IRELAND should not impose further austerity even if growth targets are missed next year, the IMF has said.
The agency also called on Europe to honour pledges to help make Ireland's debt more sustainable, in its latest review of the country's finances.
It outlined fears that growth may be weaker than expected during 2013 - but does not advocate more austerity.
Instead it advises the coalition that if it is failing to reach economic targets next year, it should not rush to bring in any further cutbacks, for fear of damaging any fragile growth. Instead the economic targets could be pushed out until 2015 to help recovery.
The IMF made the statement as it approved its eighth review of the bailout programme, authorising the release of a further €890m funding under the bailout terms.
It said Ireland had so far shown "steadfast policy implementation" with the conditions of the bailout programme, despite slower growth this year.
It is predicting more gradual economic recovery with growth of 1.1pc in 2013 and 2.2pc in 2014. But with many economists forecasting growth of less than 1pc in 2013, there is a real threat to Ireland's chances of getting out of bailout and back to the markets as planned in 2014.
The IMF says that if growth is weaker than forecast and economic targets begin to slip, the Government should not introduce extra cuts or a mini-Budget. Instead the Government should wait until 2015 before taking extra measures, in order to protect whatever growth there is.
IMF deputy managing director David Lipton said: "The program with Ireland has now been in place for two years and the Irish authorities have consistently maintained strong policy implementation.
"The authorities have demonstrated their commitment to put Ireland's fiscal position on a sound footing, with the 2012 deficit target expected to be met even though growth has been low.
"Nonetheless, if next year's growth were to disappoint, any additional fiscal consolidation should be deferred to 2015 to protect the recovery.
"Continued strong Irish policy implementation is essential for the programme's success," said Mr Lipton.
In what may be a reference to the ongoing negotiations on repayment of Anglo Irish debt, Mr Lipton called on European partners to deliver on pledges to help Ireland.
"Ireland's market access would also be greatly enhanced by forceful delivery of European pledges to improve programme sustainability, especially by breaking the vicious circle between the Irish sovereign and the banks."
The IMF also said that the banking sector needs to be reformed and shored up to help improve lending. "Vigorous implementation of financial sector reforms is needed to revive sound bank lending in support of economic growth," it said.