The International Monetary Fund approved a $1.24 billion emergency loan for Iraq Thursday, saying the country needs extra support in the face of the Islamic State insurgency and depressed oil prices.

The money, to be disbursed immediately, will help the government meet urgent budget and balance of payments shortfalls while it undertakes fiscal and structural reforms.

"The twin shocks faced by Iraq from the ISIS (Islamic State) insurgency and the drop in global oil prices have severely widened the government deficit and caused a decline in international reserves," said IMF Deputy Managing Director Mitsuhiro Furusawa.

"The authorities' policies to deal with the shocks, including sizable fiscal adjustment and maintenance of the exchange rate peg, go in the right direction," Furusawa said in a statement.

"However, large fiscal and external financing gaps remain," he added, necessitating more internal measures to balance government finances, including new electric power tariffs or "compensatory measures".

The seizure of more Iraq territory by Islamic State group jihadists and the costs of mobilizing a counterattack have further strained the government's budget, already eroded after crude oil prices, its key source of revenue, fell by half over the past year.

Mainly due to the insurgency, the IMF says the Iraqi economy contracted by 2.1 percent last year and might grow only a bare 0.5 percent this year.

The IMF projects Baghdad's budget deficit to rise to 17 percent of gross domestic product this year, from five percent in 2014.