WASHINGTON - The International Monetary Fund on Wednesday said Iraq's economy would expand significantly from the previous year's lows as long as the security situation allows for higher oil production and investment.

Mohsin Khan, the IMF's director for the Middle East, said Iraqi oil production was forecast to climb by 200,000 barrels per day to 2.2 million barrels a day in 2008.

"We are expecting much higher growth, and it is really coming from the fact that we expect oil production to be higher," Khan told reporters.

"We also think that the government will ...if the security situation continues to improve ... that the government will be able to fulfil its major investment plan in the oil and the non-oil sectors," he added.

He said the higher oil output would push gross domestic product growth significantly up to over 7 percent, possibly higher, in 2008 and 2009, from just 1.3 percent in 2007 when bitter sectarian violence drove the country to the brink of civil war.

Khan said 2007 growth for Iraq may well turn out to be stronger because the IMF's forecast of 1.3 percent was based on indicators for the first six months of the year. Since then, new data for the second half of 2007 showed economic activity may have been stronger than believed, he added.

"The big change is going to be - and what we're hoping for - is oil production," Khan told reporters. "Beyond that for 2009 we also expect it to be in the 7 to 8 percent range, but of course all of this is conditional on oil production expansion and the security situation improving."

In December, the IMF approved a 15-month $744 million (379 million pound) loan agreement for Iraq, which Khan said would focus on maintaining economic and financial stability, and facilitate higher investment and production in the country's key oil sector.

Meanwhile, annual consumer price inflation is targeted to decline to 12 percent, he added.

Khan said rising oil export prices had more than offset production shortfalls and boosted international currency reserves by close to $7 billion. By the end of 2007, reserves were $27 billion, some $6 billion higher than projected, he said.

Despite a stronger fiscal position, Khan said Iraq would still need aid, particularly when it came to securing the country.

U.S. and Iraqi forces battling a simmering insurgency and sectarian bloodshed have made progress since thousands of extra U.S. troops were rushed to Iraq last year, but indiscriminate violence remains a daily occurrence.

"The fact of the matter is we have a very conservative fiscal projection, because we base it on a pretty low price of oil and I think the Iraqis do this by design," Khan said. "So the oil prices we are assuming, for example, in 2008 is $57 a barrel, which is obviously much, much lower than the world price.

"So I think even on that basis they are fiscally sustainable. If in fact we factor in today's price, then the fiscal picture looks very, very good," he added.