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O 231242Z JUN 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7482
INFO RUEHBUL/AMEMBASSY KABUL PRIORITY 8763
RUEHLO/AMEMBASSY LONDON PRIORITY 8150
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 3426
RUEHKP/AMCONSUL KARACHI PRIORITY 9919
RUEHLH/AMCONSUL LAHORE PRIORITY 5663
RUEHPW/AMCONSUL PESHAWAR PRIORITY 4432
RUEKJCS/SECDEF WASHINGTON DC PRIORITY
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL PRIORITY
RHWSMRC/USCINCCENT MACDILL AFB FL PRIORITY
RUEAIIA/CIA WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 ISLAMABAD 002201 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PREL PTER PGOV PK
SUBJECT: SCENESETTER FOR CODEL CARDIN 
 
¶1.  (SBU) Summary.  Pakistan's newly elected civilian 
government remains a fragile coalition beset by differences 
over how to restore the deposed judiciary and President 
Musharraf's future.  Continuing political deadlock over the 
judiciary has seriously undermined the GOP's ability to 
tackle growing economic and security challenges. We look 
forward to briefing you on political, economic and security 
developments.  End Summary. 
 
Political Overview 
------------------ 
 
¶2.  (SBU)  The coalition government between the Pakistan 
People's Party (PPP) and the Pakistan Muslim League-N (PML-N) 
continues to hold despite strains over how to restore the 
judges fired by President Musharraf in November 2007.  Until 
that issue is resolved, the PML-N ministers have withdrawn 
from the cabinet.  The ongoing deadlock has seriously 
undermined the GOP's ability to tackle growing economic and 
security challenges.  PPP leader Asif Zardari and PML-N 
leader Nawaz Sharif agreed to passage of a budget June 21 
that expands the number of Supreme Court justices from 16- to 
9; that should allow the government to bring the deposed 
judges back on board.  Still undetermined, however, is the 
fate of former Chief Justice Iftikhar Chaudhry. 
 
¶3.  (SBU)  According to a recent poll, Nawaz's popularity has 
risen to 86%; the poll indicates that if an election were 
held today, the PML-N would win 42% of the vote compared to 
32% for the PPP.  Nawaz has been touting a simple 
pro-judiciary/anti-Musharraf message.  Zardari's position is 
more nuanced; he is calling for restoration of the judiciary 
minus Chaudhry via a package of constitutional reforms that 
would denude the presidency of key powers.  He also is 
proclaiming that a PPP member will soon be in the presidency 
but has stopped short of supporting outright impeachment of 
Musharraf.  Although the PPP remains the dominant party in 
the coalition, Nawaz's strength is growing.  He will win a 
National Assembly seat in the June 26 by-elections, and his 
brother Shahbaz Sharif has just become Chief Minister in 
Punjab, the political and economic heartland of Pakistan. 
 
¶4.  (SBU)  Musharraf has said publicly that he will not 
resign but will accept whatever the parliament decides about 
his fate.  Should a motion of impeachment be brought against 
him, Musharraf will have an opportunity to defend himself in 
parliament.  A two-thirds majority of a joint sitting of the 
National Assembly and the Senate is required to impeach a 
president; Musharraf's party and its allies still control the 
Senate, and there is debate over whether the coalition 
currently has the votes to impeach.  Indirect Senate 
elections in March 2009 will likely bring the PPP and/or the 
PML-N to power in the Senate. 
 
Security Situation 
------------------ 
 
¶5.  (SBU)  We will provide you with an in-depth security 
brief when you arrive.  The GOP has announced a new policy of 
outreach, not (they insist) to militants, but to tribal 
leaders who provide support networks for the Taliban, foreign 
al Qaeda militants, and a growing coterie of criminals who 
are colluding with militants.  We remain skeptical that 
negotiated and pending agreements with these tribal leaders 
are enforceable. We have expressed our concern that these 
agreements must prohibit cross-border attacks on U.S./ISAF 
forces in Afghanistan.  Cross-border attacks have doubled 
compared to the same period last year. 
 
