SEOUL,30 Dec. 30 (WAM) -- North Korea's economy is believed to have expanded at least 1.8 percent this year as it did last year but the country faces a tougher year ahead, Yonhap News Agency reported Thursday based on a South Korean government report..

The report, titled "Comprehensive Review of North Korean Economy 2004," said the communist country's economic growth rate for the year is likely to exceed the previous year's 1.8 percent.

The North's food situation has also improved as its fall crop inched up 1.4 percent to over 4.31 million tons from a year ago but the country still is about 2 million tons short of demand, Yonhap quoted the South Korean Unification Ministry report as saying"The North's food production marked the highest level since the mid 1990s due to favorable weather conditions, abundant outside help including fertilizer and increased enthusiasm (among North Korean farmers) to produce more since its economic reform measures," it said.

North Korea's economy has been undergoing new difficulties since July 1, 2002 when it introduced some market elements, allowing limited ownership of privately produced crops while getting rid of its decades-old food rationing system.

The new measures included sharp increases in wages and prices of goods traded at scores of "farmers' markets" that have sprung up in Pyongyang, the capital, and other cities. The measures, however, backfired, triggering inflation.

North Korea, the report said, will continue to need outside aid in the new year as its food production would fall about 2 million tons short of its total requirement estimated at 6.4 million tons.

The impoverished country turned to international handouts in 1995 as a result of years-long natural disasters and mismanagement of the economy. The North's economy plunged into a steep decline especially after its former mentor, the Soviet Union, collapsed in 1992.

"North Korea's economy faces a number of negative factors in 2005 due to high inflation caused by the July 1 economic reforms and its unstable non-economic conditions such as the standoff over its nuclear weapons (program) and its human rights violations," the report said.

Six-way talks aimed at resolving tension over the North's nuclear weapons program has come to a standstill, with North Korea refusing to sit at the negotiating table.

The nuclear tension effectively blocks North Korea from getting outside financial assistance to resuscitate its dilapidated economy.

The North, on the other hand, may seek to improve ties with South Korea in the new year because it understands that no economic recovery is possible without Seoul's aid, the report said.