WASHINGTON-The International Monetary Fund on Friday agreed to increase a loan to Pakistan by $3.2 billion to buttress an economy and budget hurt by a war against Taliban militants and a global recession. 'Pakistans economy has continued to stabilise, IMF Deputy Managing Director Murilo Portugal said in a statement. 'Reforms in the financial sector and the foreign exchange market have been progressing, and steps have been taken to strengthen the social safety net. The expanded financing brings the total loan outstanding to the IMF to $11.3 billion, or about 6.3 per cent of Pakistans gross domestic product, the Washington-based lender said in the statement. 'This reflects the confidence the financial institutions and the international community now have in Pakistans resolve to stabilise and improve its economy, Ambassador Husain Haqqani said. The country was forced to turn to the IMF for a $7.6 billion credit line last year after its current-account deficit widened to a record and its foreign reserves shrank 75 per cent in a year to $3.45 billion. Pakistan agreed on July 16 to cut power subsidies almost 50 per cent this year to meet a condition set by the IMF for the November bailout. The additional aid is needed to shore up the govts finances as it fights the Taliban at a cost of $8.5 billion a year. Pakistans economy came almost to a halt as the global recession erodes exports and deters investment. The $146 billion economy may expand as little as 0.8 per cent in the year to June 2010, according to HSBC Holdings Plc, the weakest pace since 1952. Pakistan stocks rose on reports top Taliban guerrilla Baitullah Mehsud, who ordered suicide bombings nationwide and had a $5 million bounty on his head, may have been killed in a US missile strike. The Obama administration hasnt yet verified the reports, White House Press Secretary Robert Gibbs said. Following the Executive Boards discussion on Pakistan, Portugal, the Deputy Managing Director and Acting Chair, also said that Pakistan progress was appreciable, considering the security developments that resulted among others in the large number of Internally Displaced Persons (IDPs), the global economic recession and the difficult domestic political environment. 'The end-2008/09 fiscal deficit target was missed, due partly to unforeseen security-and IDP-related expenditures but also to excessive spending by provinces and revenue shortfalls, owing partly to delayed implementation of tax reforms, he said, adding,the unresolved energy sector problems have continued to undermine Pakistans growth potential and burden public finances. 'A durable solution to the problem of low tax revenue should start with the early implementation of VAT and the ongoing tax administration reforms. These reforms will make the economy less vulnerable, provide the steady flow of resources needed to reduce poverty and develop basic infrastructure, and strengthen the govts ability to deal with the pressing needs of the population, which are now compounded by the large number of IDPs. He further said:the recent agreement with World Bank and Asian Development Bank staffs on the electricity sector reform signals a desire to address the deep-seated problems in that sector, including the resolution of the intercorporate circular debt, which burdens the energy sector enterprises, and the elimination of tariff differential subsidies within a year from now, making additional fiscal resources available for priority spending. 'The macroeconomic outlook for 2009/10 remains difficult, and the external position is subject to considerable downside risks. The donor support pledged in Tokyo and the augmentation of access under the IMF-supported Stand-By Arrangement by about $3.1 billion will help mitigate these risks and enable the implementation of the govts fiscal programme; however, this financing is temporary and should be used as a bridge until the revenue reforms bear fruit. The 2009/10 budget aims to provide adequate space for priority spending. This includes spending on IDPs, support for poor households, and other well-targeted social spending, he added. He said that monetary policy should remain vigilant about preventing a resurgence of inflation. The relaxation of the fiscal policy stance, electricity tariff increase, and the rebound in oil prices will add to inflationary pressures that monetary policy needs to combat. 'The increased flexibility of the exchange rate and the timely elimination of the State Bank of Pakistans provision of foreign exchange for imports of diesel and other refined products will improve the functioning of the foreign exchange market, make Pakistans economy more resilient to external shocks, and will contribute to further strengthening of its international reserves position. The accelerated reforms to strengthen central bank independence and the legislative amendments to increase its supervisory powers will enhance the monetary policy framework and help strengthen the banking system, he said.