IMF staff met with top Iraqi officials, including the finance chief and governor of the central bank, last week in Amman, Jordan, to discuss the country's recent economic development, the Islamic State insurgency and the decline in oil prices, the Fund said in a statement.
"Iraq's GDP is expected to contract by about 0.5 percent this year largely because of the economic effects of the ISIS insurgency," the head of the team, Carlo Sdralevich, said in the statement, using the initials of another name for the insurgent group.
In its World Economic Outlook report in October, the IMF estimated Iraq's gross domestic product would shrink 2.7 percent this year.
A senior IMF official said Thursday that the improved GDP outlook reflected higher oil production, according to an email from a Fund spokeswoman.
For 2015, GDP growth was projected at about 2.0 percent as oil production and exports continue to increase, helped by the recent agreement between the central government and the Kurdistan Regional Government on oil exports, the IMF said in the statement.
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The new growth pace was stronger than the IMF's 1.5 percent estimate in October.
Iraq's non-oil growth has slumped since the start of the Islamic State conflict earlier this year due to the destruction of infrastructure, hampered access to fuel and electricity, low business confidence, and disruption in trade, the global lender said.
Jihadists from the Islamic State group have seized large parts of Iraq and neighboring Syria, and a US-led coalition, including Iraqi forces, are fighting to defeat them.
But the IMF's picture for the oil industry, and therefore the economy, was brighter, with most of the oil infrastructure is in the south of the country, out of reach of the IS insurgents.
Together with output from the autonomous Kurdish region, Iraq's oil production is expected to climb to 3.3 million barrels per day in 2014, up from 3.1 million barrels a day in 2013, the Fund said.
Exports were seen remaining at 2013 levels of 2.5 million barrels a day.