The $685 million IMF standby credit arrangement agreed on Friday was the fund's first with Iraq and is designed to support the nation's economic programme over the next 15 months.

Takatoshi Kato, IMF deputy managing director, said: "The Iraqi authorities were successful in promoting macro-economic stability in 2005, despite the extremely difficult security environment."

A raging anti-government campaign in parts of the country and almost daily bombings in and around Baghdad, the capital, have hindered economic rebuilding since the US invasion in 2003.

But Washington says progress is being made and the IMF agreement is crucial for Iraq's ability to borrow money overseas and necessary to trigger a full debt-reduction deal approved by the Paris Club of creditors a year ago.

Open economy

John Snow, the US treasury secretary, said in a statement: "I applaud the IMF Board's approval of a standby credit arrangement with Iraq today.

Violence has hindered economic
rebuilding since the US invasion

"This arrangement will underpin economic stability and help lay the foundation for an open and prosperous economy in Iraq."

An IMF stamp of approval was not only necessary to secure the Paris Club's 80% reduction of some of Iraq's foreign debt, but will also be an important seal of approval as Iraq prepares to seek additional aid from donors.

Broader international support for the economic reconstruction of Iraq is a key part of the strategy of George W Bush, the US president, to reduce the country's reliance on American support and begin withdrawing US troops.

Peaceful election

Washington is eager to capitalise on Iraq's largely peaceful elections on 15 December, which elected the country's first full-time government since the fall of Saddam Hussein.

A deal with private lenders will
cut Iraq's debt burden by $11 bn

Iraq also concluded a debt-for-debt exchange offer on Friday with the largest claimants against the former government, worth about $14 billion, said Ernst & Young, Iraq's debt reconciliation agent.

This represents about 60% of all the commercial claims registered with the firm.

Under the offer, Iraq grants anyone with a claim of $35 million or more the chance to swap for either privately placed notes or an interest in a multi-currency loan.

Claimants swap at a rate of 20% of the value of their original holding. The new notes mature in 2028 and carry a 5.8% fixed coupon.

Snow said in a separate statement: "This deal, when fully implemented, will reduce the burden on the Iraqi people of Saddam-era debt by more than $11 billion."