Iraq's economic prospects are improving with increased security helping to boost oil output and exports, while inflation has declined, the International Monetary Fund said.

The IMF approved its first performance review of Iraq's $746.3 million IMF loan program. It said Iraqi authorities had largely stuck to the program's agreed economic targets, although it waived those related to a government wage and pension bill.

Still, it said further economic progress depended on more improvements in Iraq's security situation, sound management of oil revenues, and reform measures.

'After several very difficult years, economic prospects for Iraq are improving and the authorities are persevering with the implementation of their economic program in 2008, IMF deputy managing director Takatoshi Kato said in a statement.

To keep inflation in check, the IMF said Iraq's central bank planned to tighten its monetary policy stance, including by increasing the pace of appreciation of its currency.

To speed up rebuilding of Iraq, the IMF said a supplementary 2008 budget allowed for sizable spending increases following years of public underinvestment.

It said a civil service pay hike will be phased in over 2008 and 2009 to avoid overheating of the economy. 'It will be important to step up the pace of structural reform,' Kato said.

'Of particular urgency are the early adoption of a comprehensive reform plan for modernizing public financial management, the finalization of the census of public service employees to eliminate ghost workers, and the streamlining of the in-kind public distribution system,' he added.

He urged that a restructuring program for two major commercial banks, based on financial and operational audits, should proceed and regulations for commercial banks completed. A new legislative framework for the country's oil sector will facilitate investments in the sector, Kato added.

The IMF said Iraq had made progress in fighting corruption in the oil sectors by introducing oil meters and increasing transparency. 'An extension of the metering system to all oil sector activities will further strengthen transparency in the sector,' Kato said.

He said Iraqi authorities were making 'commendable efforts' in concluding debt agreements with non-Paris Club and private creditors. - Reuters