By Khalid Qayum
Bloomberg News
Sunday, November 16, 2008

Pakistan reached an agreement in principle with the International Monetary Fund on a $7.6 billion loan package aimed at preventing the nation from defaulting on foreign debt and restoring investor confidence.

The loan "will be used for the balance of payments and to build our foreign reserves," Shaukat Tarin, the de facto finance minister, said Saturday at a televised news conference in Karachi.

Pakistan, a center in the war on terrorism, has been forced to seek IMF assistance after its foreign-exchange reserves shrank 75 percent in the past year, to $3.5 billion last week, the equivalent of one month's imports, and a group of donor nations declined to provide funds. Hungary, Iceland and Ukraine also have negotiated IMF packages in recent weeks as the global economic crisis has radiated beyond the financial sector.

"The IMF didn't give us any conditions different from our economic stabilization program," Tarin said. "The IMF counseled us to increase the key interest rate to curb inflation."

The IMF funds would be available over 23 months and have an interest rate of 3.5 percent to 4.5 percent, Tarin said. The loan would have to be repaid by 2016.

Pakistan expected to get the "maximum" amount of funds upfront from the IMF to meet $3.5 billion to $4.5 billion of needs this fiscal year, Tarin said. The country may receive the first installment this month, he said.

The IMF loan "will give confidence to investors, and it will help us in seeking more aid from friendly countries and other lenders" such as the World Bank and Asian Development Bank, Tarin said.