Pakistan says $7.6 billion IMF loan agreed

KARACHI-PAKISTAN: Pakistan has agreed to borrow $7.6 billion from the International Monetary Fund to avoid adding an economic crisis to its struggle against Islamic militants, an official said Saturday.

Finance chief Shaukat Tareen said the IMF had agreed ``in principle'' to the bailout after examining government plans to tackle Pakistan's yawning budget and trade deficits.

``We believe that we can see commencement of a steady stream of inflows from now on, thereby eliminating the air of uncertainty,'' Tareen said at a news conference.

The loan will augment Pakistan's foreign currency reserves, whose rapid decline had raised the prospect of a run on the rupee and a default on the country's international debt.

That risk has already eroded confidence in Pakistan's government and economy, deterring badly needed foreign investment at a time of slowing economic growth and runaway inflation.

Tareen said the government would apply formally for the loan this coming week. The IMF has already signaled that it will consider the application quickly. Tareen said Pakistan would receive payments over a two-year period and is hoping to receive a first substantial installment before the end of the month.

He said the loan carries an interest rate of between 3.5 per cent and 4.5 per cent and that Pakistan would have five years to pay it back, starting in 2011 or 2012.

Pakistan is one of a number of countries including Hungary and Ukraine seeking IMF assistance in the wake of the global credit crunch that is already undermining the world economy.

However, nuclear-armed Pakistan's position on the front line of the US-led war against terrorism makes its stability particularly vital to the international community.

Pakistan's government has been reluctant to go to the IMF but had little choice once allies including the United States, China and Saudi Arabia failed to come forward with significant bilateral aid.

Opposition lawmakers complain that the IMF will impose austerity measures including cuts in government spending that will hurt Pakistan's many poor. Tareen, however, insisted that the IMF had merely approved the government's own still-unpublished reform plans.

Pakistan's economy, which enjoyed years of fast-paced growth under former President Pervez Musharraf, is threatened by gross imbalances caused by soaring bills for imported oil and foodstuffs.

Earlier this year, the government slashed massive subsidies on fuel and other essential goods that had pushed its budget deficit to over 7 percent of gross domestic product in the year through June.

Oil prices have since dropped back sharply. However, inflation in Pakistan remains above 20 percent, prompting the central bank to hike interest rates last week at a time when other countries are reducing rates to stimulate economic growth.

High import bills also caused a huge trade deficit that has drained Pakistan's foreign currency reserves to $6.7 billion, down from a peak of $16.5 billion in October 2007.

Pakistan is hoping for direct economic assistance from a group of nations called the ``Friends of Democratic Pakistan.'' Senior officials from the group meet in Abu Dhabi on Tuesday.

Pakistan is hoping that Saudi Arabia will supply it with oil on deferred payment, while countries including Germany have said they are willing to boost development aid.