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UNCLAS SECTION 01 OF 03 ISLAMABAD 002109 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN ETRD EAGR ENRG PREL PGOV PK
SUBJECT: PAKISTAN'S 2008-2009 BUDGET: OVERLY OPTIMISTIC, PART ONE OF 
THREE 
 
SUMMARY 
- - - - 
 
¶1. (SBU) The Government of Pakistan (GOP) released its USD 31 
billion 2009-2009 budget June 11 in a speech by Finance Minister 
Naveed Qamar to Parliament.  In addition to setting revenue targets 
and expenditure levels, Pakistan's budget also includes assumptions 
on economic growth and economic policy measures.  This message is 
part one of a three part series detailing Pakistan's 2008-2009 
budget.  Part two will cover energy measures, while part three will 
cover agricultural sector reform and poverty alleviation programs. 
The current fiscal year's budget set an overly optimistic growth 
figure of 5.5 percent, with annual inflation running at 12 percent. 
The GOP will reduce the fiscal deficit from nine to 4.7 percent of 
GDP.  Imposition of additional taxes will increase revenue 
collection by 25 percent to USD 1.85 billion. 
 
¶2. (SBU) Summary continued:  Proposals for the phase out of energy 
subsidies by December 2008 have been discussed. Resumption of the 
privatization program, decreases in subsidies and increased duties 
on luxury goods are expected to decrease the current account deficit 
from seven to six percent of GDP.  Reserves are targeted to increase 
to USD 12 billion. Given the downturn in Pakistan's economy, this 
budget seems overly optimistic in terms of growth, revenue 
collection and closing the fiscal and current account deficits. 
Qamar introduced a proposal for new government bonds with market 
interest rate yields to decrease borrowing from the State Bank of 
Pakistan.  No increase in the military budget reflects a real 
decrease in spending because of inflation.  For the first time, it 
is more than a single line item, but is still opaque. 
 
¶3. (SBU) Summary continued:  Energy was given special mention, with 
plans to promote unrealistic conservation and efficiency measures to 
reduce demand by 1500 MW to decrease the electricity shortfall to 
3000 MW.  Qamar also proposed an increase in the minimum wage from 
USD 59.12 to USD 88.69, a pension program, a 20 percent increase in 
government salaries and increases for poverty alleviation programs 
(septel, part three). End summary. 
 
"UNFAVORABLE DEVELOPMENTS" MEAN MISSED TARGETS 
- - - - - - - - - - - - - - - - - - - - - - - 
 
¶4. (U) Pakistan's Finance Minister Naveed Qamar gave the annual 
speech to Parliament rolling out the USD 31 billion FY 2008-2009 
budget June 11.  (Note:  Pakistan's fiscal year runs from July 1 - 
June 30 the following year.  According to Pakistan's Constitution, 
the budget must be debated and passed by Parliament before the July 
1 beginning of the fiscal year. End note.)  He first gave an 
overview of the "unfavorable developments" during the current fiscal 
year.  As a result of increases in international commodity prices 
and the previous government's unwillingness to curtail spending, 
Qamar commented that Pakistan missed its fiscal and monetary targets 
for FY 2007-2008.  Growth was 5.8 percent, compared to the 7.2 
percent target and 6.8 percent growth rate during the previous 
fiscal year.  The missed growth target is largely due to weak growth 
in the manufacturing and agricultural sectors.  Inflation was 11 
percent, as compared to 7.8 percent during last fiscal year. 
 
¶5. (U) The budget deficit will be a record seven percent of GDP, 
compared to the four percent target.  The current account deficit is 
projected at USD 11 billion, or seven percent of GDP.  Reserves 
declined from a record high of USD 16.5 billion to less than USD 
12.3 billion at the end of April 2008.  The rupee depreciated nearly 
6.4 percent between July 2007 and April 2008.  Qamar highlighted 
that the deficit was financed through borrowing from the State Bank 
of Pakistan (SBP), "which is like printing money."  He made the link 
between SBP borrowing and inflation, adding that "we have to stop 
this process; otherwise, inflation will be much higher than it is at 
present." 
 
BUDGET AMBITIOUS AND TARGETS OPTIMISTIC 
- - - - - - - - - - - - - - - - - - - - 
 
¶6. (U) The GOP established six priorities for the 2008-2009 budget: 
 
ISLAMABAD 00002109  002 OF 003 
 
 
 
 
-- restore economic stability through reduction of the fiscal and 
current account subsidies, "rationalization of subsidies," and 
accumulation of foreign exchange reserves; 
-- protect Pakistan's most vulnerable sectors of society; 
-- increase social sector spending to improve social indicators; 
-- improve housing for the most disadvantaged Pakistanis; 
-- increase the productivity of the agricultural and manufacturing 
sectors; and 
-- restore investor confidence by emphasizing the government's 
commitment to economic growth, investment, and the key role of the 
private sector. 
 
Part three of this message (septel) will look at the agricultural 
sector and poverty alleviation measures included in the proposed 
budget. 
 
¶7. (U) The GOP has also set ambitious macroeconomic targets for the 
FY 2008-2008 fiscal year, including: 
 
-- 5.5 percent GDP growth; 
-- 12 percent inflation; 
-- 25 percent investment to GDP ratio; 
-- reducing the fiscal deficit from 7.0 to 4.7 percent of GDP; 
-- reducing the current account deficit from seven to six percent of 
GDP; and 
-- increasing the foreign exchange reserves to USD 12 billion. 
 
