VZCZCXRO3734
PP RUEHLH RUEHPW
DE RUEHIL #3493/01 3101350
ZNR UUUUU ZZH
P 051350Z NOV 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC PRIORITY 9647
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHML/AMEMBASSY MANILA 3062
RUEHBUL/AMEMBASSY KABUL 9355
RUEHNE/AMEMBASSY NEW DELHI 3985
RUEHLO/AMEMBASSY LONDON 9026
RUEHKP/AMCONSUL KARACHI 0561
RUEHLH/AMCONSUL LAHORE 6295
RUEHPW/AMCONSUL PESHAWAR 5140
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 003493 
 
SENSITIVE 
SIPDIS 
 
REFS: A. Islamabad 03492 B. Islamabad 03300 C. Islamabad 02403 D. 
Islamabad 02400 E. Islamabad 02233 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN EAID ETRD EAGR PREL PK
SUBJECT: PAKISTAN'S APPEAL FOR WHEAT THROUGH THE GSM 102 PROGRAM 
 
¶1. (SBU) Summary.  The Government of Pakistan (GOP) faces a wheat 
shortage of 1.75 million tons, valued at approximately USD 450 
million.  Post recommends approval of a USD 450 million U.S. 
Department of Agriculture (USDA) GSM-102 credit guarantee program 
for Pakistan in FY 2009 to support sales of U.S wheat, address the 
needs of the poorest people of Pakistan, and enhance food security 
throughout the region, including in Afghanistan which receives 45 
percent of its wheat from Pakistan.  Although Pakistan defaulted on 
the GSM-102 program between 1998 and 2002, payment of the debt has 
subsequently been rescheduled through 2024.  Post believes this 
program, if timed to coincide with the announcement of the IMF 
program, could provide a vote of confidence for the democratically 
elected government of Pakistan and serve as a symbol of U.S. support 
for Pakistan's economic difficulties.  End Summary. 
 
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WHEAT DEFICIT GOING INTO THE WINTER 
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¶2. (SBU) Wheat stocks currently held by the GOP (3 million tons) are 
only sufficient to meet domestic consumption needs through January 
2009, as the government releases stocks to the provinces at the rate 
of about 1 million tons of wheat per month.  Pakistan will not 
harvest its next wheat crop until April/May 2009; therefore, it 
needs additional imports of 1.75 million tons (at an estimated cost 
of USD 450 million) to avoid shortages in February and March. 
Pakistan's total wheat import needs for the 2008/2009 marketing year 
are estimated at 3.5 million tons.  To date, the GOP has secured 
imports of 1.7 million tons of red wheat and 50,000 tons of white 
wheat.  To meet the country's consumption needs until it harvests 
the next crop, the government must purchase an additional 750,000 
tons of red wheat and 1 million tons of white wheat.  Pakistan 
typically imports wheat at a ratio of 70 percent red wheat and 30 
percent white wheat. 
 
¶3. (SBU) The April 2009 crop is expected to be lower than planned 
due to water and fertilizer shortages.  Irrigation for the current 
crops has fallen due to a combination of low rainfall and a water 
dispute with India, which has resulted in a 34 percent drop in water 
levels.  Fertilizers, both Diammonium Phosphates (DAP) and urea, are 
in short supply as producers are said to be hoarding or smuggling 
stores.  Winter just began in Pakistan (typically November through 
February) and a food shortage will aggravate Pakistan's many 
problems, especially if the economy continues to contract and energy 
blackouts continue in food insecure regions. 
 
¶4. (SBU) Recently, the World Food Program (WFP) identified Pakistan 
as one of 40 countries in the world at risk for food insecurity. 
The WFP raised its estimate of at-risk individuals from 60 to 77 
million, or 48 percent of Pakistan's population.  Over 100 million 
Pakistanis live on less than two dollars per day, including 27 
million living on less than one dollar per day.  The cost of wheat 
has risen 68 percent in the last twelve months, which has placed 
this basic commodity out of reach for many average citizens. 
However, current supplies are insufficient to meet demand through 
the winter. This will lead to further price increases if additional 
wheat is not available before the next harvest. 
 
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IMPACT ON AFGHANISTAN 
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¶5. (SBU) While Post defers to our colleagues in Kabul, it seems as 
if GSM credits for Pakistan would also help alleviate potential 
wheat shortages in Afghanistan.  Like Pakistan, the World Food 
Program has also labeled Afghanistan as one of 40 food insecure 
countries.  A severe drought in Afghanistan has led to a 60 percent 
decline in this year's wheat crop.  Historically, some of the 
shortfall in Afghanistan's wheat production is filled through 
legitimate imports from Pakistan.  But due to an artificially low 
wheat price in Pakistan, traders are now regularly smuggling 
Pakistani wheat into Afghanistan.  Pakistan supplies about 45 
percent of Afghanistan's wheat needs. 
 
 
ISLAMABAD 00003493  002 OF 003 
 
 
¶6. (SBU) This year, the Pakistani government raised by 48 percent 
the government purchase price of wheat.  (The international 
community had strongly urged an increase in the artificially low 
government purchase price of wheat.)  The GOP plans another 52 
percent increase in the government purchase price in April 2009.  An 
increase in domestic wheat prices in Pakistan will eventually 
encourage more domestic wheat production and less hoarding. 
However, as prices in Afghanistan and Pakistan reach parity, it will 
become less attractive for Pakistanis to either sell or smuggle 
wheat to Pakistan. 
 
