VZCZCXRO5202
RR RUEHLH RUEHPW
DE RUEHIL #3374/01 3010301
ZNR UUUUU ZZH
R 270301Z OCT 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 9463
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHML/AMEMBASSY MANILA 3043
RUEHBUL/AMEMBASSY KABUL 9296
RUEHNE/AMEMBASSY NEW DELHI 3932
RUEHLO/AMEMBASSY LONDON 8944
RUEHKP/AMCONSUL KARACHI 0507
RUEHLH/AMCONSUL LAHORE 6245
RUEHPW/AMCONSUL PESHAWAR 5081
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEAIIA/CIA WASHDC
RUEKJCS/SECDEF WASHINGTON DC

UNCLAS SECTION 01 OF 03 ISLAMABAD 003374 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN EAID EIND ENGY EPET PREL PGOV PK
SUBJECT:  BALOCHISTAN PROVINCE: FINANCIALLY DEPENDENT ON THE FEDERAL 
GOVERNMENT AND FACING INCREASED BUDGET SHORTFALLS 
 
¶1. (U) Summary.  As an underdeveloped region in Pakistan, 
Balochistan is dependent on the federal government for 94 percent of 
its budget and faces an estimated budget deficit of PKR 8.81 billion 
(USD 112 million) for the current 2008-09 financial year.  Despite 
being the largest province in size geographically, Balochistan only 
receives 5 percent in federal tax revenue.  It also receives revenue 
from the federal government in natural gas royalties, duties, and 
surcharges (which combined have declined 32 percent from FY2006-07 
to FY2007-08) and a minimal amount from tax revenue despite being 
packed with natural resources and huge economic potential.  As the 
Government of Pakistan (GOP) realizes that an International Monetary 
Fund (IMF) program may be inevitable for the economy to survive, 
development funds and provincial budgets will likely be cut to meet 
IMF conditionality.  Since it is so reliant on the federal 
government for revenue, Balochistan could be extremely vulnerable 
when these cuts are made to meet the current balance of payment 
crisis.  End Summary. 
 
------------------------------- 
ECONOMIC WOES FOR THE PROVINCE 
------------------------------- 
 
¶2. (U) Balochistan has experienced a series of financial crises 
throughout the last five years due to its heavy debt servicing 
liability.  The province heavily depends on federal government 
financial support and does not receive any significant revenue yield 
from taxes.  Balochistan relies on the federal government for 
approximately 94 percent of its budget.  It has an estimated deficit 
budget of PKR 71.19 billion (USD 901 million at 79 PKR to USD) for 
the current 2008-09 financial year.  The total income of the 
province for FY 2008-09 is estimated at PKR 62.38 billion (USD 790 
million) against total expenditures of PKR 71.19 billion (USD 901 
million).  Sources of revenue include income from the province's 
natural resources which totaled PKR 9.746 billion (USD 123 million), 
income from provincial tax collection which was PKR 3.47 billion 
(USD 44 million) and income from federal grants and tax collection 
estimated at PKR 48.05 billion (USD 608 million). 
 
¶3. (SBU) Income from natural resources is divided into three 
categories: royalties, surcharges, and excise duties.  Royalties 
correspond to the payment by the federal government for the use of 
the natural gas.  In FY 2007-08, royalties to Balochistan were PKR 
2.68 billion (USD 34 million) up from PKR 2.24 billion (USD 28 
million) in FY 2006-07.  Surcharges represent the taxes on gas 
consumption paid by users of natural gas.  In FY 2007-08, surcharges 
dropped to PKR 4.796 billion (USD 60 million) from PKR 10.99 billion 
(USD 139 million) in FY 2006-07 (a 56 percent drop).  Excise duties 
are taxes levied on the production of natural gas.  In FY 2007-08, 
excise duties were PKR 2.27 billion (USD 29 million) up from PKR 
1.13 billion (USD 14 million) in FY 2006-07.  Year over year, income 
from natural gas dropped from PKR 14.357 billion (USD 182 million) 
in FY 2006-07 to PKR 9.746 billion (USD 123 million) in FY 2007-08. 
This drop is attributed to lower natural gas production, which was 
disrupted by law and order problems and supply transmission 
problems. 
 
¶4. (SBU) When planning for the new fiscal year which began July 1, 
the Balochistan government sought financial help from the federal 
government during its budget announcement in June 2008, as it did 
not have financial resources for new development projects.  On June 
17, Prime Minister Yousuf Raza Gilani announced a PKR 6 billion (USD 
76 million) grant for Balochistan from his special discretionary 
funds, as well as directing the Oil Gas Development Company to pay 
PKR 3 billion (USD 38 million) in outstanding debt to the 
Balochistan government.  On October 20, the federal government 
announced that it would provide another PKR 3 billion (USD 38 
million) in debt relief to the Balochistan provincial government 
from unidentified federal funds. 
 
