DUBAI - Oman has started raising a $3.5 billion seven-year loan underwritten by seven regional and local banks that will help refinance a loan it took out last year, a source with direct knowledge of the deal told Reuters.

The finance ministry loan could go up to $4 billion, the source said, as the Gulf oil producer seeks to refinance the $2.2 billion loan taken out early last year.

The banks underwriting the loan include First Abu Dhabi Bank, Mashreq Bank, Abu Dhabi Commercial Bank, Gulf International Bank, Bank ABC and two Omani banks, according to the source and a report by Refintiv's IFR.

The Oman government did not respond to a request for comment.

FAB and ADCB declined to comment. Mashreq Bank, Bank ABC and GIB did not immediately respond to a request for comment.

The previous loan taken out in February last year had a 15-month tenor with a one-year extension option at the borrower's discretion, two other sources said previously.

Final pricing was not immediately available.

All-in pricing for last year's loan, including fees, was between 375 and 390 basis points over LIBOR.

Oman expects its budget deficit this year to reach 5% of gross domestic product (GDP), well within the limits of a medium-term fiscal plan it launched in 2020 to fix its heavily-indebted finances.

The small Gulf crude producer may still need to tap international debt markets to fill its funding needs this year, other sources have said.

Capital Economics said last week that Oman, as well as Bahrain, were likely to seek further financing from richer Gulf neighbours in the coming years to service large external debts and maintain their currencies' pegs to the dollar.

Oman expects public debt to reach 75% of GDP in 2022, which would be below previous estimates of an 86% debt-to-GDP ratio.

Fitch last month revised Oman's outlook to "stable" from "negative" as higher oil prices and fiscal reforms improve its balance sheet. In October, Moody's did the same and S&P revised its outlook to "positive" from "stable".

(Reporting by Saeed Azhar Additional reporting by Lisa Barrington Editing by Mark Potter) ((Yousef.Saba@thomsonreuters.com; +971562166204; https://twitter.com/YousefSaba))