
Bahrain’s king ordered his cabinet last year to forge a consensus with parliament on the new subsidy system, which would include bundling meat subsidies and a cost of living allowance into a single package.
Officials had said the new system would be simpler than the current one, by consolidating several payments, and direct a bigger proportion of subsidies to the poorest citizens.
But the government rejected the lawmakers’ proposals in August.
Saudi Arabia, along with Kuwait and the United Arab Emirates, came to the rescue of Bahrain’s cash-strapped government last year when a prolonged period of lower oil prices inflated its public debt to nearly 93 percent of annual economic output.
As part of the $10 billion bailout deal, Bahrain agreed to introduce a 5 percent value-added tax (VAT), as well as further subsidy cuts and a voluntary retirement plan for state workers.
A government spokesperson did not confirm the subsidy reform plan has been scrapped but said Bahrain was committed to achieving fiscal balance as promised to its Gulf allies.
“The fiscal balance program introduced in 2018 aims to balance Bahrain’s budget by 2022 without diminishing basic services offered to citizens,” the spokesperson said in a statement.
The government is fast-tracking substantial infrastructure investment projects worth over $32 billion, the statement added, including $7.5 billion from Gulf allies, $10 billion from government holding companies and $15 billion from private investors.
The fiscal programme has so far cut the budget deficit by 35 percent according to preliminary estimates for 2018, it added.
Bahrain’s budget deficit fell to 11.7 percent of GDP last year from 14.2 percent in 2017, partly because of higher oil prices, cuts in utility subsidies and new excise taxes, the IMF has estimated.
Western-allied Bahrain has seen political unrest for years, before and after the Arab Spring.
Home to the U.S. Navy’s Fifth Fleet, the small Gulf kingdom has prosecuted and removed the citizenship of hundreds of protesters in mass trials and banned the main opposition groups. Most of the leading Shi’ite opposition figures and human rights activists are imprisoned or have fled abroad.
In the meantime, Bahrain has been trying to market itself as a financial technology hub for the Middle East and North Africa.
The price of Bahrain’s 2028 dollar bonds have risen since the Gulf bailout from a record low last June when the country looked in danger of default. But that upward trajectory could go into reverse if Manama does not tackle its spending overruns. (Reporting by Aziz El Yaakoubi Editing by Mark Heinrich)