* Albanian PM says to pay debts to private sector
* Cycle of debt has created a financial deadlock
TIRANA, Sept 19 Albania's government will pay debts and un-reimbursed VAT totalling 400 million dollars to the private sector to break a deadlock hurting the economy, new Prime Minister Edi Rama said on Thursday.
Both the World Bank and the International Monetary Fund have advised the previous government to pay the money because it was hurting businesses and linked it to rising bad loans.
"We cannot continue to tolerate the deadlock created by the debt to the private sector," Rama told a conference of the Central Bank of Albania and Oxford University. "We are working to re-pay this debt as soon as possible."
He said the debt had pinned down the economy, choked businesses and practically paralysed to a considerable degree the power of banks because of the whole chain of debt.
"We cannot ask the banks to be more active if we do not re-pay the debt and we shall repay it at any cost," Rama said.
Lending to the economy increased by just 0.9 percent in the second quarter of this year compared to the same period of 2012. A weak economy and perception of insecurity by businesses is holding back demand for credits in addition to more stringent conditions by banks.
Albania's gross domestic product grew 1.7 percent last year. However, this marked a slowdown in rates of annual growth of 6 percent over a decade until 2009 when the recession in neighbours Italy and Greece hurt one of Europe's poorest states.
Rama, whose government was installed on Sunday, did not say where he would find the money to make the payments, which will help businesses to re-invest and repay their loans.
Albania's public debt at the end of the first quarter of this year stood at 63.3 percent of GDP, exceeding a maximum 60 percent recommended by the International Monetary Fund.
The budget deficit for the first eight months of 2013 was 54 billion leks ($513 million), higher than a target of 47 billion leks for that period, according to finance ministry figures. (Reporting By Benet Koleka; Editing by Stephen Nisbet)