By Lesley Wroughton

The International Monetary Fund on Wednesday approved $436 million in emergency lending to Iraq and said it hoped its backing would generate additional international economic support, including debt relief.

The IMF loan, the first ever by the global lender to Iraq, should help economic rebuilding efforts by the Iraqi interim government after decades of dictatorship and a U.S.-led war, which have worn down the economy and caused unemployment. "The fund is making these resources available to Iraq at a difficult time in terms of security, but also a critical time as Iraq strives to rebuild its economy and prepare for elections early next year," said Takatoshi Kato, the IMF deputy managing director. "The approval of (the emergency assistance) will hopefully serve to catalyze much needed financial and technical assistance from the international community and will facilitate the process of reducing Iraq's external debt to a sustainable level," Kato added.

The IMF aid comes as the Paris Club of 19 rich industrial nations discuss canceling Iraq's $120 billion foreign debt. The Paris Club, which includes all Group of Seven nations, normally favors having an IMF lending program in place before it agrees to cancel or reschedule debt. The United States and Canada are pushing for at least 90 percent forgiveness of the debt. France, which opposed the U.S. war in Iraq together with Russia and Germany, insists a 50 percent debt write-off is sufficient for an oil-rich country.

The IMF said Iraq's official bilateral creditors had confirmed that during the emergency program through 2005, they would defer any debt payments by Iraq falling due to them. This would diminish risks to the IMF from lending to Iraq, it said. Kato said creditors had also indicated "they are willing to make their best efforts, given Iraq's continuing cooperation with the fund, to provide debt relief on appropriate terms."

Emergency Assistance

The IMF's emergency assistance program helps countries with urgent balance of payments financing needs and is designed to be disbursed quickly and supported by policy advice and, in many cases, technical assistance. Talks between Iraqi officials and financial institutions like the IMF and World Bank (news - web sites) have taken place outside the country since both withdrew their staff from Baghdad last year after the bombing of the UN headquarters in Baghdad.

Kato said Iraq's main program goal was to stabilize its economy and lay the groundwork for reforms. "The authorities' program is to be underpinned by a prudent fiscal policy that aims to limit spending to available government revenues and external resources, the use of the exchange rate to anchor inflationary expectations and the implementation of key structural reforms to transform Iraq into a market economy," he added. The reforms would include the restructuring of state-owned enterprises and enhancing transparency of the oil sector, Kato said.

Meanwhile, IMF chief economist Raghuram Rajan and senior World Bank officials said on Wednesday there were signs of an economic pickup in Iraq, visible from the volume of goods in Iraqi markets. "In the same way that countries that suffer severe economic crisis rebound very quickly ... one would be hopeful that Iraq would rebound very strongly once the security situation is dealt with," Rajan said.

The World Bank said Iraq had not requested official assistance, although the global institution is overseeing one of two donor trust funds of reconstruction money. Christiaan Poortman, the bank's top official for the Middle East, said a lack of economic data made it difficult to assess how fast the economic recovery was occurring. "There is no question that reconstruction does generate growth and jobs, but the base from which this is happening in Iraq is very low, so we have a very long way to go," Poortman said before the start of the fall IMF/World Bank meetings.