But Bayan Jabor said on Tuesday that he remained optimistic that an agreement would be reached.

Iraq won an 80% cancellation of its $38.9 billion debt to Paris Club creditors in 2004. But it still owes Gulf states about $40 billion, mostly to Saudi Arabia and Kuwait. Much of the money was borrowed during the 1980-1988 Iran-Iraq war.

"As for the debts outside the Paris Club, the negotiations are still going on. There is the debts with the Gulf states. We are having talks with the Saudi finance minister. We have agreed to send an Iraqi delegation to Riyadh," Jabor said.

Jabor said discussions were focused on whether the original debt was subject to interest. Baghdad thinks not, while Saudi Arabia claims $15 billion in interest on top on an original $9 billion loan.

"I think the Gulf states will co-operate with us and will help Iraq after we specify the nature of the debt," he said.

Jabor, who took up his post in Iraq's new government two months ago, told Reuters he had worked out a plan to restructure state-owned banks and was considering higher import tariffs and taxes to boost revenue.

He also said that the country's economy was still functioning despite violence that is claiming 100 lives every day.

Debt forgiveness key

Debt forgiveness is a key obstacle to the country's integration into the international financial community and would also help to boost regional trade and commerce.

At the moment, an Iraqi company with a foreign bank account risks having it seized by creditors.

Iraq closed a $14 billion debt swap with private lenders in December but Jabor says he has no plans to seek more funds from international capital markets.

"The free market economy is the best solution. But in Iraq we cannot implement it in a year or two. Maybe after five years or more, Iraq will be similar to the United States"

Bayan Jabor,
Iraq finance minister

However, the country is facing a projected shortfall of $5 billion in its 2006 budget and the finance minister has presented plans to the government to double import tariffs to 10% and create new taxes on some industries and get private firms to pay their share.

"The Iraqi finance depends fully on oil and this is not right. So we have began studying increasing the base of taxes to include sectors which were not covered before, for example the mobile [telephone] companies," Jabor said.

Part of Iraq's problem in collecting taxes is that almost the entire economy is cash-based and restructuring the banking system has been a key priority, starting with the reorganisation and recapitalisation of the two state-owned lenders Rasheed Bank and Rafidian Bank. Jabor said this was close to completion.

But Jabor ruled out a large-scale reorganisation of the state banks that would result in job losses.

High unemployment is bolstering the ranks of anti-US and anti-government fighters and Jabor said that this meant it would take years for the country to adopt the reforms urged by Washington.

"The free market economy is the best solution. But in Iraq we cannot implement it in a year or two. Maybe after five years or more, Iraq will be similar to the United States," he said.

He also acknowledged corruption, seen as a serious obstacle to economic revival, was widespread within the finance ministry, but said action to stamp this out was already being taken.