¶6.  (SBU)  Pakistan has agreed to participate in a combined 
investigation (with the  U.S. and Afghanistan) of the June 10 
incident in which 11 Pakistani military personnel were killed 
by U.S. strikes.  The U.S. regrets the loss of life that 
occurred.  Until this investigation is complete, however, we 
are refraining from further public comment.  We are 
encouraging Pakistan to move forward on manning a tripartite 
Border Coordination Center at Torkham, Afghanistan (the first 
of six BCCs) as a way to provide real-time intelligence that 
could prevent future incidents. 
 
Economic Situation 
------------------ 
 
ISLAMABAD 00002201  002 OF 002 
 
 
 
¶7. (SBU) Following five years of seven percent annual 
economic growth, Pakistan is currently facing severe economic 
challenges.  Rolling electricity shortages, rising food costs 
and the GOP's decision to subsidize fuel and energy have 
contributed to deterioration of all major economic 
indicators.  Economic growth for the current fiscal year is 
expected to be 5.8%, well below a target of 7.2%.  The fiscal 
deficit is projected to be 7% of GDP versus a target of 4%; 
GOP borrowing from the State Bank of Pakistan (SBP) reached 
an all-time high of USD eight billion for the first ten 
months of the fiscal year.  As of early May 2008, the GOP had 
USD 13.98 billion in outstanding debt to the SBP, or 9% of 
GDP.  Pakistan's trade deficit rose to USD 17 billion, up 
from USD 11 billion last year, as lackluster export growth 
fell far short of increasing imports.  Savings and foreign 
investment both declined, further impacting overall GDP 
growth. 
 
¶8. (SBU) The GOP passed its USD 31 billion 2008-2009 fiscal 
year budget on June 21.  In addition to setting revenue 
targets and expenditure levels, the budget also includes 
assumptions on economic growth and economic policy measures, 
setting an overly optimistic growth figure of 5.5%.  The GOP 
plans to reduce the fiscal deficit from 9% to 4.7% of GDP; 
the imposition of additional taxes will increase revenue 
collection by 25%.  Resumption of the privatization program, 
decreases in subsidies and increased duties on luxury goods 
are expected to decrease the current account deficit from 7% 
to 6% of GDP. 
 
¶9. (SBU) Energy is a growing concern for Pakistan and 
threatens to further impact the economy.  Not a single 
megawatt has been added to the national grid since 2000, 
despite population growth and economic expansion.  Pakistan 
currently suffers from an energy shortfall of between 4,000 
to 4,500 megawatts per day with some regions and cities 
suffering from blackouts for up to 12 hours per day. 
Industrial production is threatened as factories are unable 
to produce goods and unemployment is rising. Petroleum and 
electricity subsidies account for the bulk and have continued 
to rise as international oil prices have skyrocketed.  The 
GOP is paying USD 554 million per month for subsidies on 
petroleum and will attempt to reduce these subsidies in the 
coming fiscal year despite the intense popularity of such 
measures with the public. 
 
¶10. (SBU) The prices of basic agricultural commodities have 
steadily risen over the past year, including the cost of key 
staples such as wheat, rice and cooking oil.  Pakistan has 
been suffering from monthly double digit food price inflation 
since September 2007.  Over 100 million Pakistanis live on 
less than 2 dollars per day, including 25 million living on 
less than one dollar per day.  The World Food Program 
recently identified Pakistan as one of 40 countries at risk 
of food insecurity and recently raised its estimate of 
at-risk individuals from 60 to 77 million, or 48 percent of 
Pakistan's population. 
 
FATA Development Plan 
--------------------- 
 
¶11.  (SBU)  USAID's Office of Transition Initiatives has 
begun work on small projects in all seven agencies of the 
Federally Administered Tribal Areas (FATA).  Working with the 
FATA Secretariat, we have also begun to implement our 
livelihoods, health/education and capacity development 
projects.  We would be happy to brief you on these projects, 
our measures to monitor spending of this project-based 
assistance, and efforts to improve coordination among other 
donors. 
 
 
 
 
 
PATTERSON