Shaukat Tarin in Karachi on Saturday. (AFP)

Karachi, Nov. 15 (Reuters): Pakistan has agreed with the International Monetary Fund (IMF) on a $7.6 billion emergency loan to stave off a balance of payments crisis and pave the way for a broader economic rescue plan.

The IMF said today its executive board was expected to meet shortly on the 23-month standby credit, after IMF staff and Pakistan agreed on a reform programme. “This support is part of a broader package that includes financing from other multilateral institutions and regional development banks,” IMF managing director Dominique Strauss-Kahn said.

The international community is concerned that an economic meltdown in the nuclear-armed state could play into the hands of the al Qaida and allied Islamist militant groups seeking to destabilise the Muslim nation of 170 million.

The eight-month-old civilian government is banking on goodwill towards Pakistan during its transition to democracy after more than eight years under former army chief Pervez Musharraf, who quit as President in August to avoid impeachment.

Shaukat Tarin, the recently appointed adviser to the Prime Minister, said the formalities should be concluded next week. “We are expecting it this month,” he told a news conference in Karachi when asked when the first tranche might arrive.

“We have requested IMF to give as much as they can.”

The interest rate on the credit facility would vary between 3.51 and 4.51 per cent with changes according to market conditions, and would be payable between fiscal 2011/12 and 2015/16, Tarin said.

The IMF did not disclose details. But it said the credit under its emergency funding facility would be tied to Pakistani economic reforms, including higher official interest rates and tighter fiscal policies, plus a well-funded social safety net to protect the poor.

Pakistan expects the World Bank and other lenders to step forward with several billion dollars of additional loans, and steadfast ally China to pitch in with $500 million. But other multilateral lenders and friendly governments were waiting for the IMF accord before acting, in order to bring some discipline to Pakistan’s economic management, analysts said. Other potential donors are gathering in Abu Dhabi on Monday for a “Friends of Pakistan” conference.

State Bank of Pakistan governor Shamshad Akhtar said the IMF money would be used to build up the central bank’s foreign currency reserves, which Tarin said should be equivalent to more than three months import cover.

The central bank’s reserves stood at $3.5 billion on November 8, equivalent to just nine weeks worth of imports, and Pakistan faced defaulting on international debt obligations in February next year unless it received a multi-billion dollar infusion.

The rupee has lost 23 per cent in value against the dollar since the start of the year, and foreign investors have fled a stock market which is down around 35 per cent.

Stocks would have fallen further but for an artificial floor authorities placed under the Karachi market’s benchmark index at the end of August, and almost certainly will fall further once the floor is removed. Tarin said the IMF had endorsed Pakistan’s own strategy to bring about structural adjustments needed to correct unsustainable current account and fiscal deficits.

The strategy included reducing excessive government borrowing from the central bank to zero, and boosting the tax base, but did not involve a cut in defence spending, one of the heaviest items on the budget, Tarin said.

The only point of difference with the IMF, according to Tarin, was the fund’s desire to see higher interest rates. But a 200 basis point hike in State Bank's policy discount rate to 15 per cent announced on Wednesday partially met those concerns. With headline inflation running above 25 per cent and core inflation at 18.3 per cent, real interest rates are still in negative territory.