- Associated Press - Friday, January 7, 2011

KARACHI, Pakistan (AP) — The second-largest member of Pakistan’s ruling coalition reversed its decision to join the opposition Friday, averting the potential collapse of the government in this nuclear-armed nation.

The move by the Muttahida Qaumi Movement, announced after the government backed down on unpopular economic measures, eased the political crisis facing Pakistan. But the government’s concessions could prevent it from receiving billions of dollars in international loans, exacerbating the country’s already precarious financial position.

The MQM’s decision came a day after Prime Minister Prime Minister Yousuf Raza Gilani said the government would reverse unpopular fuel price hikes that partly prompted the party’s defection. He also said Friday during a visit to MQM headquarters in the southern port city of Karachi that the government would postpone a new tax system meant to raise more revenue.

“Our unity will benefit both the country and the national interest,” said Mr. Gilani, while standing next to senior MQM leader Raza Haroon. “We can steer the country out of this storm.”

Mr. Haroon said the MQM agreed to rejoin the coalition for the sake of democracy and the country’s well-being.

But the party’s demands that the government reduce fuel prices and hold off on tax reform will deepen the country’s deficit, a development that could lead the International Monetary Fund to withhold billions of dollars in loans desperately needed to stabilize the economy.

IMF spokeswoman Caroline Atkinson criticized the fuel price decision Thursday, saying Pakistan needed to reduce the amount of money it is spending on energy subsidies.

“They’re inefficient and untargeted so that the bulk … of the benefit from the energy subsidy goes to higher-income individuals and large companies,” Ms. Atkinson said.

Secretary of State Hillary Clinton also criticized the decision, saying “we think it is a mistake to reverse the progress that was being made to provide a stronger economic base for Pakistan.”

The U.S. has pledged billions of dollars in civilian aid to bolster Pakistan’s economy, but Mrs. Clinton has said repeatedly that the country must reform its tax system to increase the amount of revenue it is generating domestically.

Political analyst Mosharraf Zaidi said the ruling Pakistan People’s Party may have survived this crisis, but it was severely weakened and unlikely to get much done legislatively in the two years remaining in its term.

“There’s a good chance it’ll complete its mandated tenure, but it will do so literally continuing to stumble and sputter from one crisis to next,” he said.

Associated Press writers Nahal Toosi and Munir Ahmed contributed to this report from Islamabad.