IMF Approves $7.6B Loan For Pakistan

Pakistan has won final approval for a $7.6 billion loan from the International Monetary Fund to help the front line state in the campaign against Islamist terrorism stave off possible economic meltdown.

The IMF said a first installment of $3.1 billion will be transferred immediately to the nuclear-armed country, which is battling surging violence by Taliban- and al Qaeda-linked militants and is increasingly seen in the West as key to stabilizing neighboring Afghanistan.

The IMF said the Pakistani economy had been badly hit by the worsening security situation, higher oil and food import prices and the global financial and credit crisis.

"By providing large financial support to Pakistan, the IMF is sending a strong signal to the donor community about the country's improved macroeconomic prospects," IMF acting Chairman Takatoshi Kato said in a statement released after the decision Monday in Washington, where the fund is based.

Pakistan's young government had been reluctant to go to the IMF but had little choice after close allies - the United States, China and Saudi Arabia - turned down pleas for significant bilateral aid.

With the IMF deal now in place, Pakistani officials hope those three and other nations in the "Friends of Pakistan" group will move forward with their own assistance packages.

In mid-November, the IMF announced it had reached a preliminary agreement on the deal.

Opposition and nationalist lawmakers have criticized the government for turning to the fund, saying the IMF will impose austerity measures that will hurt ordinary Pakistanis, two-thirds of whom live on $2 a day or less.

"This IMF loan the government is getting is in fact poison, and the nation has been forced to drink it," Javed Hashmi, a senior figure in the main opposition party, told reporters.

But many Pakistani economists and commentators argue that the country had no choice but to turn to the IMF.

The loan removes the most pressing risk facing the country, namely that it would not be able to repay dollar-denominated government bonds due to mature early next year, said Muzammil Aslam, an economist at the Pakistani securities firm KASB.

Economic progress in the medium term depended on Pakistan meeting some of the conditions imposed by the IMF, said Aslam, noting the package was subject to quarterly review.

"That is the big gray area," he said.

The IMF said that in return for the money, Pakistan had agreed to phase out energy subsidies, boost taxes and implement other money saving reforms. It said the World Bank would put in place a "comprehensive" social security net to shield the poor from any cuts.

Aslam and other economists noted that Pakistan's government had already made some tough decisions, such as hiking the prices of fuel and electricity.

In an interview with The Associated Press earlier this month, President Asif Ali Zardari said the loan was "a difficult pill, but one has to take medicine to get better."

The loan will immediately boost Pakistan's foreign currency reserves, whose rapid decline had fueled a 20 percent slide in the value of the rupee since March.

The currency has clawed back some ground in recent weeks as it became clear that the IMF would step in.

The country is also wracked by power cuts, inflation running at above 20 percent and has seen its stock market slump amid waning investor confidence.

All the drag on the domestic economy has put the young government up against a wall; struggling to assert itself in front of a skeptical public and an opposition which readily criticize the leaders as powerless.

The new president has taken some measures to try and consolidate his power, including the weekend move to shut down the political wing of the nation's ubiquitous spy agency.

CBS News' Farhan Bokhari reported the move to disband the Inter Services Intelligence service may have been a step in the right direction, but critics say it won't be enough to stem the heavy-handed influence of the military in a nation where the government itself lacks clout. (Read more.)

Pakistan is one of a number of countries including Hungary and Ukraine seeking IMF assistance in the wake of the global credit crunch. However, its strategic importance in the U.S.-led war against terrorism makes its financial and political stability particularly critical for the international community.

U.S. officials say that militants sheltering in its lawless northwest are behind much of the violence in Afghanistan, where a resurgent Taliban threaten the success of the U.S.-led mission there seven years after the invasion.

They also say that al Qaeda's leadership - including Osama bin Laden - has managed to regroup in the region, and is possibly plotting attacks on the West.

Pakistan's army is currently batting militants in several parts of the northwest, but some Western analysts and officials suspect elements within the security forces of sympathizing with the extremists.

On Monday, government forces killed at least 15 militants in fighting in the Swat valley, the army said.

Troops have also made progress in securing Peshawar just outside the tribal belt, a strategic city where there has been a spate of attacks on foreigners recently, military official Zafrullah Khan said. About 25 suspected militants were killed over two weeks around Peshawar, which sits on a key supply route for Western troops in Afghanistan, he said.