By Maher Chmaytelli and Ahmed Rasheed

BAGHDAD (Reuters) - Iraq has approved measures requested by the International Monetary Fund to unlock loans that should help the country overcome a cash crunch caused by declining oil revenue, a senior government official said.

The agreement, reached last month between Iraq and the IMF, "is on track", Mudher Salih, an adviser on financial policy to Prime Minister Haider al-Abadi, told Reuters late on Sunday.

Among the measures approved are settling by the end of the year all arrears owed to foreign oil companies operating in Iraq, Salih said. He did not say how much was owed.

The OPEC nation sought budget support from the international community after a collapse in oil prices over the past two years. The drop in revenue that resulted caused the public deficit to widen and delayed payments to foreign oil producers.

The IMF in May agreed to provide $5.4 billion over three years. But the funds are conditional on Iraq's implementing measures to cut spending, increasing non-oil revenue and settling several billion dollars in arrears to oil companies.

The Iraqi government approved the measures at a meeting last week and informed the IMF, Salih said in an interview.

Baghdad expects the IMF board to approve by the end of June or early July the disbursement of a first tranche of about $600 million, he added.

The reforms include a tax increase, higher electricity fees and better banking supervision to fight corruption and money laundering, Salih said. It also calls for streamlining state-owned companies and auditing the bloated public payroll to purge so-called "ghost employees" who don't show up to work, he said.

The crash in global oil prices since 2014 came as Iraq needed more resources to fight Islamic State, the ultra-hardline group that seized vast tracts of the north and west, displacing about four million people.

A recent increase in oil prices, to $50 a barrel from below $30 earlier this year, will not delay the reforms, Salih said.

The agreement with the IMF should unlock a total of $18 billion in international assistance over three years, Finance Minister Hoshiyar Zebari has said. He cited the World Bank and the Group of Seven leading industrialized nations among the donors, along with the IMF.

Zebari said Iraq expects to sell $2 billion in eurobonds in the last quarter of this year, when international aid starts coming in, helping to lower its cost of borrowing.

Iraq last sold international debt in 2006, when it issued about $2.7 billion of bonds due in 2028 with a coupon of 5.8 percent.

(Writing by Maher Chmaytelli, editing by Larry King)