¶7. (SBU) The combination of rising prices and the shortfall in wheat 
imports should cause wheat prices in Pakistan to rise sharply.  If 
the GSM credits can encourage imports, local supplies should be 
greater, price increases should be less, and more Pakistani wheat 
should be available in Afghanistan. 
 
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GOP REQUEST FOR GSM-102: NEED FOR WHEAT 
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¶8. (SBU) The GOP has approached Post requesting an expansion of the 
USDA GSM-102 credit guarantee program to cover Pakistan's near-term 
wheat import needs.  The GSM-102 program helps ensure that credit is 
available to finance commercial exports of U.S. agricultural 
products by providing competitive credit terms to buyers.  By 
reducing the financial risk to U.S. lenders, the GSM-102 program 
encourages exports to countries, such as Pakistan, where financing 
(and therefore sales) might not be available without the program. 
 
¶9. (SBU) The Trading Corporation of Pakistan has approved five 
Pakistani banks to finance wheat purchased by the GOP.  These 
Pakistani banks would borrow money from U.S. banks to purchase the 
U.S. wheat.  The loans offer favorable interest rates because the 
USDA (i.e. the USG) guarantees payment, under the GSM-102, to the 
U.S. banks.  In August 2008, the GOP provided the USDA with a Credit 
Guarantee Assurance, or sovereign guarantee, whereby the GOP 
guarantees all GSM-102 wheat purchases by the approved Pakistani 
banks in any amount.  Under the current GSM-102 program, the total 
exposure available for Pakistan for FY 2009 is USD 48.01 million. 
 
¶10. (SBU) Per the program rules, USDA will need to waive the total 
exposure guideline if Pakistan is to purchase its wheat import 
requirements under the GSM-102 credit guarantee program for any 
amount above the USD 48.01 million maximum cap.  On September 20, 
Ministry of Food, Agriculture and Livestock (MINFAL) Secretary 
Muhammad Zia-ur-Rehman wrote the Ambassador asking for a USD 400 
million expansion of its existing request for a USD 100 million GSM 
102 facility for the procurement of wheat.  Thus, the total GOP 
request for GSM-102 is USD 500 million, which roughly represents the 
cost of importing 1.75 million tons of wheat at the time the request 
was made.  Post notes that the international price of wheat has 
since decreased.  Therefore, Post estimates that USD 450 million 
would cover Pakistan's short term import costs. 
 
¶11. (SBU) Contacts in the Trading Corporation of Pakistan and MINFAL 
inform Post that if sufficient credit guarantees are made available 
under the GSM-102 program, the GOP will probably purchase most of 
its near-term wheat import requirements from the U.S.  Timing is 
important, however, as wheat shipments from the U.S. to Pakistan 
take a minimum of 45 days.  Pakistan has not purchased wheat since 
August 7 and even then the transaction amounted to only 210,000 tons 
of red wheat.  In short, Pakistan urgently needs the additional 
wheat imports to avoid food shortages. 
 
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HELPING WITH FOOD INSECURITY 
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¶12. (SBU) During Prime Minister Yousaf Raza Gilani's visit to 
Washington in July 2008, President Bush committed to providing USD 
115.5 million in food security assistance to Pakistan, including USD 
24 million for the Food for Progress plan, USD 10 million for the 
McGovern-Dole program, and USD 8.5 million in Economic Support 
 
ISLAMABAD 00003493  003 OF 003 
 
 
Funding (ESF) for USAID's agricultural program.  These programs are 
underway and provide food in some of Pakistan's most remote areas. 
However, these programs support on-going school feeding programs and 
supplemental food aid for WFP operations in Pakistan.  None of these 
programs can provide short term relief for the wheat shortfalls this 
winter. 
 
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FINANCIAL SITUATION 
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¶13. (SBU) Pakistan is working closely with the International 
Monetary Fund (IMF) to reach a stabilization program and to increase 
Pakistan's foreign exchange reserves.  The announcement of a USDA 
GSM-102 program concurrent with Pakistan's adoption of an IMF 
package would enhance Pakistan's ability to meet its international 
commitments and help restore economic stability in the region.  It 
would also provide a vote of confidence in the GOP and the IMF plan. 
 
 
¶14. (SBU) Pakistan defaulted on debt accrued under the GSM-102 
program between 1998 and 2002.  Economic mismanagement coupled with 
U.S. and international sanctions imposed after the completion of 
nuclear tests in 1998 made it difficult for Pakistan to meet its 
obligations.  GOP debt under the GSM-102 program totals USD 284 
million; however, payment of this debt subsequently has been 
rescheduled through 2024.  Pakistan has not utilized the GSM 102 
program since FY 1999 due to the combination of relatively good 
wheat crops, availability of lower-priced wheat from Black Sea 
sources, better fiscal position of the government, and until 
recently, the availability of cheap international credit. 
 
¶15. (SBU) Comment:  The economic situation in Pakistan is tenuous, 
and the GSM-102 program offers an opportunity to provide the poorest 
people of Pakistan, and by extension Afghanistan, relief from 
potential wheat shortages during the critical winter months.  The 
program would contribute to enhancing food security and allow U.S. 
producers to make a significant wheat sale on commercial terms. 
Coordinated timing of this program would allow the USG to 
demonstrate its support to the GOP and IMF plan or, alternatively, 
could be announced at the upcoming Friends of Democratic Pakistan 
meetings.  Post recommends approving a GSM-102 program commensurate 
with Pakistan's needs to ensure that the GOP has the ability to 
purchase additional imports of 1.75 million tons of wheat at an 
estimated cost of USD 450 million.  End Comment. 
 
PATTERSON