The International Monetary Fund may provide a large loan to Iraq in 2016 to help stabilise the country's finances as it grapples with low oil prices and the Islamic State insurgency, a senior IMF official said.

An IMF team will discuss with Iraqi officials early next month how to create a Staff-Monitored Programme for Baghdad - an arrangement under which the Fund would monitor Iraq's economic policies, said Masood Ahmed, director of the IMF's Middle East and Central Asia Department.

"We would be hoping to build a track record on policy implementation that would serve as a basis for a further IMF funding programme later in 2016," he said in an interview.

Ahmed said the new IMF loan would be a "multiple" of the $1.24 billion in emergency funding which the IMF agreed to provide in July this year.

Financial pressures on Iraq have become so heavy that earlier this month, Baghdad halted a plan to issue $2 billion of international bonds because the yield that investors were demanding was too high.

The cancellation of the bond issue was a fresh blow to government efforts to finance a budget deficit which it has projected at about $25 billion this year, in a budget of roughly $100 billion.

Ahmed said Baghdad was not in immediate danger of running out of money because it could postpone investment projects and rely if necessary on more financing by the central bank.

But he said the government needed to come up with a clear, comprehensive plan to repair its finances, and an IMF monitoring programme could help.

"This programme could help to give confidence to investors in the event that the authorities decided to approach the bond market again," Ahmed added.

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.

Ahmed said he believed authorities had the will to push through reforms, though he stressed that any policy changes would have to be "sustainable socially and politically" so the IMF would not seek to impose choices.

"The prime minister, the finance minister, the central bank governor all recognise that they are faced with the need to make difficult choices." – Reuters