Nov. 10 (Bloomberg) -- Pakistan's inflation accelerated to near a three-decade high in October, placing further strains on a nation that the International Monetary Fund says needs $10 billion to avoid defaulting on its debt.

Consumer prices in South Asia's second-largest economy soared 25 percent from a year earlier after gaining 23.9 percent in September, the Federal Bureau of Statistics said in Islamabad today. Transport and communication costs jumped 39.3 percent, with food and beverages prices up 31.7 percent.

Pakistan may be compelled to raise interest rates in order to receive an IMF bailout, if the Washington-based lender insists on the same conditions it applied to loans for Iceland and the Ukraine. Higher borrowing costs may not bring inflation down soon as other conditions attached to an IMF loan would likely include higher energy prices, economists said.

``The time when inflation actually starts to recede may be pushed forward further,'' said Khalid Iqbal Siddiqui, head of research at InvestCapital Securities in Karachi. ``Even though fuel prices are currently on the way down, there are other utilities whose prices are likely to be raised by the government, as per an agreement with the IMF.''

State Bank of Pakistan Governor Shamshad Akhtar is struggling to bring inflation under control amid a blowout in the nation's balance of payments and a 31 percent drop in the rupee this year, which has driven up import costs. The currency reached a record low of 83.55 per dollar on Oct. 17.

Shrinking Reserves

The nation's foreign reserves have also shrunk to $3.71 billion on Oct. 25 from $14.2 billion a year ago, raising concern that Pakistan will not be able to pay its $3 billion debt servicing costs due in the coming year.

Gasoline prices in Pakistan were cut by 6 percent on Nov. 1, the seventh change in eight months, after a decline in crude oil prices in the international market.

Pakistan is expected to make a formal request for financial assistance to the IMF this week, the Business Recorder reported today, without elaborating on where it obtained the information.

Conditions attached to an IMF loan would include an increase in the central bank's benchmark interest rate to 15 percent from 13 percent, as well as a 31 percent rise in tariffs on electricity and other utilities, the newspaper reported.

Pakistan is also seeking funds from lenders such as the World Bank and the Asian Development Bank and donor countries included in the `Friends of Pakistan' group to help stabilize its economy. A meeting of the group, which includes the U.S., U.K., China and Saudi Arabia, is scheduled for this month in United Arab Emirates.

`Severe Pressure'

Pakistan's credit rating was lowered by Standard & Poor's and Moody's Investors Service in October on concern the nation won't be able to pay its overseas debt because of eroding foreign reserves. The country ended its last IMF program in 2004.

``Pakistan faces severe pressure from the external side, the fiscal side, the monetary side, economic growth and politics,'' Elena Okorotchenko, head of Asian sovereign ratings at S&P, said in a Nov. 5 interview in Singapore. ``There are five angles in which we analyze a country's ratings and Pakistan is negative on all counts.''

To contact the reporter on this story: Farhan Sharif in Karachi at fsharif2@bloomberg.net.

Last Updated: November 10, 2008 03:49 EST