ROME, June 12 (Reuters) - Italy's economy will grow by 1.3 percent this year, the International Monetary Fund said on Monday, raising a previous projection of 0.8 percent thanks to a broader euro zone recovery and supportive fiscal and monetary policy.
However, growth will slow to around 1 percent in 2018-20, the IMF said in a report following its annual Article IV meetings with the Italian authorities, reiterating its frequent calls for Rome to adopt urgent structural reforms.
"Weak productivity and low aggregate investment remain key challenges for faster growth, held back by structural weaknesses, high public debt, and impaired bank balance sheets," the report said.
Italy's public debt, at around 132 percent of gross domestic product, is the highest in the euro zone after Greece's, and its banks are weighed down by some 350 billion euros ($391.93 billion) of soured loans.
The IMF's improved growth outlook for this year, compared with its 0.8 percent forecast made in April, follows a better-than-expected first quarter, when the economy expanded by 0.4 percent from the previous three months.
"The overarching challenge is to boost productivity, which requires more ambitious policy efforts and broad and sustained political support," the IMF said.
Its new 2017 growth forecast is higher than that of the government of Prime Minister Paolo Gentiloni, which sees expansion of just 1.1 percent.
However, if achieved it would still leave Italy in its customary position among the most sluggish euro zone economies.
Gentiloni's administration is backed by a broad but fragile coalition and there is frequent speculation that it may collapse in the autumn, leading to a general election some six months ahead of the end of the legislature in May 2018.
On public finances, the IMF called Italy's official target of reducing the budget deficit to 1.2 percent of gross domestic product next year "appropriate", although the government recently proposed making the goal less ambitious.
The target for this year's deficit-to-GDP ratio is 2.1 percent. ($1 = 0.8930 euros) (Reporting By Gavin Jones)