KARACHI Pakistan needs `substantial external financing` to stabilise its economy and rebuild fast-shrinking foreign currency reserves, a senior IMF official said.

The economy has been hard hit by soaring world prices for oil and food, which have cut the reserves to a six-year low and pushed the rupee down a fifth against the dollar this year alone.

IMF Director of the Middle East and Central Asia Department Mohsin Khan said Pakistans five-month-old government was preparing its own strategy to steer the economy away from the rocks and had not requested a fund programme.

In an email reply to Reuters received on Friday, Khan said he had yet to see all the details of the Pakistani strategy, but it had outlined its plan to raise funds and put finances in order.

`They are looking at accelerating privatisation, obtaining donors support, and tapping the international markets by issuing GDRs (global depository receipts) and exchangeable bonds,` he said.

Khan said the strategy included letting interest rates rise if necessary, allowing greater exchange rate flexibility, reducing the fiscal deficit and cutting government borrowing.

The government has said it will cut quarterly net borrowing from the central bank to zero, in order to help control inflation already running at close to 25 per cent.

`If the measures outlined in the comprehensive policy strategy are implemented, and sufficient financing is secured quickly, the Pakistani economic authorities could stabilise the economy this year and start to build up reserves,` Khan said.

Investors dislike so many ifs, and the international bond market has been pricing in the risk of Pakistan defaulting on its debt early next year.

Currency reserves have been falling at a rate of around $800 million a month since peaking last October.

Latest data released by the Finance Ministry showed reserves fell from $9.13 billion on Aug. 30 to $8.89 billion on Sept. 3, the lowest level since 2002, of which the central banks reserves accounted for $5.5 billion.

Some bankers have suggested that the civilian government should turn to the IMF for support.

Because of Pakistans frontline role in fighting terrorism and backing for the NATO mission in Afghanistan, bankers anticipate international help to avert a default and a balance of payments crisis.

Pakistan was being bailed out by the IMF when Musharraf took over in a coup in 1999, and over the last six years it underwent a remarkable turnaround to become one of the worlds fastest growing economies, albeit off a low base. Between 1999 and early this year, the Karachi stock markets main index rose close to 1,000 per cent.

But in 2007, as Musharrafs grip on power began to slip, the fiscal and balance of payments deficits deteriorated largely as a result of policy paralysis in the face of soaring world prices for oil and food.

Analysts, however, see Pakistan entering a fresh phase of political instability, highlighted on Wednesday by an apparent assassination attempt on Prime Minister Yousaf Raza Gilani.

The rupee hit an all time low of 77.45 to the dollar the same day but steadied to close on Friday at 76.40/50, marking a drop of more than 19 per cent from the end of 2007.

Central bank Governor Shamshad Akhtar issued a statement on Thursday saying the World Bank was seeking to speed up close to $1 billion in investments in Pakistan.

A Finance Ministry official has said the Asian Development Bank (ADB) is also expected to $500 million from a $1.3 billion loan programme. Pakistan has also agreed in principle with Saudi Arabia to defer payments on oil imports estimated at $5.9 billion.