BAGHDAD, March 3 ( Reuters ) - Iraq is discussing a possible bond issue worth nearly $6 billion with Deutsche Bank and Citibank as part of its efforts to cover a huge projected budget deficit this year, Finance Minister Hoshiyar Zebari said. State revenues have tumbled along with falling oil prices just as Iraq faces a costly military campaign against Islamic State militants in its northern and western provinces, leaving a likely 25 trillion Iraqi dinar ($21.4 billion) shortfall To fund the deficit, Zebari said the finance ministry was looking at measures including the bond issue, borrowing from state banks, and converting some Iraqi bank assets held with the central bank into bonds. It might also consider raising money through forward sales of oil if the cabinet rejects plans for the 10-year bond issue. Officials say Prime Minister Haider al-Abadi's cabinet sees the proposed 9 percent interest rate as prohibitively high.
The sharp fall in oil prices forced Zebari into several revisions of the 2015 budget, each time trimming projected revenue from crude exports. The final version was based on a $56 price per barrel and exports of 3.3 million barrels per day. Oil exports so far this year have been below 2.6 million bpd, due partly to bad weather at the main southern export terminal and disappointing shipments from the north through a Kurdish-run pipeline. But Zebari said volumes were rising. "I think people are now realising that this is a realistic budget," he told Reuters in his Baghdad ministry office. He said a proposal to convert 50 percent of assets held by state banks in the central bank into bonds will raise around $5 billion, and Iraq will also use its Special Drawing Rights to raise $1.8 billion through the International Monetary Fund. The government is also introducing taxes on imported cars, SIM cards and the Internet. It hopes to borrow $6 billion from state banks and save $2 billion by trimming allowances to better-paid state employees. "All in all, we've tried through our own means to cover the projected deficit," he said. Zebari, a Kurd serving in the Baghdad federal government, said authorities in the capital and in the semi-autonomous Kurdish Regional Government remained committed to an oil export deal despite disputes over volumes shipped and payments.
Kurds have complained that Baghdad has not honoured its commitments to pay them a portion of government expenditure, while Baghdad says only a fraction of the expected oil from its northern fields has been transported for export via Turkey.
"We are dealing with different expectations and mistrust. But the deal is holding. The talks are continuing," he said.
Zebari said the government had transferred 250 trillion Iraqi dinars to the Kurds so far this year, a fraction of the amount originally envisaged. He hoped another payment would be made soon and that another round of talks would take place.
"It should be as soon as possible if both sides want to salvage this deal. It has not collapsed, but because of the two factors -- the expectations and mistrust -- it is difficult." (Editing by Catherine Evans)
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