By Dominic Evans
BAGHDAD (Reuters) - Iraq is seeking to postpone a final $4.6 billion installment of reparations for its 1990-91 occupation of Kuwait, Finance Minister Hoshiyar Zebari told Reuters, as it faces a cash crisis caused by falling oil prices and war with Islamic State.
Since Iraq was first allowed to resume oil sales nearly two decades ago it has paid funds into a United Nations body overseeing compensation for looting and damage inflicted during Saddam Hussein's seven-month occupation of Kuwait.
More than a million claimants have been paid and nearly all the $52.4 billion reparations bill has been met through Iraq's annual allocation of 5 percent of crude oil exports to the U.N. Compensation Commission (UNCC).
But with its economy now set to shrink for the first time since the 2003 U.S.-led invasion toppled Saddam and ended more than a decade of sanctions, Iraq can ill afford to divert a large chunk of the 2015 budget to make that last payment due next year.
"We have been really committed to paying this on time up until now," Zebari said in a telephone interview conducted on Thursday. "We are in discussions with the Kuwaitis, trying to defer the payment for two years or at least a year, to allow some space... to present a realistic budget."
A senior UNCC official in Geneva said no decision had yet been made, and any change would require the agreement of the UNCC's Governing Council, which has same 15 member states as the U.N. Security Council.
"We are hearing the Governing Council will be considering the issue at a special session next week," the official told Reuters, adding that a meeting had been tentatively set for Dec. 18 in Geneva.
There was no immediate comment from Kuwaiti officials.
OPEC producer Iraq is suffering from the sharp fall in oil prices and the Islamic State takeover in the north and west, which has caused mass displacement of people, destruction of infrastructure and a sharp increase in military expenditure.
Two weeks ago, after the latest oil price fall, it scrapped a draft 2015 budget and said it would cut back spending plans.
Iraq needs Kuwait's agreement to delay payment because the last, and largest, outstanding claim for compensation comes from the emirate itself for damage to its oil facilities.
More than 700 Kuwaiti oil wells were set on fire by Iraqi troops retreating from the U.S.-led operation Desert Storm to recapture it in January 1991. Some of them burned for 10 months.
Iraq would also need to win broad international support for a deferral because its obligation to pay the money is enshrined in U.N. Security Council resolutions.
"There is an understanding," Zebari said. "Next week there will be some hectic diplomatic activity between Baghdad, Kuwait, Geneva and New York in order to present a joint request to postpone the payment." A delay of one or two years would give Iraq "some breathing space", he added.
Iraq's repayments were first set at 30 percent and then 25 percent of oil sales when it resumed limited exports under the U.N. oil-for-food deal in 1996. The portion was cut to 5 percent after Saddam was overthrown in 2003 and sanctions were lifted.
The International Monetary Fund said Iraq's economy is set to shrink in 2014 by 0.5 percent, its first contraction in at least a decade, and that its international reserves have fallen $10 billion so far this year.
The 2014 budget deficit is likely to reach 5 percent of GDP, the Fund said.
Zebari said he hoped the government could agree a revised 2015 budget at a meeting on Sunday.
Despite oil's fall below $70 a barrel, the finance minister said Baghdad will still base next year's spending plans around that price, since the IMF was forecasting crude will average that level over the course of the year.
Since the original draft budget was thrown out by Prime Minister Haider al-Abadi, the finance ministry has trimmed around $10 billion of spending, Zebari said, still leaving a projected deficit of around $30 billion.
"It was (originally) over 47 trillion dinars ($40 billion) with all the extra spending. So we cut down on unnecessary contracts or payments, or we are delaying projects," he said.
(additional reporting by Stephanie Nebehay in Geneva; editing by David Stamp)