The United States has signed a $3bn debt forgiveness deal with Pakistan.

The signing brings Pakistan a step closer towards winning the cancellation of a further $1bn of debts to the US.

Pakistan's government offered vital support to the US-led coalition's war against terrorism during the war to remove the Taleban government from neighbouring Afghanistan.

The US president promised the debt forgiveness measures when Pakistan's President Pervez Musharraf visited Washington in February.

Looking better

Pakistan's finance minister, Shaukat Aziz, said the agreement to postpone the repayment of the $3bn of loans by more than 20 years gave Pakistan "space to spend money on poverty reduction".

Finance Minister Shakat Aziz: 'space to tackle poverty'

Pakistan recently won praise from the International Monetary Fund for its handling of its economic problems, managing to secure economic growth and low inflation despite regional unrest.

"In the last 18 months, given what has occurred in terms of sanctions, in terms of Afghanistan... virtually every other country would have collapsed," a spokesman for a recent IMF assessment team said.

The deal covers debts unpaid about two months after the suicide hijacking attacks on New York, at the end of November 2001.

Big breathing space

The latest rescheduling deal is more sweeping than one signed by the US and Pakistan last December covering about $500m of loans.

Not only does it involve more money, but Pakistan has 38 years to repay the bulk of the loans - $2.3bn - and a 15-year holiday from interest payments.

Repayment of the remaining $0.7bn has been put on a 23 year time frame, with a five year rest from interest payments.

The loans involved were for projects ranging from agriculture to defence spending and funds to support importers.

Altogether, Pakistan's creditors have agreed to reschedule $12.5bn of debts since the launch of the US offensive to dislodge the Taliban.