The medium-term economic outlook for Pakistan is fragile and the country faces significant risks, the International Monetary Fund (IMF) said in a review.
Pakistan agreed in November to an IMF emergency loan package of $7.6 billion to avert a balance of payments crisis and shore up reserves. Last month, the fund increased the loan to $11.3 billion, and also released a third tranche of $1.2 billion.
"A slower global recovery, higher commodity prices, and political instability, as well as existing constraints on energy and infrastructure pose significant risks to the outlook," the IMF said in its latest review, posted on its website.
The IMF said the main macroeconomic indicators showed an improvement but the economy was still vulnerable to shocks.
Inflation had declined from a record high in August last year but the pace of the decline, especially in the latter part of the 2008/09 fiscal year, which ended on June 30, had been slower than expected, the IMF said.
Imports had contracted sharply and overseas workers' remittances had continued to grow which had helped the current account deficit improve.
However, the financial account remained weak as net foreign flows declined by nearly $3 billion in the 2008/09 fiscal year compared with the previous year, it said.
GDP growth in the 2009/10 fiscal years is projected at 3 percent from an earlier 4 percent, the IMF said. The government has set a target of 3.3 percent.
The IMF said Pakistan's performance to the end of June, according to preliminary data, suggested that targets set for the State Bank had been met, but the fiscal deficit had exceeded a ceiling by 0.9 percent of GDP.
The IMF said it opposed a cut in interest rates until inflation fell significantly.
"Staff argued that the policy interest rate should remain on hold until core inflation shows a further significant decline," it said.
The central bank announced this month a cut of 100 basis points in its policy rate to 13 percent.
State Bank of Pakistan Governor Salim Raza said the cut recognised positive macroeconomic developments and would provide impetus for growth, while the central bank was not underestimating the problems the economy faced.
The data under review by the IMF was for the period up to June. Inflation decreased to 11.17 percent in July from a year earlier, and from 13.1 percent in June.