Q+A-How will Pakistan budget cope with recession, insurgency?

KARACHI, June 9 (Reuters) - Pakistan announces its budget on Saturday, needing money to cope with a humanitarian crisis posed by over 2.5 million displaced people in the conflict-ridden northwest, while its army saps resources to fight the Taliban.

Nuclear-armed and a key Western ally fighting Islamist militancy in the region, Pakistan is also trying to turn the wheel on an economy in virtual recession.

Having been left with an economic mess and a burgeoning Islamist insurgency, a struggling civilian government needs to restore confidence just 15 months after coming to power.

While trying to drum up more financial support from friendly governments, Pakistan also has to run its budget plans past the International Monetary Fund, having accepted a $7.6-billion emergency loan to avert a balance of payments crisis in November.

Last week, the World Bank announced a $900 million package for Pakistan to strengthen education and fight rural poverty.

Despite everything, the rupee PKR= has been stable for months at about 80 to 81 to the dollar after losing 22.1 percent in 2008, and the Karachi stock market benchmark index .KSE has risen 17.5 percent this year, after a 58.3 percent drop last year.

WHAT IS THE PACE OF THE ECONOMY?

The Planning Commission projects GDP to grow 3.3 percent in 2009/10. In 2008/09, it is expected to grow 2 percent, tantamount to recession in an emerging economy with more than a third of its people living in poverty and an annual population growth of more than 2 percent. The economy has slowed sharply after growing by 5.8 percent in 2007/08.

Agriculture was seen growing 3.8 percent in 2009/10, slowing from 4.7 percent in 2008/09.

Manufacturing is expected to grow 1.8 percent in the coming year, after an expected 3.3 percent contraction year.

(For more details on what to expect, click on [ID:nSIN406572])

HOW DO THE FINANCIALS STACK UP?

Pakistan is deep in junk bond territory, according to credit rating firms.

The IMF said last month it had reached a preliminary understanding to let Pakistan increase the 2009/10 (July-June) fiscal deficit target to 4.6 percent, compared with an original target of 3.4 percent, and a 2008/09 deficit forecast by the central bank at between 4.0 and 4.5 percent.

Analysts say Pakistan may still find it hard to keep the fiscal deficit within 4.6 percent, as development spending is projected to increase by 13 percent to 621 billion rupees (nearly $8 billion).

The slowing economy has hampered revenue growth. Having targeted growth of 5.5 percent, revenues are expected to undershoot a total target of 1.25 trillion rupees by at least 80 billion rupees ($1 billion).

Pakistan's central bank said last week it anticipated slippage in the fiscal deficit target.

WHAT IS THE COST OF THE HUMANITARIAN CRISIS?

The United Nations last month called for international support to raise a $543 million fund to help Pakistan meet the costs of looking after 2.5 million people displaced by fighting in the Swat valley and neighbouring areas of the northwest.

Although the offensive has cleared militants out of Swat's main population centres, the government has still to give the all-clear for people to go home.

U.N. High Commissioner for Refugees Antonio Guterres has estimated the cost of helping people go back to Swat to rebuild their lives could be up to $1 billion.

The United States has pledged more than $300 million for the refugee crisis, and has called for European and Islamic nations to do more to help. [ID:nN08349998]

HOW DOES PAKISTAN JUSTIFY ITS DEFENCE SPENDING?

The Nation newspaper reported last week that the government had decided to raise defence spending by 15.5 percent for 2009/10 to 342 billion rupees. That would equate to almost 12 percent of a total budget outlay of 2.9 trillion, reported by the News.

There is plenty of criticism over the amount spent on defence though Pakistan rejects that because of the fragility of relations with rival India. The two nations have fought three wars since they won independence from British colonial rule in 1947, and went to the brink of a fourth in 2002.

Although the most pressing threat to Pakistan has become the internal one posed by Islamist militants, the perceived threat posed by India runs deep in the Pakistani military psyche.

India put a five-year-old peace process on "pause" after Pakistani militants attacked the Indian city of Mumbai on Nov. 26 last year, killing 166 people.

($1=80.75 rupees) (Editing by Simon Cameron-Moore and Jerry Norton)