Iraqi authorities agreed on Tuesday to have the International Monetary Fund monitor Baghdad's economic polices as a basis for a possible funding program in 2016, the IMF said in a statement. Mission chief Christian Josz said the Staff-Monitored Program would aim to rein in spending and reduce Iraq's budget deficit, which is expected to approach 12 percent of economic activity next year.

The move, he said, "will allow the Iraqi authorities to build a track record for a possible Fund financing arrangement." An IMF loan would help the major OPEC oil exporter stabilise its finances as it grapples with lower oil prices and costs associated with the fight against Islamic State militants. A senior IMF official told Reuters last month the new loan would be a "multiple" of the $1.24 billion in emergency funding which the IMF agreed to provide in July. Financial pressures on Iraq have become so heavy that Baghdad halted a plan to issue $2 billion of international bonds last month because investors were demanding too high a yield. A big new IMF loan to Iraq would come with policy conditions, such as steps by Baghdad to reduce energy price subsidies and reform state-owned enterprises - steps which could be politically difficult.

Prime Minister Haider al-Abadi is already struggling to sustain support for political reforms he announced in August aimed at reducing corruption and waste. Josz said the IMF expected Iraq's gross domestic product (GDP) to grow by 1.5 percent this year on higher oil production, and the current account deficit to expand to 7 percent of GDP. He predicted foreign exchange reserves, which amounted to $59 billion at the end of last month, would decline but remain high enough to cover nine months of imports through the end of the year.