VZCZCXRO2102
RR RUEHLH RUEHPW
DE RUEHIL #1715/01 1211408
ZNR UUUUU ZZH
R 301408Z APR 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 6742
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHRC/USDA FAS WASHDC 4204
RUEAIIA/CIA WASHDC
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEHKP/AMCONSUL KARACHI 9639
RUEHLH/AMCONSUL LAHORE 5388
RUEHPW/AMCONSUL PESHAWAR 4125

UNCLAS SECTION 01 OF 03 ISLAMABAD 001715 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: EAGR EAID ETRD ECON PGOV PREL PK
SUBJECT: PAKISTAN: THE IMPACT OF RISING FOOD AND COMMODITY PRICES 
 
REF: A) STATE 39410, B) Islamabad 1643, C) Islamabad 1532, D) 
Islamabad 669, E) Islamabad 69 
 
¶1. (U) The following is a response to the Department's request for 
information on the impact that rising food and agricultural 
commodity prices are having on Pakistan's economic and political 
stability. 
 
¶2. (SBU) Summary:  The prices of almost all essential agricultural 
commodities have steadily risen over the past twelve months.  While 
there have been no reports of widespread unrest due to wheat 
shortages and the rising cost of food, food price inflation is 
further undermining the Government of Pakistan's already fragile 
balance of payments situation.  Pakistan will likely continue to 
face food supply challenges in the short term due to increased 
international prices, the effects of a lower-than-expected wheat 
harvest and the impact that nation-wide power shortages continue to 
have on agricultural production.  End Summary. 
 
PRICES RISE ACROSS THE BOARD 
- - - - - - - - - - - - - - 
 
¶3. (SBU) The prices of basic food commodities have steadily risen 
over the past year, including the cost of key staples such as wheat, 
rice and cooking oil.  Pakistan's 2008-09 wheat production is 
forecast at 21.5 million metric tons, well below the 23 million 
metric tons needed to meet domestic demand.  The Government of 
Pakistan's (GOP) lack of a coordinated commodity policy, water 
shortages and production overestimates are to blame for the 
discrepancy.  If forecasts prove to be true, the GOP will have to 
import around 1.5 million metric tons of wheat in 2008-09.  Despite 
a good 2007-08 harvest, Pakistan remained in the grip of a wheat 
crisis, importing 1.7 million metric tons.  Due to price supports, 
the cost of wheat in Pakistan is among the cheapest in the world, 
currently trading at USD 252 per metric ton.  The relative low price 
of Pakistani wheat increases the incentive to smuggle wheat to 
neighboring India, Iran and Afghanistan, further exacerbating 
domestic wheat shortages. 
 
¶4. (SBU) Almost all essential food commodities have increased in 
price over the last twelve months.  While Pakistan is a rice 
exporter, a below-target fiscal year 2008 rice harvest in Pakistan, 
coupled with strong demand for Pakistani rice in the international 
market, has resulted in continuous pressure on domestic rice prices. 
 For the past year, the cost of both IRRI-6 and basmati rice 
varieties have risen by 79.86 percent and 61.24 percent 
respectively.  Vegetable oil is Pakistan's largest agricultural 
import and the domestic price of both vegetable and cooking oil has 
risen over fifty percent in the past year.  Only onions, garlic and 
sugar, all commodities domestically produced in surplus this year, 
have decreased in price.  The chart below details the price 
movements of essential commodities over the last twelve months. 
 
FURTHER STRAIN ON THE GOVERNMENT'S BOTTOM LINE 
- - - - - - - - - - - - - - - - - - - - - - - 
 
¶5. (SBU) Rising commodity prices come at a time when Pakistan's 
newly elected civilian government is already under economic strain. 
Budget overruns already total USD 8.3 billion due to energy 
non-payment issues, food and fuel subsidies, defense expenditure 
overruns and national election spending.  Finance Minister Ishaq Dar 
has said that if the GOP does not contain spending, the fiscal 
deficit could rise to the unsustainable level of 9.5 percent of GDP. 
 Food imports grew by 25.7 percent during the first eight months of 
the current fiscal year (July 2007 - February 2008), accounting for 
25.8 percent of Pakistan's current account deficit.  Food imports 
will likely continue to rise as domestic shortages continue and 
international commodity prices rise.  Wheat imports, estimated at 
1.5 million metric tons in 2008-09, will also negatively impact the 
current account.  Dar said that the economic situation is so 
alarming that the GOP has revised all macroeconomic targets 
downward.  The GDP growth rate target has been revised from 7.2 
percent to 6 percent and the fiscal deficit target revised upwards 
from 4 percent to over 6 percent of GDP. 
 
¶6. (SBU) Federal Bureau of Statistics figures indicate that food 
price inflation jumped 20.61 percent in March 2008, setting a new 
national and regional record.  Pakistan has been suffering from 
monthly double digit food price inflation since September 2007. 
During the first nine months of the current fiscal year (July 2007 - 
March 2008), overall inflation registered at 9.5 percent versus 8 
percent over the same period last year. Food inflation increased to 
 
ISLAMABAD 00001715  002 OF 003 
 
 
13.8 percent in the period, up from 10.3 percent last year.  There 
is little food preference substitution in Pakistan due to a low 
average per capita income (USD 920) and deeply entrenched 
consumption habits. 
 
