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RUEHPW/AMCONSUL PESHAWAR 5260

UNCLAS SECTION 01 OF 03 ISLAMABAD 003691 
 
SIPDIS 
 
REFS: 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV ETRD ELAB PGOV PREL PK
SUBJECT: AMBASSADOR MEETS WITH AGRICULTURE SECRETARY ON FOOD AID 
 
¶1. (SBU) Summary.  On November 21 MINFAL Secretary Zia ur Rehman and 
Additional Secretary Shahid Hussain Raja requested an urgent meeting 
with Ambassador to discuss agricultural issues in Pakistan.  The 
Secretary requested USG assistance on wheat imports, specifically 
access to the USDA GSM-102 program.  The USDA Food for Progress 
agreement, USAID agriculture project and a proposed agriculture tax 
were also discussed.  Post seeks guidance on the best way to 
facilitate Pakistan's ability to import U.S. wheat under the GSM-102 
program.  Post recommends that the 5 Pakistani Banks listed below be 
approved to participate in the GSM-102 program as soon as possible. 
Post also recommends providing a waiver to Pakistan for the export 
limitation condition under the Food for Progress agreement as soon 
as possible.  Based on the inflows of private trade, the GOP now 
maintains that they need to import 1.5 million metric tons of wheat 
at an estimated cost of USD 350 million for this winter season. End 
Summary. 
 
¶2. (SBU) This is an action request. See paragraph 14. 
 
- - - - 
GSM 102 
- - - - 
 
¶3. (SBU) On November 21 MINFAL Secretary Zia ur Rehman and 
Additional Secretary Shahid Hussain Raja requested an urgent meeting 
with Ambassador to discuss agriculture issues in Pakistan. 
Secretary Rehman specifically requested USG assistance with wheat 
imports.  MINFAL is anxious to gain access to the USDA GSM-102 
program in order to facilitate Pakistan's ability to purchase U.S. 
wheat.   Raja stated there is some confusion with the GOP as to how 
much credit is available to Pakistan under this program.  Local 
newspapers have been erroneously reporting that the USG has approved 
USD 200 million under GSM-102.  EconCouns explained that under 
current USDA guidelines the total credit exposure for Pakistani 
banks is calculated at USD 48 million.  Raja said he would like 
something in writing explaining Pakistan's ability to participate in 
the program. 
 
¶4. (SBU) Secretary Rehman confirmed that the GOP still needs to 
urgently import another 1.75 million tons of wheat in order to meet 
the country's wheat consumption needs until the next wheat crop is 
harvested in April/May 2009. 
 
¶5. (SBU) Comment: Pakistan has identified its annual wheat import 
needs at 3.5 million tons, of which 1.75 million tons have been 
purchased to date.  Due to recent changes in the government's wheat 
import policy, the GOP expects private traders to import about 
250,000 tons of wheat before the next harvest.   The GOP maintains 
that in order to purchase the balance 1.5 million tons of wheat 
(estimated cost: USD 350 million) international support will be 
necessary.  [NOTE:  On November 20, in response to the country's 
deteriorating wheat stock situation, MINFAL instructed the Trading 
Corporation of Pakistan to issue a tender for imports of 500,000 
tons of white wheat.  On November 24, no financing had been made 
available to purchase the wheat and, therefore, MINFAL has postponed 
the tender.  END NOTE] 
 
¶6.  (SBU) Comment continued:  Pakistan is eligible as a destination 
country under the GSM-102 Regional Program for the Middle East and 
Africa.  However, Pakistani Banks covered under  Pakistan's August 
26 Credit Guarantee Assurance (a sovereign guarantee which 
specifically guaranteed National Bank of Pakistan, Habib Bank 
Limited, United Bank Limited, Muslim Commercial Bank Limited, and 
Allied Bank of Pakistan) are currently not eligible to participate 
in the GSM-102 program.  Post recommends that these 5 banks under 
the Credit Guarantee Assurance be approved to participate in the 
GSM-102 program as soon as possible, thereby enabling Pakistan to 
purchase USD 48 million (200,000 metric tons) worth of wheat under 
the GSM-102 program. 
 
- - - - - - - - - 
FOOD FOR PROGRESS 
- - - - - - - - - 
 
ISLAMABAD 00003691  002 OF 003 
 
 
 
¶7. (SBU) Rehman inquired about the "status of the wheat pledged by 
President Bush."  EconCouns noted that the U.S. is still awaiting 
GOP approval of the USDA Food for Progress agreement draft which 
consists of 50,000 tons of donated U.S. wheat.  Rehman explained 
that MINFAL and the Economic Affairs Division (EAD) have cleared the 
draft; however, the Ministry of Commerce has not yet approved the 
deal and is concerned over a provision in the Food for Progress 
agreement that apparently restricts Pakistan from exporting wheat 
while it receives donated wheat from the U.S.  Raja further 
explained that the Ministry of Commerce believes that by accepting 
the Food for Progress wheat, the GOP will not be able to export any 
wheat during the current fiscal year.  MINFAL would like to get 
clarity as soon as possible on whether the GOP is restricted only in 
exporting donated U.S. wheat and thus free to export domestic wheat 
if available after the immediate shortfall is addressed. 
 
