Poor security dogging Iraq economy,

By Alister Bull

WASHINGTON (Reuters) - Iraq has taken steps to strengthen its economy but there will be no real progress until the country's dire security situation has improved, the International Monetary Fund said on Thursday.

Announcing the completion of the fifth review of Iraq's $727 million standby arrangement, which Baghdad wants as a precaution and not because it badly needs the money, the IMF said the country faced some serious economic challenges.

"The expansion of oil production is lagging and inflation, while on a downward path, remains high reflecting in large part shortages associated with the security situation, notably of fuel products," the IMF said in a statement.

"A turnaround hinges critically on an improvement in the security situation," it said.

The United States has rushed 30,000 extra troops to reinforce a clampdown aimed at stemming sectarian violence, which has pushed Iraq to the brink of all-out civil war.

U.S. President George W. Bush has said he hopes the surge of military force will curb the bloodshed while efforts aimed at kick-starting the economy cut crippling unemployment, which has pushed many young men into the anti-U.S. insurgency.

The IMF said it welcomed steps taken by the Iraqi government to bolster the economy and cited increases in official fuel prices as a step in the right direction.

The hikes have lifted the official price of gasoline from pre-2003 invasion level of around 3 U.S. cents a liter to around 32 cents a liter, meaning money previously spent on subsidies can go toward more pressing public projects.