A $1.2 billion loan will support Iraq in strengthening fiscal stabilization and improving efficiency in the energy sector to help counter the effects of the drop in oil prices and rising security costs, the World Bank said on Friday.

The World Bank Group's Board of Directors acknowledged the Government of Iraq's engagement in a rigorous reform program and approved the Emergency Fiscal Stabilization, Energy Sustainability and State-Owned Enterprise Transparency Development Policy Financing.

The operation is aligned with the Government's recovery blueprint for 2015-2018, that commits to reforms to achieve inclusive growth, efficient service delivery and improved social protection.

"The World Bank's support for the current reform momentum in Iraq is very important at this critical time as the country grapples with long standing challenges in the financial sector, public financial management and energy efficiency and security," World Bank Director for the Mashreq Region Ferid Belhaj said.

The proposed operation will focus on reforms in three areas. Reforming the public wage system by reducing the highest salaries and increasing the lowest ones will improve expenditure allocation. There will also be reforms in public investment and debt management, and the pension scheme. Reducing gas flaring, expanding gas-to-power generation and reducing electricity subsidies will help support more sustainable energy supply. A third area of reform focuses on addressing the lack of transparency among financial and non-financial state-owned enterprises.

The support to Iraq is very much in line with the World Bank's strategy for the Middle East and North Africa, which was launched in October. This strategy builds on four pillars: Renewing the social contract in fragile states in the region; Regional cooperation; Resilience to refugee shocks; and Reconstruction and Recovery where needed. And to achieve these goals, calculated risk taking in countries such as Iraq is required.