PHASING OUT ENERGY AND ELECTRICITY SUBSIDIES 
- - - - - - - - - - - - - - - - - - - - - - 
 
¶8. (SBU) Qamar mentioned phasing out subsidies in very general terms 
in his budget speech, saying many of the subsidies benefit "groups 
that are neither needy nor should be subsidized."  He added that "a 
detailed pruning of subsidies is necessary and inevitable to 
preserve the country's finances."  While not included in the budget 
speech, the Ministry of Finance (MOF) proposed to the Federal 
Cabinet that consumer fuel prices should be at parity with 
international prices by December 30, 2008.  The MOF also proposed 
that consumer fuel prices be adjusted periodically in accordance 
with fluctuations in international fuel prices.  (Comment:  Phasing 
out subsidies by the end of the year would require nearly tripling 
prices at the pump, which is unlikely to happen. See part three of 
this message for more details. End comment.) 
 
¶9. (SBU) The MOF also seeks to roll back electricity subsidies and 
has proposed to the Cabinet that the GOP allow for fluctuations in 
the fuel surcharges to cope with international prices. MOF also 
proposed amending the tariffs set by the National Electric Power 
Regulatory Authority (NEPRA) to allow additional fuel surcharges or 
other taxes on per unit electricity consumption with an aim of 
eliminating subsidies to the power sector by the end of 2008. 
 
LIMITING BORROWING FROM THE CENTRAL BANK 
- - - - - - - - - - - - - - - - - - - - - 
 
¶10. (U) Qamar was adamant in his presentation that the GOP must 
limit borrowing from the State Bank of Pakistan (SBP), commenting 
that "borrowings from the central bank have reached an unacceptable 
level.  This is a major source of inflationary pressures and should 
be contained."  The MOF has proposed a series of three, six and 12 
month bonds which will be available from authorized commercial banks 
and will yield market interest rates.  New products will also be 
introduced as part of the National Savings Scheme. 
 
NEW TAXATION MEASURES 
- - - - - - - - - - - 
 
¶11. (U) In order to close the fiscal deficit, the GOP has formulated 
a set of new taxes, which it believes will boost tax revenues by 25 
percent to USD 1.85 billion.  The GOP will attempt to reduce its 
reliance on indirect taxes.  Direct taxes now account for 39 percent 
of tax collection.  The GOP proposes to increase duties on 300 
 
ISLAMABAD 00002109  003 OF 003 
 
 
non-essential and luxury items from the 15 to 25 percent range to 
between 30 and 35 percent.  These items include cosmetics, many 
domestic appliances, luxury food items and cigarettes.  The custom 
duties on cars with 1800cc and larger engines will be raised from 90 
to 100 percent.  A five percent duty will be imposed on imported 
vehicles with engines smaller than 850cc.  A USD 3.70 duty will be 
assessed on imported cell phone handsets. 
 
¶12. (U) The GOP will also raise the general sales tax from 15 to 16 
percent, and increase the excise tax on telecommunications services 
from 15 to 21 percent.  Excise taxes on banking and insurance 
services will be raised from five to ten percent.  Excise taxes on 
cement will be increased from USD 11.08 per metric ton to USD 14.04. 
 
 
¶13. (U) Qamar acknowledged that, while the number of Pakistanis 
paying taxes had increased to 20 percent of the population, that 
figure is still low given Pakistan's population of 160 million. 
Pakistan's tax to GDP ratio still remains one of the lowest in the 
region at 11 percent.  He proposed the withdrawal of 11 income tax 
exemptions, but increased the overall income tax exemption to USD 
2,665 for men and USD 3,548 for women. 
 
INDUSTRY AND MANUFACTURING 
- - - - - - - - - - - - - - 
 
¶14. (U) Qamar proposed a number of measures aimed at shoring up 
Pakistan's industrial competitiveness, including an increase on 
duties from five to 20 percent on imported sewing machines; and 
decreasing import duties on raw materials for a wide range of 
industries, including  textiles, pharmaceuticals and call centers. 
The MOF also proposed a number of modest measures to benefit foreign 
investors.  These include the elimination of local offsets for the 
import of capital goods worth more than USD 50 million for the 
establishment of new industrial projects. 
 
MILITARY BUDGET 
- - - - - - - - 
 
¶15. (U) The military budget was not mentioned in the Finance 
Minister's speech.  However, Prime Minister Gilani announced earlier 
in the week that there would be no increases in this year's military 
budget. This implies a real decrease of around six percent, after 
accounting for inflation and rupee depreciation, according to 
Ministry of Finance contacts.  For the first time, the 2008-2009 
budget documents provide a breakdown between defense administration 
and military defense.  Military defense is further broken down into 
employee-related expenses, operating expenses, physical assets, 
civil works and an undefined "less recoveries" category.  Total 
military spending for the 2008-2009 fiscal year is USD 4.38 billion. 
(Comment:  Between Coalition Support Fund reimbursements, Foreign 
Military Sales and a few smaller programs, the U.S. contributes 
approximately 25 percent of Pakistan's stated defense budget. 
Pakistan's strategic weapons budget is not publicly available. End 
comment.) 
 
COMMENT 
- - - - 
 
¶16. (SBU) Comment: The Ministry of Finance's proposed budget is 
overly optimistic on growth, revenue, deficit reduction, expenditure 
targets as well as the elimination of subsidies. It is heavy on 
poverty alleviation measures (part three of this message), 
consistent with the electoral promises of both the Pakistan Peoples 
Party (PPP) and the Pakistan Muslim League - Nawaz (PML-N). However, 
it falls considerably short of recommending any meaningful measures 
that will address Pakistan's increasingly severe energy crisis (part 
two of this message).  This is only the MOF's proposal; Parliament 
will now debate it before passage in advance of the July 1 beginning 
of the fiscal year.  End Comment. 
 
PATTERSON