VZCZCXRO0117
RR RUEHLH RUEHPW
DE RUEHIL #3202/01 2811105
ZNR UUUUU ZZH
R 071105Z OCT 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 9165
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHML/AMEMBASSY MANILA 3018
RUEHBUL/AMEMBASSY KABUL 9224
RUEHNE/AMEMBASSY NEW DELHI 3860
RUEHLO/AMEMBASSY LONDON 8828
RUEHKP/AMCONSUL KARACHI 0425
RUEHLH/AMCONSUL LAHORE 6165
RUEHPW/AMCONSUL PESHAWAR 4995
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEAIIA/CIA WASHDC
RUEKJCS/SECDEF WASHINGTON DC

UNCLAS SECTION 01 OF 02 ISLAMABAD 003202 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN EAID PREL PK
SUBJECT: WITH RECORD HIGH Q1 BORROWING FROM THE STATE BANK, PAKISTAN 
SLIPS CLOSER TOWARDS FINANCIAL DEFAULT 
 
¶1. (SBU)   Summary.  Despite numerous pledges to the contrary, the 
Government of Pakistan's (GOP) borrowing from the State Bank of 
Pakistan (SBP) is at a record high in spite of commitments to reduce 
borrowing to net zero levels in every quarter.  While the Federal 
Board of Revenue has performed reasonably well in tax collection, 
surpassing targets by a small margin, funds are insufficient to 
finance increased spending. Although complete first quarter fiscal 
data has not been publicly released yet, the increased SBP borrowing 
indicates that the fiscal deficit could be much higher than 
targeted.  The rapid depletion of foreign exchange reserves has 
created additional stress such as a large rupee depreciation and a 
liquidity crunch in the inter-bank market.  The inter-bank call 
money rates have shot up to record levels and the State Bank of 
Pakistan had to intervene in the market to provide liquidity to 
banks. End Summary. 
 
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BORROWING FROM STATE BANK OF PAKSITAN AT RECORD HIGH 
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¶2. (SBU) GOP borrowing rose over 100 percent in the first 11 weeks 
of the current fiscal year (July 2008-June 2009). According to SBP 
data, the government borrowed PKR 170.19 billion (USD 2.16 billion) 
from July 1 to September 20 from the SBP.  The GOP retired PKR 3.73 
billion (USD 47.4 million) to the SBP during the same period last 
year.  In the recent plan, "Economic Program of Pakistan: 
Reinvigorating Hope and Ameliorating Peoples' Livelihood" dated 
September 20, Ministry of Finance officials predicted a "likely 
over-run" in the first quarter budget deficit target; however, these 
GOP predictions called for an overrun of only 0.3 percent of GDP in 
fiscal deficit.  With an overall budgetary fiscal deficit target of 
4.7 percent of GDP for the current fiscal year, the GOP has exceeded 
all predictions with this estimated 1.47 percent of GDP budgetary 
deficit in just the first quarter, which is much higher than the 
quarterly fiscal deficit target of 1.17 percent. 
 
¶3. (SBU) Analysts said that the government borrowing increased due 
to the large underlying budget deficit which includes 
debt-servicing, and a backlog of payments and subsidies.  Commercial 
banks were also feeling the liquidity crunch and were not 
participating in auctions of government securities. The government 
has time and again committed to bring quarterly net borrowing from 
the central bank to zero in order to control inflation running at 
over 25 percent. 
 
¶4. (SBU) On October 6, the SBP injected PKR 53.9 billion (USD 685 
million) into the banking system to save it from the extreme credit 
crunch and high call money rates.   The first work day after the 
official three day EID holiday opened with a severe shortage of 
liquidity which pushed up inter-bank call money rates to 32 to 40 
percent.  The situation could have been worse if the SBP had not 
injected huge liquidity, PKR 53.9 million (USD 685 million), into 
the system.  However, several local press reports quote commercial 
bank officials who claim that bank withdrawals during Ramadan and 
EID were much more than the amount injected by the SBP. 
 
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RUPEE DEPRECIATION AT ALL TIME HIGH AND FOREIGN RESERVES FURTHER 
DECLINE 
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¶5. (SBU)  On October 6, the value of the rupee sank to a record low 
as import payments drove the rupee to a low of 78.65 against the 
dollar in early trades. The previous low was observed on Sept 22 at 
78.55.  Local currency dealers anticipate further depreciation due 
to impending import payments.   Foreign exchange reserves with the 
SBP fell to USD 4.76 billion on October 6th from USD 4.86 billion on 
September 30th.  The deposit of the recent USD 500 million Asian 
Development Bank loan is reflected in the marginal improvement of 
foreign exchange reserves, which were USD 4.68 billion on September 
27th before the disbursement. 
 
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TAX REVENUES ARE UP 
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¶6. (SBU)   Tax revenue is up 23.5 percent during the first quarter 
(July-Sept) of FY 09 over the same period last year.  Showing 23.5 
 
ISLAMABAD 00003202  002 OF 002 
 
 
percent increase, the Federal Board of Revenue raised PKR 253.3 
billion (USD 3.22 billion) in the first quarter versus PKR 205.13 
billion (USD 2.61 billion) in the same period last year.   The 
revenue collection also surpassed the PKR 250 billion (USD 3.17 
billion) target set for this quarter (July-September 2008). Domestic 
sales tax collection increased by more than 50 percent showing that 
the record inflation has helped the government to raise more revenue 
from consumers.  Additionally, sales tax collection on imported 
goods grew by 17.1 percent, indicating that the newly imposed 30 to 
35 percent additional customs duties on "luxury goods" has not 
slowed import growth as expected.   Overall, imports surged by 31 
percent year on year in July-August 2008 mainly due to increased 
imports of petroleum products as energy blackouts continue to plague 
the country and more generators are installed nationwide. 
 
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COMMENT 
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¶7. (SBU) Pakistan's economy has recently felt only negatives 
including a rapid depletion of its foreign exchange reserves, large 
depreciation of its currency and substantial slowdown in foreign 
inflows.  As the GOP shops for assistance around the world, 
commitments to stem borrowing from the State Bank of Pakistan and to 
keep net borrowing at zero in every quarter of FY 09, have been a 
constant mantra. However, record borrowing from the SBP in the first 
quarter of the new fiscal year dampens expectations that the new 
government's economic reform plan is feasible and that the GOP has 
the discipline to implement the strict but necessary measures. 
 
PATTERSON