VZCZCXRO5570
RR RUEHLH RUEHPW
DE RUEHIL #3388/01 3011246
ZNR UUUUU ZZH
R 271246Z OCT 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 9493
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHML/AMEMBASSY MANILA 3051
RUEHBUL/AMEMBASSY KABUL 9304
RUEHNE/AMEMBASSY NEW DELHI 3940
RUEHLO/AMEMBASSY LONDON 8955
RUEHKP/AMCONSUL KARACHI 0515
RUEHLH/AMCONSUL LAHORE 6253
RUEHPW/AMCONSUL PESHAWAR 5089
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 003388 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN ETRD PREL PGOV PK
SUBJECT: TAREEN ANNOUNCES HIS ECONOMIC PLAN AND KSE RETAINS FLOOR 
 
¶1. (SBU) Summary.  Pakistan's Advisor on Finance Shaukat Tareen 
discussed his nine point economic plan with the business community 
on October 25th, which according to him will bring the economy back 
on track. He asserted that he will raise the tax-revenue to GDP 
ratio to 15 percent from the current 10 percent by bringing untaxed 
and under-taxed sectors like agriculture and real estate into the 
tax net.  Tareen said that the present government will focus on 
production-led growth instead of consumption-led growth. Yet so far, 
the economic indicators are defying the GOP efforts as the large 
scale manufacturing sector production dropped close to 5 percent in 
the first two months of the current fiscal year.  The Karachi Stock 
Exchange (KSE) floor continues to be in operation and the KSE Board 
has not given any time line for lifting it.  Despite previous 
efforts the GOP has failed to tax the agricultural sector, which 
according to some does not have huge revenue yielding potential 
since 90 percent of farmers are either subsistence farmers or 
landless tenants.  The GOP also did not tax capital gains in the 
2008-09 budget, which would have discouraged speculative trading in 
the stock exchanges. End Summary. 
 
---------------- 
ECONOMIC ROADMAP 
---------------- 
 
¶2. (SBU) In a nationally televised event, Advisor to the Prime 
Minister on Finance, Shaukat Tareen, addressed the traders and 
businessmen at the Federation of Pakistan Chambers of Commerce and 
Industry on October 25 and said that the government has drawn up a 
roadmap to revitalize the economy, which will have far-reaching 
effects in putting the economy back on track.  Tareen's roadmap has 
nine elements, which include stabilizing macro economic indicators 
(i.e. inflation, budget deficit and exchange rate), introducing 
social safety nets such as Benazir Income Support Program, promoting 
agricultural development, encouraging manufacturing sector 
competitiveness, developing human resources, launching an integrated 
energy development plan, promoting public private partnerships, 
working on capital market and civil services reforms. 
 
¶3. (SBU) The GOP says it needs USD 3 to USD 5 billion in the next 30 
days to avert a possible default on its foreign debt obligations. 
Tareen said if the GOP decides to borrow money from the IMF, it will 
be based on its home grown economic package.  He said that the 
fiscal deficit will be reduced to 4.3 percent from 7.4 percent and 
the tight monetary policy will be continued to check inflation. 
According to Tareen, the thrust of economic policies will now be 
shifted to production-led growth from a consumption-driven strategy 
and agriculture will be given top priority.  Tareen said the country 
is faced with many challenges such as poverty and soaring inflation 
and stated that the number of people earning one dollar per day has 
increased from 25 percent to 44 percent of the total population. 
(Comment: Dr. Ashfaque Hasan Khan, Economic Adviser at the Ministry 
of Finance, said that there are no surveys or statistics to 
substantiate poverty figures and termed it as a political statement. 
End Comment.) 
 
-------------------- 
DECLINING PRODUCTION 
-------------------- 
 
¶4. (SBU) Tareen also announced that Pakistan's industrial output 
declined by around 4.87 percent in the first two months of the 
current fiscal year, indicating that the 6.1 percent growth target 
set for 2008-09 is unlikely to be achieved.  Many sub-sectors of the 
large-scale manufacturing sector did not perform well during 
July-August including electrical goods and textiles. The textile 
sector is labor intensive and any drop in textile production or 
exports can result in massive layoffs.  The severe power shortage 
and highest-ever increase in energy prices also fueled the decline. 
The slump in industrial growth has affected the export of 
commodities, particularly the textile and clothing exports which 
declined by 0.77 percent in the first quarter of the current fiscal 
year. 
 
