Conditions on the IMF loan do not include reducing Pakistan's defence budget, says finance official [AFP]

"We have reached an agreement with the IMF with the help of our friends and other officials, Shaukat Tarin, adviser to the Pakistani president, said on Saturday.

Tarin said Pakistan would receive $4 billion dollars this year as part of the 23-month deal, but the agreement was still to be signed.

"Next week, we [Pakistan] will officially apply and send them a letter of intent," he said.

"The interest rate on the IMF programme will be 3.51 to 4.51 per cent," Tarin said. Pakistan is expected to begin repayments in 2011.

Pakistan has applied for up to $9 billion in credit from the IMF and, based on its IMF quota, it is entitled to get at least $7.6 billion.

'Last resort'

The country needs up to $4.5 billion to deal with a balance of payments crisis that has raised the prospect of the key US ally in the so-called "war on terror" defaulting on its foreign debts.

The international community is concerned that economic meltdown could benefit groups sympathetic to al-Qaeda and the Taliban operating along the Pakistan-Afghan border.

The Pakistani government had previously said it would only apply to the IMF for emergency funds as a last resort.

Not only will the move prove unpopular with much of the population, the fund only agrees credit under strict fiscal conditions - such as the elimination of subsidies.

However, by November 8 this year, the state bank of Pakistan's foreign currency reserves were equivalent to just nine weeks worth of import payments.

With foreign currency reserves so low, the government faced the prospect of defaulting on its international debt obligations in February unless if received a multi-billion dollar cash injection.

Tarin said conditions attached to the loan would force the Pakistani government to reduce borrowing but would not impose cuts on the nation's defence spending.

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