AMMAN (Reuters) - Iraq has reached a $5.4 billion standby agreement with the International Monetary Fund that could unlock $15 billion more in international assistance over the next three years, Finance Minister Hoshiyar Zebari said on Thursday.

Iraq's Finance Minister Hoshiyar Zebari speaks during a news conference in Baghdad October 21, 2015. REUTERS/Khalid al-Mousily

Iraq’s economy has been hit by the plunge in oil prices since mid-2014 and the country is expected to have a financing gap of $17 billion this year unless it can secure more funding, an IMF document obtained by Reuters showed. The cost of fighting Islamic State militants is another burden on the budget.

Zebari said the deal agreed after a week of talks with the IMF in neighboring Jordan could allow Iraq to borrow again in international markets.

“The program will help us get bonds and improve our international credit rating,” he told a news conference in the Jordanian capital. “In this program we will win time to do much-needed reforms to push our resources.

“It’s not the end of the road but the deal is crucial to allow us to overcome the crisis Iraq faces.”

Iraq's existing dollar bond, due 2028 IQ024029557= traded almost 1 cent higher after the IMF deal was announced.

Christian Josz, head of the IMF’s Iraq mission, told reporters the agreement was an important first step that would give confidence to other donors to extend more financing.

He said the standby loan would be disbursed in 13 tranches over the three years to June 2019, with payment over eight years including a three-year grace period. The interest rate will be between 1 and 1.3 percent depending on how much Iraq borrows.

Zebari said the standby loan was conditional on cutting Iraq’s budget deficit and other measures like reducing the billions of dollars in arrears owed to foreign oil companies.

Iraq, a major OPEC exporter, is planning to lower the oil price assumed in its budget, widening the fiscal deficit of 24 trillion dinars ($21 billion) by several billion dollars.

The agreement still needs the approval of the IMF board, which meets in June. A decision is expected either at the end of June or in July.

Josz said in March that the IMF wanted Iraq to gradually bring spending into line with revenues so that it can stabilize its debt at 75 percent of gross domestic product by 2020.

“The main objective of the program is to achieve debt sustainability and so to achieve that Iraq needs to rein in spending. The main component of the program is fiscal adjustment,” Josz said on Thursday.

Other reforms sought by the Fund include improving tax and customs revenue collection, reducing deficits of government-owned enterprises, streamlining electricity prices and better banking supervision to combat corruption and money laundering.

Iraq’s lavish food distribution system also needs to be targeted more efficiently to the most vulnerable, according to a source in the talks.

Economic growth this year will be about 10 percent, driven entirely by oil, Josz said, with oil production expected not to fall below 4.2 million barrels a day in coming years.

National debt as a percentage of GDP hit 53 percent last year and will reach 77 percent this year.

Iraq reduced government expenditure by 30 percent in nominal terms last year, however, Josz said, adding that was a considerable achievement.