Pakistan agrees to IMF bailout

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By Stephen Graham ASSOCIATED PRESS

ISLAMABAD, Pakistan | Pakistan said Saturday it had agreed to borrow $7.6 billion from the International Monetary Fund in an effort to stabilize the economy of this strategically important U.S. ally on the front lines of the battle against al Qaeda and the Taliban.

The government had been reluctant to go to the IMF, but had little choice once even close allies the United States, China and Saudi Arabia snubbed its pleas for significant bilateral aid.

Pakistan's finance chief said the IMF agreed to the bailout after endorsing plans to tackle the country's huge budget and trade deficits.

Opposition lawmakers fear the IMF will impose austerity measures that will hurt ordinary Pakistanis, two-thirds of whom live on $2 a day or less. But the IMF said the package included steps to protect the poor from cutbacks.

The loan will boost Pakistan's foreign-currency reserves, which have seen a rapid decline that raised the prospect of a run on the local currency and a default on the country's foreign debt.

"We have fulfilled our commitment that Pakistan will never default [on its debt]," Shaukat Tareen, finance adviser to Pakistan's prime minister, said at a news conference.

Pakistan is one of a number of countries, including Hungary and Ukraine, seeking IMF assistance in the wake of the global credit crunch.

However, nuclear-armed Pakistan's strategic importance on the front lines of the U.S.-led war against terrorism makes its financial and political stability particularly critical for the international community.

Security concerns are currently focused on Peshawar, a strategically vital city on the edge of the wild tribal belt where militants stage attacks on U.S. and NATO troops across the border in Afghanistan and increasingly threaten the city itself.

Pakistan's economy, which enjoyed years of fast-paced growth under then-President Pervez Musharraf, is threatened by gross imbalances caused by the soaring costs of imported oil and food.

Earlier this year, the government slashed massive subsidies on fuel and other essential goods that had pushed its budget deficit to 7.4 percent of gross domestic product in the year through June.

The government is aiming for 4.3 percent in the current fiscal year, when the IMF expects Pakistan's economic growth to slump to 3.5 percent annually from 5.8 percent in the previous 12 months.

Oil prices have fallen sharply. However, inflation in Pakistan remains above 20 percent, which prompted the central bank to increase interest rates by two percentage points last week at a time when many other countries are reducing borrowing costs to stimulate growth.

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