* Lower oil prices have hit reserves, budget
* No threat seen to local currency peg
* Banking reforms to include privatisation
By Stephen Kalin
BAGHDAD, Sept 8 (Reuters) - Lower oil revenues have cut Iraq's foreign currency reserves to about $60 billion, the central bank governor said on Tuesday, enough to cover about 18 months worth of imports for OPEC's second-largest oil producer.
The plunge in oil prices since last year and Iraq's fight against Islamic State militants have put severe pressure on its finances. The government has projected a fiscal deficit of about $25 billion this year, in a budget of roughly $100 billion.
Those factors have also chipped away at international reserves, which fell to $66 billion at the end of 2014 from $78 billion at the end of 2013, according to the International Monetary Fund.
But Ali al-Alak told Reuters that a drop in dollar-denominated expenditures has also eased demand on foreign currency.
"Iraq is at the comfortable level of reserves," he said in an interview at his office in central Baghdad. Reserves are decreasing on a monthly basis, he added, but "not that much".
Alak brushed off concern that continued decline would put pressure on the Iraqi dinar, which the central bank auctions to banks and licensed traders at a fixed price of 1,166 to the dollar.
"If we look at the markets these days, the rate is very stable, very reasonable. So there are no worries about that right now," said Alak, who took office a year ago.
The local currency sank as low as 1,400 to the dollar in the secondary market in mid-June from 1,228 a week earlier. It was trading at 1,218 on Tuesday, two dealers said.
BONDS AND BANKS
To help close its budget deficit, Baghdad is marketing its first international bond issue in nine years in Europe and the United States this week.
It hopes to raise as much as $6 billion in a series of U.S. dollar bond sales, but Alak said the first stage would be for $2 billion. He estimated the interest rate would exceed 8 percent, given security concerns.
Iraq's outstanding U.S. dollar bond maturing in 2028 is trading at a yield of 10.37 percent.
Before the sale, Iraq obtained its first sovereign credit ratings; Standard & Poor's and Fitch rated it B-minus, six notches below investment grade.
Baghdad is also planning a domestic issue of $5 billion worth of bonds starting in the fourth quarter.
Alak said issuing in international markets would help reintegrate Iraq into the global financial system following decades of war and sanctions. "Practice is needed for Iraq for the future," he said.
He said Iraq also needed to reform its banks by restructuring and privatising the two main state banks, Rafidain and Rasheed.
"This is the main change that can lead to changing the whole sector. These two banks control about 80 or 90 percent of the whole sector," he said.
He suggested foreign banks could acquire shares in the lenders over the next two to three years.
By law, the central bank cannot make loans to the finance ministry, but Alak said it had injected liquidity into the system by purchasing up to 5 trillion Iraqi dinars ($4.38 billion) worth of treasury bills and bonds this year in the secondary market. ($1 = 1,141.0000 Iraqi dinars) (Editing by Larry King)