VZCZCXRO1990
RR RUEHLH RUEHPW
DE RUEHIL #3801/01 3441400
ZNR UUUUU ZZH
R 091400Z DEC 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 0585
INFO RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEHRC/USDA FAS WASHDC 4292
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/SECDEF WASHINGTON DC
RUEHKP/AMCONSUL KARACHI 0760
RUEHLH/AMCONSUL LAHORE 6491
RUEHPW/AMCONSUL PESHAWAR 5348
RUEHNE/AMEMBASSY NEW DELHI 4175
RUEHBUL/AMEMBASSY KABUL 9550
RUEHKT/AMEMBASSY KATHMANDU 9325

UNCLAS SECTION 01 OF 02 ISLAMABAD 003801 
 
 
SENSITIVE 
SIPDIS 
 
 
E.O. 12958:  N/A 
TAGS: ECON ETRD EAID EFIN ENGY EINV PGOV PK
SUBJECT: IMF LOOKS FOR USG SUPPORT WITH PROGRAM IMPLEMENTATION 
 
REF: ISLAMABAD 03776 
 
 
¶1. (SBU) SUMMARY.  EconCounselor met with the IMF's Resident 
Representative to discuss Pakistan's implementation of economic 
stabilization policies.  They agreed that the SBA adjustment 
measures are necessary for a stable economy and this message should 
be continually reinforced with officials of the Government of 
Pakistan (GOP).  The USG and GOP have discussed holding a donors' 
conference on January 8 in Beijing, a date that could strike the 
balance between promptly endorsing progress while still achieving a 
successful conference.  The GOP still faces the difficulty of 
removing the costly electricity subsidies and the trading 
restrictions on the stock exchange.  In February the IMF evaluation 
team will visit Pakistan for the first assessment of Pakistan's 
benchmarks.  END SUMMARY. 
 
¶2. (SBU) On December 8, EconCounselor and EconOff met with Paul 
Ross, the International Monetary Fund's (IMF) Resident 
Representative in Pakistan to discuss Pakistan's implementation of 
the Stand-By Agreement (SBA) the IMF board approved November 24. 
Ross commented that in the past, Pakistan has not always followed 
through on IMF program commitments, leading to curtailed programs 
and indicated that the IMF would appreciate additional U.S. 
reinforcement on the importance of meeting the benchmarks when 
meeting with GOP officials.  While Ross and EconCounselor agreed 
that it is important to reinforce the message when communicating 
with the GOP that the SBA adjustment measures are necessary for a 
stable economy, both also agree that the current quarter will be 
especially critical for the program as donors will be looking at 
benchmark commitments as well.  Ross noted that Mohsin Khan, 
Director for Middle East and Central Asia  will be visiting Pakistan 
next week for meetings and the IMF evaluation team will visit 
Pakistan in February to determine if the program requirements are 
being met, but the exact date for the team visit has yet to be 
determined. 
 
--------------------------------------------- ----- 
DONOR FUNDING IS EXPECTED BUT HAS NOT MATERIALIZED 
--------------------------------------------- ----- 
 
¶4. (SBU) EconCounselor said the USG and GOP have discussed holding a 
donors' conference on January 8 in Beijing but the dates have yet to 
be finalized.  EconCounselor explained that while donors are 
interested in a prompt response to endorse the GOP's adjustment plan 
and the SBA -- and the USG in particular wants to avoid losing the 
momentum and hold the conference soon to reinforce the program - 
donors are also interested in seeing that SBA benchmarks are met and 
that sufficient resources are marshaled to have a successful 
conference. 
 
¶5. (SBU) EconCounselor noted that given the global financial crisis, 
several potential donors are very interested in the results of the 
GOP's prioritization of development projects as it may be easier to 
garner support for projects versus direct budgetary support.   For 
example, the USG is acutely aware of the imminent shortage of wheat 
in Pakistan during this winter and is working to help finance 
imports from the United States.  (reftel) 
 
¶6. (SBU) Ross noted that the GOP expects China to deposit USD 500 
million in Chinese U.S. dollar reserves into the State Bank of 
Pakistan.  The GOP will be permitted to use the reserves for any 
purpose, including budgetary expenditures, but will then return the 
reserves to China.  China's original offer was at the London 
interbank lending rate (LIBOR) (2.795 percent as of December 8) plus 
one percent for a term of one year, but the GOP requested a longer 
term.  This request is being considered but the reserve deposit is 
expected to be disbursed in December. 
 
¶7. (SBU) The SBA includes a forecast USD 3.8 billion in financing 
from the World Bank and Asian Development Bank in fiscal year 
2008/2009.  However, both banks have had difficulty disbursing and 
Ross sought USG assistance in trying to press for quick 
disbursement.  Ross noted that, without these funds, meeting 
quarterly targets will be "very tricky." 
 
ISLAMABAD 00003801  002 OF 002 
 
 
 
----------------------------- 
POLICY INTEREST RATE INCREASE 
----------------------------- 
 
¶8. (SBU) Ross said that the proposed January increase in the policy 
rate from 15 percent to 16.5 percent is still under discussion.  The 
decision will be a function of rupee exchange rates, foreign 
exchange reserve levels, T-bill auction results, and inflation 
rates.  Ross noted that the core inflation rate continued to 
accelerate for the October figures, so he was interested to see the 
November rates.  He also noted that the policy rate decision will be 
made factoring in economic indicator data from multiple months. 
 
-------------------- 
STOCK EXCHANGE FLOOR 
-------------------- 
 
¶9. (SBU) Noting the August 27 floor is still in place on the Karachi 
Stock Exchange, Ross said that the longer the stock exchange floor 
remained in place, the harder it becomes to remove it.  Removing the 
floor will certainly result in flight of foreign capital while 
foreign reserve stocks are low, but Ross said "there will be no 
right time" and it is necessary.  The GOP continues to revise stock 
market support schemes but the IMF's view has been that the use of 
public funds is inappropriate.   Ross noted that discussions on the 
floor removal have gone as far as possible at the staff level and 
the issue has now been elevated to the IMF's management for 
consideration of the GOP proposals.  He noted that discussions on 
the issue would continue immediately after the EID holiday and could 
not confirm local press reports that the floor may be removed as 
early as December 15. 
 
--------------------- 
ELECTRICITY SUBSIDIES 
--------------------- 
 
¶10. (SBU) Concerning the removal of electricity subsidies, Ross said 
that the World Bank was working with the GOP on phasing them out. 
The proposal is that, beginning in January, consumers' bills will 
slowly increase month-by month (2 to 4 percent) until the full 
subsidy is removed.  However, the cabinet has not reached consensus 
yet on this approach.  EconCounselor noted that this could present a 
great challenge to the GOP as public resentment continues to 
increase as the electric bills rise while blackouts also increase. 
Ross agreed that the increasing electricity outages complicate the 
price increase commitments but hoped the USG would continue to 
encourage the GOP to adhere to its targets. 
 
PATTERSON