April 17 (Bloomberg) -- Pakistan won pledges for $5.28 billion in aid from more than 20 countries to help shore up an ailing economy and combat al-Qaeda and Taliban militants along its border with Afghanistan.

“Today’s commitment will enhance Pakistan’s capacity to fight terrorism and give us an ability to strengthen civic institutions that have weakened over the years,” Pakistani Foreign Minister Shah Mahmood Qureshi said after a donor conference in Tokyo today. “We will use force whenever required but we have to reach out to the people, give them development and cater to their social needs.”

While the aid is welcome, “it all boils down to how effectively the government is going to spend it,” said Habib ur-Rehman, chief executive officer of Atlas Asset Management in Karachi. The year-old civilian government led by President Asif Ali Zardari has “not been very effective so far” in solving problems of weak governance and a slumping economy, he said, noting it has been embroiled in months of political infighting.

“This government is not clean,” said Syed Adil Gilani, chairman of the Pakistan chapter of Transparency International, an anti-corruption lobby group. “We want to see what conditions and monitoring the donors will apply to ensure that the money is used for the purpose given.” Transparency International’s annual index lists Pakistan as the 46th most corrupt country of 180 surveyed.

‘Crucial Moment’

The funds, to be spread over two years, will help the South Asian nation at a “crucial moment,” Japan’s Prime Minister Taro Aso said. Donor nations ranging from the U.S. to Iran, Saudi Arabia and China also reaffirmed commitments of more than $15 billion for projects to reduce poverty and boost growth.

Pakistan used the conference to rally support after terrorist attacks killed an average of 84 people a month so far this year including an ambush of Sri Lanka’s national cricket team. The government was seeking about $6 billion to reduce its dependence on the International Monetary Fund, which provided a $7.6 billion bailout in November.

“Pakistan desperately needs these funds to overcome its budgetary gap and support development projects which will help curb poverty,” said Zainab Jabbar, chief economist at IGI Securities Ltd. in Karachi.

The economy is forecast to expand 2.5 percent in the 12 months ending June 30, the slowest pace in eight years, after growing at an average annual pace of 5.8 percent since 2002. Economic growth will start picking up from July to an average annual rate of more than six percent over the next five years, the government has said.

Biggest Donors

The biggest donors today were the U.S. and Japan, which gave $1 billion each, and Saudi Arabia with $700 million, said World Bank Vice President Isabel Guerrero. While no specific conditions are attached to the aid, the IMF will make regular visits to Pakistan to monitor economic progress.

“The money will serve different purposes but most importantly it will shield the poor from the shocks of the global economic recession,” she said. The bank co-hosted the donor conference with Japan.

U.S. President Barack Obama’s administration is pushing Zardari’s government to fight extremism.

U.S. special envoy to Pakistan and Afghanistan Richard Holbrooke announced the U.S. contribution. The aid is subject to Congressional approval and is intended to support “development and safety net spending,” according to a faxed statement from State Department spokesman Robert Wood.

Swat Valley

Zardari signed a peace accord with Taliban militants this week that puts the Swat Valley, a former tourism destination northwest of the capital, under militants’ strict interpretation of Islamic law. The accord risks letting the Taliban further spread their influence, Pakistani security analyst Mahmood Shah said in an interview last week. It also undermines democracy and human rights, White House spokesman Robert Gibbs said April 14.

“The agreement is actually an improvement over what was already there,” Qureshi said, without elaborating. “If there is an impression that we have capitulated to the extremists, please ignore it. We have not capitulated, nor have we surrendered.”

Pakistan is still suffering effects of the U.S.-backed war in the 1980s against Soviet control in Afghanistan, and the Afghans’ subsequent civil wars, Zardari said at the conference today.

“This is a war that we all helped to create when we were fighting the Cold War,” Zardari said. “The failures that you see in our society don’t stem from the war on terror of today.”

Economic Losses

Terrorism has cost Pakistan $35 billion in economic losses and damage to infrastructure, according to a statement given to reporters by a Zardari aide. More than 3,500 terrorist incidents have taken place in Pakistan since 2007, according to the statement.

Pakistan will use assistance it receives to fight poverty and improve education in addition to security, today’s statement said.

“Poverty alleviation is fundamental to contain and reverse extremism,” according to the statement. “Alternatives have to be offered to the youth from disadvantaged parts of the population to wean them away from the appeal of extremism.”

To contact the reporter on this story: Stuart Biggs in Tokyo at sbiggs3@bloomberg.net; Takashi Hirokawa in Tokyo at thirokawa@bloomberg.net.

Last Updated: April 17, 2009 09:05 EDT