Pakistan seeks landmark deal on debt rescheduling

If it is approved, Pakistan - which already received a less generous Paris Club deal in January - would see the maturity of its government debt extended for up to 40 years and its interest payments reduced.

This would cut the government's debt servicing costs from more than 60 per cent of total revenues to close to 50 per cent in the short term.

The possible deal is part of a package of measures being pursued by foreign governments to reward Pakistan for its support of the coalition against terrorism.

Large bilateral creditors, including the US, are said to have ruled out writing off debt outright, but are seriously considering the current proposal.

Moody's, the credit rating agency, yesterday raised its outlook on Pakistani debt, citing "the likelihood that Pakistan will receive sizeable debt relief including partial forgiveness of bilateral loans".

The deal would closely mimic the "Naples terms", a more generous Paris Club agreement usually reserved for very poor countries with no access to global capital markets. US officials are understood to have stressed this would be a one-off deal - discouraging others from seeking similar treatment, but leaving creditors open to accusations of bias.

Japan, which has lifted sanctions on Islamabad, is Pakistan's biggest external creditor with $5bn ( £3.4bn) in outstanding loans. The US accounts for $3bn, with Germany and France ranking among the next biggest creditors.

Foreign governments have already pledged $800m to Pakistan in support loans. The US and the EU are also promising to lift quotas and tariffs on Pakistani exports.

Pakistan, with foreign debts of $37bn, is also close to concluding a new three-year agreement with the IMF.