----------------------------- 
INCREASING GOVERNMENT REVENUE 
----------------------------- 
 
¶5. (SBU) Tareen said that the GOP will bring untaxed and under-taxed 
 
ISLAMABAD 00003388  002 OF 002 
 
 
sectors into the tax system while the tax-to-GDP ratio will be 
increased from present 10.5 percent to 15 percent.  Noting that 
there will be no sacred cows, Tareen claimed that real estate and 
agriculture will be taxed.  Pakistan has a history of taxing 
agriculture through the land revenue system.  Yet its collection has 
always remained negligible and far below its potential. The Federal 
Board of Revenue (FBR) struggled in early 2007 to convince the 
previous government to either permit federal taxation of farm income 
or let the Board collect it on behalf of the provinces. 
 
¶6. (SBU) The FBR thought the agricultural income tax had the 
potential to generate estimated revenue of over Rs.60 billion (USD 
737 million) a year.  That amount could be gradually increased as 
the agriculture sector is about 21 percent of the nation's GDP. But 
the strong agriculture lobby, which has always formed a big part of 
almost all governments, was blamed for thwarting the FBR plans to 
effectively tax their income. 
 
¶7. (SBU) A progressive farmer from Bahawalpur and a former head of 
the Small and Medium Enterprise Development Authority (SMEDA), Iqbal 
Mustafa, said that more than 90 percent of farmers are either 
landless tenants or small land owners. Mustafa stated "When we talk 
of agriculture income tax we're actually talking of taxing the 
bigger land holders whose number shouldn't be more than 4,000 to 
5,000 in the country, which means that the agricultural tax will not 
raise revenue collection significantly." Implementation of the new 
taxes may also slow growth in the sector. 
 
------------------------------------- 
KARACHI STOCK EXCHANGE RETAINS FLOOR 
-------------------------------------- 
 
¶8. (SBU) After a meeting with Shaukat Tareen and Chairman of 
Securities and Exchange Commission of Pakistan Razi-ur-Rehman on 
October 26th, the Board of Directors of Karachi Stock Exchange (KSE) 
decided that the floor set on share price will remain in place until 
the government funds for assistance and put option mechanics are 
finalized.  The Board did not give any date for removal of the 
floor. In the meeting, the market stabilization measures were 
reviewed and it was noted that many measures, including increasing 
liquidity in the financial system and additional risk management 
measures, are in place. However, the mechanics of the put option 
fund and the National Investment Trust-State Enterprise Fund still 
required additional time for implementation. Noting that the 
government has a right to protect its companies, Managing Director 
of the KSE, Adnan Afridi, defended the government decision to invest 
its funds in state owned companies since the fund is being provided 
by the government institutions. The Fund will invest in the 
following nine stocks: Oil and Gas Development Company Ltd, Kot Addu 
Power Company, Pakistan Petroleum Ltd, Sui Southern Gas Company, Sui 
Northern Gas Pipeline, Pakistan State Oil, National Bank, Pakistan 
Telecommunication Company Ltd and Habib Bank.  President of the 
Federation of Pakistan Chamber of Commerce and Industry, Tanveer 
Ahmed Sheikh termed it a risky strategy to use liquidity provided by 
a change in the Cash Reserve Requirement and Statutory Liquidity 
requirement to maintain the stock market indicators. 
 
------- 
COMMENT 
------- 
 
¶9. (SBU) Comment. The GOP is seeking the IMF's endorsement for its 
economic stabilization policies -- and possibly securing hard cash 
from the fund itself -- which is crucial to both bilateral and 
multilateral lenders support.   Neither the IMF endorsement of 
Islamabad's economic policies or its funding are likely to come 
unless the government, among other things, outlines a credible plan 
to improve the tax-to-GDP ratio, by increasing the number of sectors 
taxed and eliminating tax exemptions.  On October 26, the GOP 
reversed a previous decision to increase electricity tariffs and 
eliminate the current subsidy by 31 percent due to widespread public 
protests. End Comment. 
 
PATTERSON