DUBAI (Reuters) - Bahrain will receive up to $2 billion from its Gulf neighbors before the end of the year as the first installment of an aid package, and some funds have already arrived in state coffers, officials said on Thursday.

FILE PHOTO: Bahrain Financial Harbour (L) and Bahrain World Trade Center are are seen in diplomatic area in Manama, Bahrain, February 28, 2018. REUTERS/Hamad I Mohammed/File Photo

Last week, Saudi Arabia, the United Arab Emirates and Kuwait offered a $10 billion aid package over five years (2018-2022) to avoid the risk of a debt crisis in the island kingdom, in a deal tied to fiscal reforms.

Bahrain’s finances have been hit hard by a slump in oil prices in 2014 and the small country has been struggling to cut government spending while avoiding public anger over austerity measures.

Two officials, who declined to be named, said $2 billion would arrive before the end of the year and would figure in the 2019 budget. Another $2 billion, due by the end of 2019, may also be reflected in the budget, one official added.

The funds will help the kingdom, which is holding parliamentary elections in November, as it implements new fiscal reforms, the officials said.

It also makes sense economically and politically for the three wealthy Gulf states, which are diplomatic allies of Bahrain. Any collapse of Bahrain’s currency or a credit crunch could undermine confidence throughout the region.

Bahrain released a 33-page fiscal plan last week after signing the agreement with its Gulf neighbors to fix its debt-burdened finances and abolish its budget deficit by 2022. Manama had projected a $3.5 billion budget deficit in 2018.

ELECTIONS

The plan, which promises further cuts in public spending, comes at a sensitive time as Bahrain prepares for elections, the second ballot since 2011 when protesters took to the streets demanding democratic change.

A government spokesperson confirmed that Bahrain has received some funds as part of the aid package, but declined to give details.

The spokesperson said the approval of a value-added tax law and the establishment of a national taxation body (among other measures) demonstrated the government’s commitment to “delivering swift, comprehensive reform”.

The support from other Gulf powers came after investors started doubting Manama’s ability to pay back its debt and asked for higher returns, which prompted the government to cancel a bond sale in March.

Bahrain does not plan to issue new U.S. dollar-denominated bonds this year, a central bank official told investors on Tuesday, one source told Reuters.

The yield on Bahrain’s dollar bond due 2023 edged down 6 basis points to a seven-month low of 5.64 percent on Friday after the Gulf state announced the aid package from its neighbors.