BAGHDAD, Sept 29 (Reuters) - Iraq is likely to delay the planned sale of $2 billion in bonds on international markets until at least early 2017, a government adviser said on Thursday, hoping that rising oil revenues and victory over Islamic State will improve public finances.
Baghdad had said it would issue the bonds, with half the value guaranteed by the U.S. government, in the last quarter of 2016. But those plans appear uncertain after Finance Minister Hoshiyar Zebari was sacked last week on corruption charges, which he denies.
“I think we are going to push it back,” Mudher Salih, an adviser on financial policy to Prime Minister Haider al-Abadi, told Reuters in an interview. “We have to see the situation of the oil market - if it’s enhanced we could leave it a little, if the oil market deteriorates more, we will have to borrow.”
Oil prices rose nearly 2 percent on Thursday, with Brent crude futures at $49.49 a barrel, on optimism over OPEC’s first output cut plan in eight years in order to support prices.
Iraq has seen spectacular gains in output in recent years and is asking oil majors to expand production further to above 5 million barrels per day from the current 4.7 million.
The government, which relies almost exclusively on oil income, has struggled to pay its bills since global crude prices dropped in 2014, the same year Islamic State militants seized a third of the country’s territory.
Iraqi forces, backed by a U.S.-led military coalition, have retaken around half that land and are gearing up now for a push on Mosul, the largest city under the jihadists’ control.
Abadi has pledged to regain Mosul, Iraq’s second-largest city, by the end of the year and said doing so would effectively end Islamic State’s presence in the country.
Salih said he expected the major OPEC producer’s economic situation to improve after the operation, so that military spending could be cut or diverted to rebuilding areas devastated by a war that has displaced more than 3.3 million Iraqis.
“We will be going from a war budget to a peace budget,” Salih said in his office in Baghdad’s heavily fortified Green Zone government district.
He predicted this would improve Iraq’s credit rating to at least a B+ in the next six months, from a current B-, and significantly lower its cost of borrowing.
Iraq has $2.7 billion of international bonds due in 2028 with a coupon of 5.8 percent, currently yielding about 9 percent.
Military spending in Baghdad’s 2017 budget remains the same as this year, but could be reclassified during the fiscal year according to changing needs, Salih said.
To replace missing oil revenue, Iraq has turned to the International Monetary Fund for a loan package that would also serve as the basis for other lenders to provide support.
The IMF approved a three-year, $5.34 billion standby loan in July, in exchange for a package of economic reforms. Baghdad hopes that will unlock over $12 billion in additional aid from sources such as the Group of Seven leading industrialized nations.
Salih said Iraq had agreed “in principle” last month to a three-year, $3 billion Development Policy Financing (DPF) loan from the World Bank to support Baghdad’s budget. This would be the first stream of extra financing to come out of the IMF deal.
Details of conditions to enhance Iraq’s public finance institutions and pensions have not been ironed out yet, but the first tranche will be disbursed in December, said Salih.
The loan has a 16-year repayment period with a three-year grace window and a rate of around two percent, he said.
A World Bank official said the loan was expected to be approved in December and disbursed soon after that. (Reporting by Stephen Kalin; editing by Mark Heinrich)