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Ireland is on right track to economic rehabilitation - IMF

Ireland is on track to rehabilitate its banks while its economy shows encouraging signs of recovery, the International Monetary Fund (IMF) has said.

But further political turmoil could spark more "unwarranted" delays in the clean-up operation with significant challenges still to be overcome, it warned.

An IMF team flew into Dublin last month to carry out its first review of the €85bn (£72bn) rescue package agreed along with the European Union.

In its interim report, the Washington-based organisation said Ireland was on target with a strict timetable laid down as part of the bailout deal. "The start of the process of overhauling the Irish banking system is encouraging, but the outstanding challenges are significant," it said.

The IMF team described political developments ahead of the General Election on February 25 as "turbulent".

The uncertainty was blamed for the reluctance of international money markets to lend to Ireland.

The IMF also said public reaction to the rescue deal was favourable but noted there was a lingering perception that the pain was not being equally dealt out.

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But it added economic indicators suggested a modest export-led recovery was under way.

Finance Minister Brian Lenihan said he agreed with the findings. "The report acknowledges that progress is being made towards recapitalising the banks, deleveraging, resolving non-viable banks and strengthening the bank resolution framework," he said.

"I would agree with the IMF's staff assessment that while the good start of the process to overhaul the Irish banking system is encouraging, there are significant challenges ahead.

"This Government has devised a comprehensive strategy to restore confidence in the banking sector and is committed to following through with this strategy."

Separately, Mr Lenihan said that he was postponing further cash injections into Allied Irish Banks, Bank of Ireland and the EBS building society until after the election.

He said he had informed the European Commission, the IMF and the European Central Bank that the next government should be responsible for sanctioning any more funding of the sector.

Mr Lenihan said the banks would not be affected by the "short delay".

Late last month the man bidding to become Ireland's next prime minister put down a marker in Brussels to renegotiate the multi-billion euro bailout.

Fine Gael leader Enda Kenny, speaking after talks with European Commission president Jose Manuel Barroso, said: "We discussed the situation in Ireland and I made it clear that if we get elected we would be seeking to renegotiate our bailout package."