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Last Updated: Tuesday, 16 August 2005, 15:11 GMT 16:11 UK
IMF warning over Iraq's recovery
Iraqi policeman watching an oil pipeline fire
The violent insurgency continues to threaten Iraq's economy
Iraq faces "daunting challenges" as it struggles to rebuild its battered economy, the International Monetary Fund has warned.

The violent insurgency and political uncertainties pose "major risks" to Iraq's economic recovery, the IMF said.

In its first review of the country in 25 years, the IMF called for reforms in Iraq's oil and finance industries.

The IMF report came as Iraqi lawmakers failed to meet a deadline to agree a new constitution for the country.

Iraq's parliament agreed on Tuesday to extend the deadline until 22 August to enable the country's disparate sides to reach agreement.

Fragile economy

Directors at the Washington-based IMF commended Iraq's authorities for "maintaining a degree of macroeconomic stability under extremely difficult circumstances".

They also praised Iraq's efforts to put in place legal frameworks aimed at combating the financing of terrorism and money laundering.

It has been harder to proceed with reconstruction, including in the oil sector, than we had anticipated
Adam Bennett, IMF assistant director, Middle East and Central Asia

Iraq's economy is estimated to have grown by almost 50% last year, mainly driven by a recovery in the oil industry.

Total exports in 2004 increased to North and South America, the European Union, Asia and other states in the Arab world.

However, in its report assessing the financial challenges facing post-war Iraq, the IMF described the country's economy as "fragile".

The country's economy is expected to grow by just 3.7% this year as production levels off.

"We have had to revise down the projection for growth in 2005," said Adam Bennett, assistant director of the IMF's Middle East and Central Asia department. "It has been harder to proceed with reconstruction, including in the oil sector, than we had anticipated."

While ongoing political and security problems would continue to affect the pace of reconstruction, the IMF urged Iraq's authorities to press ahead with urgent reforms of the country's economy in order to speed up investment in infrastructure, social services and poverty reduction.

Debt agreements

Iraqi woman and her child
Sweeping reforms are needed to cut poverty in Iraq, the IMF says

In particular, it called for wholesale reform within Iraq's dominant oil sector, including action to strengthen corporate governance and better controls over the monitoring of Iraqi crude exports.

It also called for the politically sensitive phasing out of government subsidies on petroleum products.

Iraq produced 738 million barrels of oil in 2004, according to the figures from the Iraqi authorities.

Separately, the IMF said the restructuring of state banks and other state-owned businesses - with a view to "reducing the role of the state" - was essential for Iraq to create the conditions for sustainable growth.

"Further steps to strengthen financial management in the public sector, diversify revenues and the economy more generally, and enhance governance will also be important," the IMF said.

The organisation stressed the need for Iraq to reach fresh agreement with creditors on rescheduling its debt.

In November last year, members of the 19-strong Paris Club group of rich creditor nations agreed to slash Iraq's debts to them by 80% by 2008.

The IMF urged Iraq to begin negations with non-Paris Club creditors, including fellow Arab Gulf countries, to reach comparable arrangements.

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