U.S. inks debt deal with Pakistan

U.S. Ambassador Nancy Powell and Waqar Khan of Pakistan's Economic Affairs Department sign the debt deal

ISLAMABAD, Pakistan -- The United States and Pakistan have signed an agreement rescheduling $3 billion in debt owed by Islamabad.

Friday's signing by U.S. Ambassador Nancy Powell and Waqar Khan, Additional Secretary of Pakistan's Economic Affairs Department, completed a tentative December 13 agreement.

The deal is seen as a show of U.S. support for economic reforms pursued by Pakistani President Pervez Musharraf's government. It is also aimed at assisting Pakistan in the aftermath of the September 11 attacks on New York and Washington.

"The terrorist attacks on the United States provided uncertainty throughout the world and strained many economies including Pakistan's," Reuters news agency reports Powell as saying.

"I trust that this debt relief would provide momentum to Pakistan's economic recovery by allowing the government additional fiscal space to focus its energies and budget resources on development priorities."

The debt covered in the deal is the U.S. portion of $12.5 billion of bilateral debt the Paris Club group of donors agreed to reschedule last November after Pakistan abandoned its support for the former Taliban regime in neighboring Afghanistan.

It includes loans from USAID, the U.S. Eximbank and for agriculture and defense, a state issued to reporters at the signing ceremony said.

Pakistan's Finance Ministry told CNN that it is also working closely with the U.S. government to cancel another $1 billion in debt.

Sanctions lifted

CNN NewsPass VIDEO Opposition parties in Pakistan say the sweeping powers President Musharraf has created for himself will undermine democracy, and vow to overturn them. CNN's Ash-Har Quraishi reports (August 22) Play video   PROFILE General Pervez Musharraf

The United States has lifted sanctions and provided Islamabad with economic support, following Pakistan's support in the war on terrorism.

Finance Minister Shaukat Aziz said the relief would effectively reduce the present value of the bilateral debt to the United States by 28-30 percent, Reuters reports.

"This agreement augers well for Pakistan. It will help reduce debt and gives us space to spend money on poverty reduction," he told reporters.

Under the rescheduling deal, $2.3 billion of consolidated official development assistance (ODA) debt will be repayable over a period of 38 years, including a 15-year grace period.

Consolidated non-ODA debt of $700 million will be repayable over 23 years, including five years' grace.

Constitutional change

The debt agreement came two days after Musharraf made constitutional changes that critics said threatened the South Asian nation's return to democratic rule.

Washington is backing Musharraf's plans to hold national elections but they also expressed concern over plans for constitutional amendments. (Full story)

Among the constitutional changes announced by Musharraf is the ability to overrule parliament.

The United States is the second largest creditor to Pakistan after Japan.

Aziz said Pakistan's total foreign debt had fallen to $36 billion from a high of $38 billion.

Last November, the United States released $600 million in aid to Pakistan, which was followed by a $1.3-billion IMF poverty reduction program and the Paris Club agreement.

Reuters contributed to this report.