Oct. 20 (Bloomberg) -- Pakistan may need as much as $10 billion from donors over the next two years to avoid defaulting on its debts, the International Monetary Fund said.

Pakistan calculated ``they needed financing somewhere in the region of $3 billion to $4 billion,'' IMF Regional Director Mohsin Khan said in an interview in Dubai today. ``We thought that it was closer to $5 billion; $5 billion this year and $5 billion next year.''

Pakistan may seek an IMF loan for the first time in four years to prevent the nation defaulting on its debt. Finance adviser Shaukat Tarin said Oct. 19 his country may seek a loan from the International Monetary Fund in a month should other lenders decline a request for as much as $4.5 billion in funds to help overcome an economic crisis.

Foreign-exchange reserves of South Asia's second-largest economy have plunged more than 74 percent to about $4.3 billion, enough to pay for less than two months of imports, in the past year and the country has $3 billion in debt-servicing costs due in the coming year.

Pakistani and IMF officials are meeting in Dubai over the coming days ``to look at the Pakistani program in much finer detail, to say that if Pakistan were to make a formal request, could we support this program or not,'' said Khan.

At the end of the meeting in Dubai, the IMF should have a ``firm idea of how much they need, who else is in the picture, and then it will be worked out what the IMF can do,'' said Khan.

All-time Low

The rupee slumped to an all-time low last week as the current-account deficit widened to a record and inflation jumped to a 30-year high. The local currency had its biggest gain in seven years today on optimism a bailout may help avert a crisis. Pakistan came off its last IMF program in December 2004.

``If I don't feel the comfort level with the multilateral agencies and our bilateral friends in three to four weeks, then I'll have to write to the IMF,'' Tarin said in an Oct. 19 interview.

Standard & Poor's, doubting Pakistan's ability to repay debt, cut the long-term foreign-currency rating on Oct. 6 to seven levels below investment grade, and said it may lower it again. Moody's Investors Service lowered its credit outlook to negative on Sept. 23, citing a risk of ``missed repayments.''

Pakistan has said it has almost removed subsidies on fuel by raising domestic fuel prices six times between April and July in line with global crude costs. Subsidies on electricity are due to be removed by June 2009.

Conditions Attached

``The most difficult measures that the government has had to take have been the elimination of subsidies and the commitment to zero net borrowing from the central bank,'' said Khan today. ``My guess would be that the other conditions that would be attached to any loan would be relatively minor compared to these.''

Pakistan's $750 million in 6 7/8 bonds due in June 2017 were quoted at a price between 40 and 43 cents on the dollar, according to a Bloomberg survey of four dealers. None of them reported trades today. The notes are lower after their initial sale in May last year at par, or 100 cents on the dollar.

Riskiest Borrower

Five-year credit-default swaps on the country's debt were quoted around 2450 basis points in New York on Oct. 17, making Pakistan the riskiest government borrower after Argentina. That means it costs $2.45 million annually to protect $10 million of the country's debt from default for five years. The cost reached a record $3.07 million on Oct. 6.

Pakistan's next interest payment on its dollar-denominated bonds is due in December and the government is scheduled to repay $500 million in February on a 6.75 percent note. Multilateral and bilateral aid may not be timely enough, S&P said on Oct. 6.

The South Asian country's balance of payments deficit widened in the quarter to Sept. 30 to $3.95 billion from $2.27 billion a year earlier, while the current-account deficit reached a record $14 billion in the year ended June 30, according to data provided by the government.

``A default is not on the cards,'' said Khan. ``A balance of payments crisis is much closer. Some people are saying they are already there; others say they are very close to being there.''

To contact the reporter on this story: Matthew Brown in Dubai at mbrown42@bloomberg.net

Last Updated: October 20, 2008 10:13 EDT