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Pakistan Agrees To $7.6 Billion IMF Bailout

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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-Qaida 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 dollar 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.

In the past three days, unidentified gunmen have killed an American aid worker, abducted an Iranian diplomat and shot and wounded two foreign reporters in the city.

Pakistani leaders consider the anti-foreigner attacks retaliation for Pakistani military operations in the tribal areas, including one in the Bajur region said to have killed more than 1,600 people since August.

On Saturday, officials said militants fired a mortar shell into the village of Michni, just north of Peshawar, killing one soldier and wounding another, while police killed a suspected suicide bomber by firing a rocket at his explosives-filled car in the nearby Shabqadar area.

Pakistan's economy, which enjoyed years of fast-paced growth under former 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 hike interest rates by 2 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 that has drained Pakistan's foreign currency reserves to $6.7 billion, down from a peak of $16.5 billion in October 2007.

Tareen insisted the IMF had merely approved the reform plans drawn up by the Pakistani government, but provided few details of expected tax increases and spending cuts.

The IMF said the program was designed to "preserve social stability through a well-targeted and adequately funded social safety net" as well as to restore investor confidence.

Tareen said Pakistan would apply formally for the emergency loan this coming week and an IMF statement said its board would consider the matter shortly.

With Pakistan's currency having fallen some 20 percent since March, Tareen said Pakistan was hoping to receive a substantial first tranche from the fund before the end of the month.

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

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

The IMF said other multinational donors were expected to extend further support.

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Associated Press writers Ashraf Khan in Karachi and Riaz Khan in Peshawar contributed to this report.