By Lesley Wroughton

WASHINGTON (Reuters) - The IMF and World Bank on Tuesday cleared Liberia's entry into a global debt relief program, a vital step toward canceling the country's $4.7 billion debts and helping it rebuild from civil war.

The International Monetary Fund's No. 2 official, John Lipsky, said the debt, owed to global institutions, other governments and private-sector creditors, was "simply unpayable and has to be forgiven."

Tuesday's announcement is a vital step toward hoisting Liberia back into the international arena after its 14-year war and isolation. Earlier this week, the IMF restored Liberia's voting rights after it cleared its arrears to the fund.

It will also free up vital resources needed for rebuilding the country whose economy was devastated by mismanagement, corruption and sanctions.

"This is the first concrete step toward achieving broad-based debt relief that will cover all of Liberia's credits including bilateral and private creditors," Lipsky told a conference call with reporters.

The announcement opens the way for immediate interim debt relief. To qualify for full debt cancellation Liberia has to complete a set of broader economic reform overseen by the World Bank and IMF.

Lipsky, the IMF's first deputy managing director, said Liberia would probably be able to conclude the heavily indebted poor countries (HIPC) initiative within two to three years. HIPC was launched in 1996 for the world's poorest and most indebted nations.

"So it is important that Liberia's creditors, including bilateral and private creditors, agree to provide debt relief consistent with the HIPC initiative," Lipsky said.

Since democratic elections in 2005, won for a former World Bank official and Africa's first female head of state, President Ellen Johnson-Sirleaf, Liberia has sought to reestablish ties with donors and creditors.

NORMALIZING RELATIONS

"We absolutely think that the normalization of Liberia's status is an important practical step giving them access to normal financing facilities, but more broadly it's symbolic of Liberia's entry into normal circumstances," Lipsky said.

In a joint statement, the World Bank and IMF said debt relief for Liberia will over time reduce the country's debt service obligations by about $4 billion.

"Entering the HIPC process today is made possible by the government's steadfast pursuit of reforms over the last two years," said Obiageli Ezekwesili, vice president for Africa at the World Bank.

"Liberia's reengagement with the international community will provide the boost needed to address the remaining, monumental challenges faced by this post-conflict country," she added.

Lipsky said the country had effectively implemented an IMF economic program despite hardships it faced emerging from war.

"Economic growth has rebounded, investment is picking up strongly. With this confidence in a much more favorable outlook, donors have provided substantial resources to help the rebuilding process," he said.

Still, it was important that parliament pass legislation to establish an independent anti-corruption corruption. The move was key to cement Johnson-Sirleaf's zero-tolerance toward corruption, he said.

"It is important that the anti-corruption commission receives broad support from the government and the legislature. At this point there is little doubt of the seriousness of intent of the government in this area ...," he said.

He said the IMF stood ready to support Liberia's efforts at higher economic growth and private investment.