TBILISI, Sept 3: The International Monetary Fund has agreed in principle to lend Georgia $750 million to soften the economic impact of a war with Russia, which may slash growth to less than half its 2007 rate, a senior fund official said on Wednesday.“Today we have reached an agreement in principle with the government on a loan package. The amount will be $750 million. It will be made through stand-by arrangements. It will last for 18 months,” David Owen, IMF Middle East and Central Asia Department senior adviser, told Reuters in an interview.

The loan package is to provide support for the government's economic policies and to “help mitigate negative impact on the economy from the recent conflict.”

“I won't be surprised if the annual growth did come down significantly by the end of the year,” Owen said.

In March, the IMF had predicted growth of 9 per cent in 2008.

Earlier in the day, Georgian Economic Development Minister Eka Sharashidze said the economy could expand just 5-6 per cent this year after 12.4 per cent growth in real terms last year.

“It could be even slower” than Sharashidze's forecast, Owen said.

Georgia has requested $1 billion to $2 billion in international aid to repair and develop infrastructure in the wake of the conflict in August, when Russia invaded to put down Tbilisi's attempt to retake one of its separatist provinces.

Russian bombing raids hit mainly military targets, but Georgia also reported considerable damage to civilian infrastructure.

Owen said the IMF Executive Board was expected to discuss the aid package to Georgia in the middle of September.

He said the biggest risk to economy was damage to investors' confidence.

“We believe that bigger potential damage is to investors' confidence...We don't have any direct evidence yet, but it's clearly the risk that investors will be less comfortable in putting money to Georgia,” Owen said.

Resource-poor Georgia depends on foreign capital to keep its economy growing.

It has been enjoying an investment boom since the election of Mikheil Saakashvili's pro-Western government in 2003.

Private inflows were running at 23 per cent of gross domestic product in 2007 as foreigners ploughed capital into construction, tourism, telecoms and transport infrastructure.

The country is also a major energy transit hub, hosting a section of the BP-led Baku-Tbilisi-Ceyhan pipeline, which supplies the world with over one per cent of its oil needs.

Owen added he did not see any immediate negative impact on the inflation level and said it could be kept within the previous forecasts.

“I think the target of eight per cent (annual inflation for 2008) is still achievable,” Owen said.

—Reuters