REYKJAVIK (AFP) Recession-hit Iceland's economy is expected to recover in 2010 after bottoming out before the end of this year, the International Monetary Fund (IMF) said Friday.

"Considerable progress has been made," said Mark Flanagan, head of an IMF mission that has spent the past two weeks evaluating the Icelandic economy, the beneficiary of a 2.1-billion-dollar (1.6-billion-euro) loan from the IMF.

"The economy should bottom out during the second half of the year, and begin a recovery in 2010," Flanagan told reporters at a news conference in the Icelandic capital of Reykjavik.

He said Iceland has made good progress in getting inflation and its public finances under control.

Some 850 million dollars of IMF money has already been paid out to the island's financial system, which collapsed last October in the face of the global economic meltdown.

Another eight installments of 155 million dollars are expected to be paid out.

"However, there are some outstanding issues that need to be addressed and some actions that need to be taken forward, particularly as relates to financial sector restructuring and fiscal consolidations," Flanagan said.

Flanagan cited the central bank's "very risky" decision to cut interest rates from 18 percent in March to 13 percent now, pointing to the weakening of the Icelandic krona in recent months.

Iceland's previous prosperity had been heavily based on its robust banking sector and the country consequently suffered a major macroeconomic blow when its key lending institutions were laid low by the global finance meltdown.

The government last October had to take control of the country's three leading banks that found themselves short of liquidity. The collapse outraged the general public, with many people losing jobs and some of their savings.

Prior to the crisis, Iceland had been among the world's richest countries, with growth averaging 4.0 percent a year. The economy expanded 7.7 percent in 2004 and 5.5 percent in 2007 before a gain of just 0.3 percent last year.