The Washington-based IMF has approved a $1.24bn loan to Iraq under its rapid financing instrument (RFI) programme.

The assistance will help Baghdad cover an urgent balance of payment and budget needs caused by the jihadist group Islamic State in Iraq and Syria (Isis) as well as the fall in oil prices.

The fund has increased its RFI loan from the $833m announced in June, reflecting the slow progress Iraq is making against Isis and further oil price declines.

“The twin shocks faced by Iraq from the Isis insurgency and the drop in global oil prices have severely widened the government deficit and caused a decline in international reserves,” says Mitsuhiro Furusawa, deputy managing director and acting chair of the board of the IMF.

“The authorities’ policies to deal with the shocks, including sizeable fiscal adjustment and maintenance of the exchange rate peg, and go in the right direction. Access under the IMF’s rapid financing instrument will help address Iraq’s urgent balance of payments and budget needs. However, large fiscal and external financing gaps remain.”

The IMF has called on Baghdad to implement electricity tariff reforms, adopt fiscal adjustment measures and find internal financing sources immediately. It has also advised medium-term structural adjustment reforms. These will be difficult to implement.

Protests erupted in Baghdad on 1 August, as Iraqis blamed government corruption for lack of investment in infrastructure. Power cuts are a daily occurence, as the country had an installed capacity of 11,025MW in 2013, far below the 16,574MW peak power demand recorded that year.

The fund forecast a budget deficit of 12 per cent of GDP in July, despite record oil exports. Iraq is also thought to have depleted its foreign reserves.

Luay al-Khateeb, non-resident fellow at the non-profit organisation Brookings Doha Centre, has estimated that the cost of financing all security forces, including the Kurdish Peshmerga, could reach $27bn in 2015.

Iraq is also struggling to pay oil companies operating in the country. The Paris-based International Energy Agency (IEA) says the federal government already owes $9bn to contractors from 2014 and is due to pay about $18bn to investors this year. However, only $12bn has been allocated in the 2015 national budget to pay cost recovery and remuneration fees. The Kurdistan Regional Government is in a similar position.

The $1.24bn loan is 75 per cent of Iraq’s quota, the maximum the fund allows under RFI a year. Iraq is permitted to reach 150 per cent of its quota cumulatively.