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Viewing cable 08ISLAMABAD2109, PAKISTAN'S 2008-2009 BUDGET: OVERLY OPTIMISTIC, PART ONE OF
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Reference ID | Created | Released | Classification | Origin |
---|---|---|---|---|
08ISLAMABAD2109 | 2008-06-13 00:58 | 2011-08-26 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Islamabad |
VZCZCXRO8182
RR RUEHLH RUEHPW
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ZNR UUUUU ZZH
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TO RUEHC/SECSTATE WASHDC 7356
INFO RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEHRC/USDA FAS WASHDC 4230
RUEAIIA/CIA WASHDC
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/SECDEF WASHINGTON DC
RUEHBUL/AMEMBASSY KABUL 8723
RUEHDO/AMEMBASSY DOHA 1555
RUEHNE/AMEMBASSY NEW DELHI 3391
RUEHLO/AMEMBASSY LONDON 8094
RUEHKP/AMCONSUL KARACHI 9888
RUEHLH/AMCONSUL LAHORE 5632
RUEHPW/AMCONSUL PESHAWAR 4378
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