* Document gives first indications of PM’s policies

* New government preparing Islamic finance framework

* Plans changes to welfare, subsidy system

* Revenues have declined with oil-price slide (Adds details throughout)

By Hamid Ould Ahmed

ALGIERS, June 20 (Reuters) - Algeria’s new government is preparing the legal framework for Islamic finance and new Islamic bonds and will make changes to its welfare system, largely unchanged for decades, to offset lower oil prices, according to an official document.

The document gave the first indications of policy for Prime Minister Abdelmadjid Tebboune along with new ministers in the key portfolios of finance, commerce and energy. He was named by President Abdelaziz Bouteflika last month.

The North African OPEC member has seen its energy revenues, which account for 60 percent of the budget, more than halved due to the slide in crude oil prices, forcing the government to cut spending, look for new revenue and announce economic reforms.

Tebboune’s government will “prepare the regulatory and legal framework relating to participatory funding ... and to issue sovereign bonds for participatory funding,” according to its action plan, a copy of which was seen by Reuters.

Tebboune is expected to present his plan to lawmakers in parliament later on Tuesday.

Participatory funding is generally a reference to Islamic financing tools. It was one of the first times the government has so openly discussed such financing options, though authorities have said they plan a local bond that is interest-free, complying with sharia law which forbids interest payments.

Authorities in Algeria are cautious about changes to an economic system still largely state run. Many Algerians are also wary about changes that upset social peace following a 1990s war with Islamist militants that killed more than 200,000 people.

The government has in the past largely failed to diversify the economy away from oil and gas, which make up 94 percent of total exports revenue. But it is under growing pressure to speed up reforms and adapt to the new circumstances.

Tapping into money from the country’s informal, parallel market, estimated by some at around $90 billion, is among the government’s aims in opting for sharia-compliant funding.

“The government plans encouraging and facilitating work in order to integrate activities of the parallel market into the formal sphere,” its action plan said.

WELFARE REFORM

Tebboune’s government also plans to reform the country’s vast subsidy system as part of efforts to cut spending, a change to a system that in the past has helped maintain social peace.

Subsidy accounts for about $30 billion in state spending a year in Algeria, where the government subsidies everything from basic foodstuffs and gasoline to medicine, housing and education.

Algeria will remain committed to social welfare policy, but there are plans to “set up new mechanisms gradually so as to identify categories eligible for state aid in an efficient way,” the government said in its action plan.

It aims for a “gradual adaptation of social transfers policy,” it said.

To achieve that goal, the government, named just weeks ago after last month’s legislative election, will launch consultation with parliament, political parties and civil society to help smooth the changes.

Algeria has increased the prices of subsidised products including electricity, gasoline and diesel for the first time in years, but experts say the price rise is insufficient to cover production costs for those products.

Authorities also started restricting imports, which will decline in 2017 by $15 billion from last year’s $46 billion, according to the government.

Financial pressure has forced Algeria to cut spending for this year by 14 percent after a 9 percent reduction in 2016, with foreign exchange reserves falling to $114 billion at the end of 2016 from $144.1 billion in December 2015 and $178 billion the previous year. (Reporting by Hamid Ould Ahmed; Editing by Patrick Markey and Janet Lawrence)