By Steve Schifferes BBC News Online at the IMF/World Bank spring meeting in Washington

Reconstruction will cost billions - but not from the IMF

These are challenging times for the international financial institutions, caught in the backlash of war.

The International Monetary Fund (IMF) and the World Bank are facing a difficult task as they begin their spring meetings in Washington in the midst of war.

Both institutions have been excluded so far from the post-war planning process for rebuilding Iraq, despite their substantial role in the reconstruction of Afghanistan.

And the tensions between Europe and the United States over the war are likely to spill over into a failure to move forward on an agenda to reform the institutions and help countries in economic crisis deal with their debts.

Finally, the Iraq war has added a significant element of instability to the already-shaky world economy, and the IMF is likely to downgrade its world economic forecast as a result.

That forecast will be published on Wednesday.

Stalemate over the war

The stalemate over the role of these institutions in Iraq parallels the continuing dispute over the role of the UN in reconstruction efforts.

In Afghanistan, the IMF played a key role in setting up the ministry of finance and the central bank, and in helping to manage the currency and the tax system.

According to Adam Posner, of the Institute for International Economics, the IMF could legally perform the same role in Iraq, as Iraq is an existing IMF member.

But disagreements among the IMF's voting members, which include many European countries who opposed the Iraq war, are likely to mean it would be hard to get the approval of the IMF board for such a role, at least until the broader question of UN involvement was resolved.

Instead, the US Treasury appears to be planning to take control of Iraq's currency, and a Treasury team might be brought in to advise the Ministry of Finance.

Economic slowdown

The long run-up to the war has also damaged consumer and business confidence, and contributed to renewed fears of economic slowdown.

Oil prices initially shot up on war fears, but have since declined.

"The world is facing great uncertainty at present," IMF Managing Director Horst Koehler said recently.

"Consumers and investors remain cautious and the recovery in the world economy is weaker than earlier anticipated."

The IMF is expected to cut back its forecast for world economic growth this year from 3.7% to 3%, with particular weakness in Europe and Japan.

But no one, including the head of the US central bank, Alan Greenspan, is sure which direction the US economy will move once the war is over.

It is burdened by large trade and budget deficits, and an overhang of consumer debt.

International coordination

The finance ministers from the world's leading industrial nations, the G7, will be meeting on the sidelines of the IMF/World Bank gathering.

But according to Mr Posner, the prospects for international cooperation have been weakened by the arguments over the Iraq war.

The US and Europe have criticised each other's economic policy for exacerbating the slowdown, with ECB-President Wim Duisenberg questioning the size of the US budget deficit which has been swollen by the costs of the war.

The US, meanwhile, argues that the European Central Bank has not reacted quickly enough with interest rate cuts to revive the flagging EU economy, which is expected to grow by just 1% this year.

And plans to devise a new system to help countries in economic crisis renegotiate their loans to the private sector seem to have foundered.

The so-called Sovereign Debt Restructuring Mechanism (SDRM), proposed two years by IMF deputy managing director Annie Krueger, seems to have been killed off by opposition from the US and the private financial sector.

"The SDRM does not seem to have political priority out of the United States, to put it mildly," a European source told Reuters.

Finally, the US lack of interest in multilateral approach extends to the World Bank - which the US is planning to bypass by introducing its own expanded foreign aid programme, the $12bn Millennium Challenge Fund, which will be run with its own separate set of rules designed to reward "good governance."