ISLAMABAD - Agreeing to the downward revision of economic growth and inflation targets for this fiscal year, the International Monetary Fund (IMF) Tuesday gave a go-ahead signal to Pakistan to cut down the discount rate (interest rate), keeping in view the falling inflation in the country. Under Article IV Consultation and First Review under the Stand-By Arrangement, a statement issued by the Executive Director for Pakistan said, The authorities agreed with the mission on a revised macroeconomic framework (with lower growth and inflation) and supporting policies for 2008/09 and beyond. The authorities would adhere to the programmes fiscal target for 2008/09 and continue with further fiscal adjustment in 2009/10, the report said. The Fund observes, There should be scope for the State Bank of Pakistan to lower its discount rate if inflation abates, the external reserve position continues to improve, and the government can sell its T-bills to banks and non-bank private investors. Exchange rate flexibility will continue to facilitate external adjustment. It was highlighted that Pakistan needs additional external assistance to reduce risks, and provide for greater development and social spending. The upcoming donor meeting provides an important opportunity for mobilizing additional assistance, the IMF hoped. In October 2008, the authorities embarked on a stabilization programme for 2008/09-09/10 aimed at restoring financial stability while protecting the poor. This programme, supported by an SBA arrangement, envisages a significant tightening of fiscal and monetary policies to bring down inflation and strengthen the external position, and includes several structural measures in the fiscal and financial sectors. Initial developments since the approval of the programme have been generally positive. The exchange rate has been broadly stable, enabling the State Bank of Pakistan (SBP) to buy foreign exchange on a net basis. As a result, gross reserves have strengthened from $ 3.5 billion at end-October to $6.7 billion as of February 20. Despite the somewhat improved confidence, credit and broad money demand growth have been lower than projected. Policy implementation has been good and the programme remains on track. All quantitative performance criteria and the structural benchmarks for the first programme review were met. The end-December fiscal deficit target, which proved challenging, was achieved through a combination of revennue and expenditure measures. However, the recent modification of cash margin requirements on letters of credit (LCs) for certain imports resulted in nonobservance of the continuous performance criterion against imposing or intensifying exchange restrictions. The authorities plan to reverse this intensification by end-June and, on this basis, request a waiver of nonobservance for the missed performance criterion. Banks have weathered the crisis well thus far, but should be monitored carefully. The worsening macroeconomic environment is affecting banks asset quality and profitability. The global economic and financial environment has deteriorated significantly since the start of the programme. While oil import prices are lower, exports are falling, external financing is more difficult, and there are increasing risks to remittances. In light of performance to date and the authorities policy intentions, staff recommends the completion of the first programme review and the approval of the waiver of nonobservance for the missed performance criterion.