¶8. (SBU) Comment: AgCouns clarified later that Food for Progress 
prohibits the GOP to export wheat in the same fiscal year that it 
receives U.S. wheat donations except for exports bound for 
Afghanistan.  AgCouns also noted that a waiver is necessary to 
bypass USDA restrictions on commercial wheat sales.  As the GOP has 
not met its wheat production target in the past two years, Post 
feels that the probability of the GOP harvesting a bumper crop of 
wheat is low especially given the water and fertilizer shortages. 
Therefore, the GOP will most likely use all of its wheat for 
domestic consumption and not be able to export any wheat in the 
foreseeable future; however the ability to export wheat to increase 
the domestic coffers is a red herring for the GOP and Post would 
like to seek a waiver for this provision.  Another option would be 
to provide a waiver just for private sector commercial transactions 
while still limiting government exports.  This would send the right 
message to the GOP while still allowing Pakistan to benefit in the 
unlikely event that there is a wheat surplus.  End Comment. 
 
- - - - - - - - - - - - - - 
USAID AGRICULTURAL PROGRAM 
- - - - - - - - - - - - - - 
 
¶9. (SBU) Secretary Rehman inquired about the status of USAID's 
recent agricultural study with Dr. John Mellor.  Ambassador 
responded that USD 50 million is set aside for this project and that 
the consultant had highlighted extension services and research as 
the means to assist Pakistani agriculture.  Ambassador mentioned 
that USAID is still in the design phase and noted debate as to 
whether the program should have a concentrated geographic focus or 
if it should be spread throughout the country.  The Secretary 
expressed his interest to provide input in the USAID program and 
that USAID should work "in concert" with MINFAL.  Ambassador agreed 
and noted that a USAID representative would soon brief MINFAL on the 
details of the plan. 
 
- - - - - - - - - - 
STRATEGIC DIALOGUE 
- - - - - - - - - - 
 
¶10. (SBU) Secretary Rehman expressed his gratitude for including 
agriculture in the Strategic Dialogue.  He also noted that the GOP 
had raised the wheat procurement price to a reasonable level to 
which the Ambassador expressed her appreciation.  Additional 
Secretary Raja said that MINFAL took the wheat price increase "to 
the cabinet 11 times before it was finally approved." The Secretary 
asked about any follow up on the decisions following the agriculture 
discussions at the Strategic Dialogue and hoped to have greater 
interaction with USG officials on agriculture. 
 
- - - - - - - - - - - - - - - - - 
SUPPORT FOR A TAX ON AGRICULTURE? 
- - - - - - - - - - - - - - - - - 
 
¶11. (SBU) Ambassador asked about the internal MINFAL views on a 
proposed agriculture tax.  Secretary Rehman noted that he did not 
attend the lively Cabinet meeting debate but voiced his opposition 
to an agriculture tax characterizing it as "not a prudent thing." 
 
ISLAMABAD 00003691  003 OF 003 
 
 
According to him, the agriculture sector is already being taxed by 
both provinces and through the income tax.  He also noted that 90 
percent of the farms in Pakistan are considered small holdings (less 
than 10 acres) and would suffer greatly from another tax. 
 
¶12. (SBU) Additional Secretary Raja noted that he differed with his 
superior but that he is in favor of an agriculture tax.  Raja 
believes that an agriculture tax should focus on the top 2-3 percent 
of farmers who are the large landowners but noted that any 
implementation will be difficult and must have a "proper mechanism 
and set up."  The Ambassador inquired whether the GOP had tax 
assessment for agriculture. Raja replied that these exist and are 
currently used to collect the flat land tax that every farmer pays. 
Rehman chimed in saying an agriculture tax is "fraught with 
difficulties" because it would tough to figure out who needs to be 
taxed and at what amount.  Noting that the small farmers do not keep 
track of all of their production costs, Rehman pointed out that none 
of the leading Western countries, including the U.S., have an 
agriculture tax. 
 
¶13. (SBU) Comment:  The wheat supply situation in Afghanistan is 
also dire, with stocks reportedly only adequate to meet consumption 
needs through January/February 2009.  Since Pakistan supplies 
roughly 45 percent of Afghanistan's wheat consumption needs, an 
improvement in Pakistan's wheat supply situation will have a 
positive impact on the food security in Afghanistan. In the absence 
of significant wheat imports, prices will rise precipitously and 
will potentially lead to further civil unrest.  Through the use of 
the GSM-102 program, the USG can facilitate the supply of a 
substantial volume of wheat into the region, thereby contributing to 
price stability and food security.  If the GSM-102 program is to be 
used to address the regional food security needs of Pakistan and 
Afghanistan, a decision needs to be made soon, because the wheat 
will need to be purchased by mid-December if it is to arrive in time 
to meet the countries' consumption needs until the next wheat crop 
is harvested in April/May 2009.  End Comment. 
 
¶14. (SBU) ACTION REQUEST:  Post requests guidance on the fastest way 
to facilitate sales of U.S. wheat to Pakistan under the GSM-102 
program.  Post requests clarity from USDA regarding the feasibility 
of providing a waiver to the export limitations included as part of 
the USDA Food for Progress agreement, and permit the GOP to export 
wheat from its next crop in the off chance that domestic surpluses 
actually materialize. 
 
PATTERSON