Page last updated at 14:27 GMT, Tuesday, 21 October 2008 15:27 UK

Pakistan holds key talks with IMF

Money changer in Pakistan
Pakistan's foreign exchange reserves have dropped

Talks are being held in Dubai between the International Monetary Fund (IMF) and Pakistan, which faces the threat of defaulting on its foreign debt.

The IMF says Pakistan needs $10bn over the next two years for loan repayments and to stabilise the economy.

Pakistani officials say they will only ask the IMF for money if other available options fail.

Pakistan's traditional allies, China and Saudi Arabia, have so far refused its request for help.

Correspondents say the country is going through its worst economic crisis in a decade, with massive trade and budget deficits, plunging foreign currency reserves and capital flight.

The BBC's Barbara Plett in Pakistan says Islamabad has prepared an economic stabilisation programme and is looking for IMF endorsement, hoping this will encourage international allies and financial institutions to release emergency funds.

Our correspondent says that if that does not work, Pakistan would be forced to accept an IMF programme to avoid defaulting on its debt obligations.

But that would be politically unpopular and an option of last resort because of the strict conditions attached, she says.

'No cash advance'

Although the Pakistani economy has recorded some quite robust growth in recent years, foreign exchange reserves have dropped by three quarters in the last year and it is believed there are sufficient funds for just a few weeks of imports.

Stockbroker in Karachi
The mood is not so bright on the Pakistani stock market

The country also needs up to $3bn within a month to avoid defaulting on loans.

In addition to strains on the country's foreign currency reserves there is a deficit in its trade with the rest of the world, approaching 9% of national income this year.

A balance of payments crisis is a possibility, analysts say, which would result in importers struggling to pay for foreign goods, including oil imports from the Middle East.

Soaring inflation and chronic power outages are also affecting the country.

A group of nations close to Pakistan called Friends of Pakistan met President Asif Zardari on Monday, but did not commit any cash support.

"It is not going to be a cash advance for Pakistan," US Assistant Secretary for South Asia, Richard Boucher, said after the meeting.

"It is going to be a strategic process in which Friends of Pakistan would look into what the Pakistani government is doing, what it is planning, and how could those efforts be supplemented," he said.

'Positive signal'

Officials believe that a "positive signal" from the IMF may encourage international financial institutions and others to release funds which are already in the pipeline.

But is unclear whether this money will be available over the next month to stop Pakistan defaulting.

The BBC's diplomatic correspondent says that the crisis adds a new element of uncertainty to a country whose stability is of growing concern to the United States and its Western allies.

Our correspondent says that Pakistan is likely to be near the top of the next US president's in-tray when he takes office in January, because it is a key Muslim ally of the West with its own nuclear deterrent.

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