¶5. (SBU) In September 2008, the State Bank of Pakistan (SBP) also 
extended a financial package to mitigate the economic difficulties 
of the Balochistan Government.  The package aims to provide 
breathing room by putting the provincial overdraft with the SBP into 
a blocked account which would be zeroed out within a period of six 
years through monthly deductions.  In order to further aid the 
Balochistan government, the SBP will enhance the existing limit of 
the Ways and Means Advance to PKR 2 billion (USD 25 million) from 
PKR 1.7 billion (USD 22 million).  (Comment: The Ways and Means 
 
ISLAMABAD 00003374  002 OF 003 
 
 
Advance is a 4 percent interest loan advanced to a province by the 
State Bank of Pakistan.  End Comment.)  The SBP Governor Dr. 
Shamshad Akhtar, however, emphasized that the Balochistan government 
would truly reap the benefits of the financial package if it imposed 
strict financial discipline and more prudently managed its cash 
inflows from other resources such as natural gas royalties and 
surcharges.  In response, the Balochistan government has imposed a 
complete ban on the purchase of new vehicles and on attendance of 
seminars in foreign countries.  Other austerity measures enacted 
include a ban on convening official meetings at hotels. 
 
¶6. (SBU) However, the additional money allocated to Balochistan from 
federal resources has already been consumed by additional 
expenditures on law and order, a reduction in oil and natural gas 
production, and higher pay and pension bills due to increased 
salaries from the recent increase in Pakistan's minimum wage from 
4,600 rupees to 6,000 rupees per month.  These problems continue to 
persist in the current fiscal year as nationalist militants, 
demanding autonomy and local control over the province's resources, 
have increased attacks on the gas pipelines.  While the federal 
government has the mandate to distribute, transmit and supply the 
natural gas, the Balochistan government does not have enough 
representation in the National Assembly or within the federal 
government to induce more production, transmission and supply of 
natural gas within the province. 
 
------------------------------------------- 
FEDERAL BUDGET SHORTFALLS IMPACT PROVINCES 
------------------------------------------- 
 
¶7. (SBU) The federal government aims to gradually increase the 
allocated shares to provinces from federal tax revenues from 41 
percent in FY2006-07 to 46 percent in 2010.  The Punjab province 
gets 50 percent of federal government tax revenue while Balochistan 
receives only 5.22 percent.  The Sindh province gets 34.85 percent 
and the North West Frontier Province (NWFP) receives 9.93 percent of 
federal tax revenues.  The Pakistani "territories" of the Federally 
Administered Tribal Areas (FATA), Azad Jammu and Kashmir (AJK) and 
the Northern Areas are not allocated a share of the federal tax 
revenues since only provinces receive allocations.  These 
"territories" however, are allocated income through the Public 
Sector Development Program (PSDP).  Azad Jammu and Kashmir has been 
allocated PKR 11.99 billion (USD 152 million) under the PSDP for 
FY2008-09 versus PKR 8.97 billion (USD 114 million) in FY2007-08, 
the Northern Areas have been allocated PKR 5.61 billion (USD 71 
million) FY2008-09 compared to PKR 4.5 billion (USD 57 million) last 
year and FATA has been allocated PKR 8.6 billion (USD 109 million) 
for FY2008-09 compared to PKR 7.5 billion (USD 95 million) in 
FY2007-08. 
 
¶8. (SBU) All of the provinces, except for Punjab, take issue over 
the resource distribution formula used by the federal government, 
which currently favors the provinces with larger population sizes. 
The provinces of Sindh, Balochistan, and NWFP claim that resource 
distribution should not be based on size of population solely, but 
rather on a combination of factors including the degree of poverty 
and tax contribution. 
 
------------------------------------------- 
RICH IN RESOURCES BUT POOR AND UNDEVELOPED 
------------------------------------------- 
 
¶9. (U) Balochistan is a resource and mineral rich province, though 
most of its natural resources are undeveloped.  It is the largest 
province in terms of size of Pakistan with 44 percent (347,000 sq. 
kms) of the land area but is the smallest in terms of population, 
with only 5 percent of the population (8 million).  The province, 
which in general lacks sufficient water resources to exploit its 
natural resource potential and to sustain its local economy, was hit 
recently by severe drought. 
 
¶10. (U) Balochistan is endowed with a large number of natural 
resources, such as coal, gold, copper, silver, platinum, aluminum, 
chromite, zinc, and uranium, which are to a great extent unexplored 
and unutilized.  The subsoil holds a substantial portion of 
Pakistan's energy and mineral resources, accounting for 36 percent 
of the country's total gas production.  Balochistan has a 770 
kilometer coastline, accounting for around 70 percent of Pakistan's 
 
ISLAMABAD 00003374  003 OF 003 
 
 
total, which could prove to be an important trade corridor in the 
region by connecting China and the Central Asian republics to the 
Arabian Sea.  The province is relatively deprived with inadequate 
health, education and employment facilities.  It is predominantly 
rural with almost 50 percent of the total population living below 
the poverty line according to the Balochistan Poverty Reduction 
Strategy Paper of November 2003. 
 
¶11. (SBU) Comment. Balochistan's financial future is closely tied 
with that of the federal government, leaving it extremely vulnerable 
in this period of economic crisis.  As the GOP inches closer towards 
realization that an IMF program may be inevitable for the economy to 
survive, development funds and provincial budgets will be cut. The 
impact on the poor, particularly in the often overlooked Balochistan 
province, will be potentially harsh as food insecurity and funding 
shortfalls further reduce services which the provincial government 
will not be able to provide with the current resources.  End 
Comment. 
 
PATTERSON