THE IMPACT ON AVERAGE PAKISTANIS 
- - - - - - - - - - - - - - - - 
 
¶7. (SBU) The rising cost of food disproportionately affects lower 
income groups.  The GOP defines "extremely poor" as individuals 
whose monthly consumption is less than 50 percent of the poverty 
line, currently at Rs 878.64 (USD 14.17) and not updated since 2005. 
Lower and middle income groups experienced higher levels of food 
inflation (13.4 percent and 13 percent) versus upper-middle and 
upper income brackets (12 percent and 10.1 percent).  Dr. Sajjad 
Akhtar of the Pakistan Planning Commission estimates that around 
fifty percent of Pakistan's population is clustered around the 
poverty line; even a small decline in monthly income or a sustained 
rise in food prices would push the majority of this group below the 
poverty line.  Pakistan is one of 40 countries identified by the 
World Food Program (WFP) as being at risk of food insecurity.  The 
WFP recently raised its estimate of at-risk individuals from 60 to 
77 million, or 48 percent of the population.  Although the GOP 
provides essential food items at subsidized prices through 
government-owned stores, a large portion of Pakistan's rural 
population does not live in close proximity to these outlets. 
 
¶8. (SBU) While there have been no reports of widespread domestic 
unrest due to rising food prices, lines at government owned stores 
are often long and key commodities such as wheat are in short supply 
in parts of Pakistan, particularly in the Northwest Frontier 
Province (NWFP). When asked to rank their most pressing grievances, 
average Pakistanis cite the rising cost of food, along with fuel 
prices and unemployment, as particularly worrisome. There were riots 
in April in Multan over the issue of growing electrical power 
outages; last summer there were power related riots in Karachi.  The 
government has announced it will have to increase fuel prices over 
the next few months, which may spark additional unrest.  Given 
transportation costs, increased fuel prices will affect food prices 
as well. 
 
FUTURE CHALLENGES AND OPPORTUNITIES 
- - - - - - - - - - - - - - - - - 
 
¶9. (SBU) Pakistan will likely continue to face food supply 
challenges in the short term due to increased international prices, 
the effects of a lower-than-expected wheat harvest and the impact 
that nation-wide power shortages continue to have on agricultural 
production.  Domestic demand shortages are projected to continue 
well into the next fiscal year with a rebound expected in fiscal 
year 2009-10.  If managed properly, Pakistan's agriculture sector 
could benefit from rising agriculture commodity prices.  If more 
resources are devoted to wheat production, the country could 
increase output and become a net exporter of wheat, providing much 
needed export revenue.  In addition, Pakistan is a rice exporter and 
will likely export more than three million metric tons this year, 
garnering around USD one billion in foreign exchange earnings. 
 
¶10. (SBU) There are currently more than 28 research centers actively 
pursuing the commercial integration of genetically modified crops in 
Pakistan.  Hybrid corn and vegetable strains are being utilized by 
domestic producers.  While Pakistan currently bans certain seed and 
plant material to protect against the introduction of foreign plant 
diseases, the use of GMO products is permitted. All imported food 
products and seeds, including cotton and grain, must comply with 
minimum quality and photosanitary standards, several of which are 
based on U.S. standards. 
 
¶11. (SBU) The GOP needs to remain vigilant on rice to ensure that 
increased exports do not lead to domestic shortages, as happened 
with wheat.  Early optimistic wheat production estimates encouraged 
the GOP to permit wheat exports to neighboring countries, only to 
find that as wheat production declined, Pakistan could no longer 
meet domestic demand.  Pakistan currently plans to export three 
million metric tons of rice and needs to actively monitor domestic 
price and demand in conjunction with export levels. The GOP is 
currently in discussions to either impose rice export duties or set 
a minimum export price for the commodity. 
 
¶12. (SBU) The GOP will need to continue to reform its trading regime 
by limiting state trading and reducing export subsidies. The GOP 
actively encourages private sector participation in the export 
 
ISLAMABAD 00001715  003 OF 003 
 
 
sector, but continues to set high tariff rates to discourage the 
import of commodities that directly compete with domestically 
produced agricultural items.  In addition, since food prices are 
likely to remain high in the medium to long-term, the targeted food 
subsidy program for low income groups needs to be revamped and 
extended to all geographic regions to effectively assist Pakistan's 
poor. 
 
U.S. PROGRAMS 
- - - - - - - 
 
¶13. (SBU) USAID's food assistance is mostly channeled through the 
World Food Program (WFP). USAID directly executes a few small 
programs, all with long lead times, targeting school nutrition and 
Pakistan's poor.  The USG is a major contributor to the WFP and two 
of their larger programs in Pakistan. Due to increased food prices, 
these programs are under funded by USD 26 million for FY2008.  While 
USAID has requested additional funding to cover some of this 
shortfall, it is Post's understanding that additional U.S. funding 
for food relief will be targeted at priority countries experiencing 
dire food shortages and starvation.  Pakistan is not on this 
priority list.  Given worldwide commodity prices for oil and wheat, 
the fragile new civilian government will be hard pressed to deliver 
on campaign promises to improve the situation.  It is in USG 
interests to support the transition to civilian democratic rule by 
assisting the GOP in tackling the effects of rising food prices. 
 
¶14. (SBU)  In addition to substantial USDA reporting on Pakistan's 
agricultural sector, Embassy Islamabad has also reported on food 
security and accompanying problems in the following cables: 
 
--Islamabad 1643: Pakistan's Level of Preparedness to Respond to 
UG99 Wheat Fungus 
--Islamabad 1532: Pakistan's Fiscal Deficit Putting Economic 
Stability at Risk 
--Islamabad 669: Pakistan Revives the Ration Card 
--Islamabad 69: Economic Election Issues; Load-shedding and Wheat 
Shortages 
 
PATTERSON