VZCZCXRO6764
PP RUEHIK RUEHPOD RUEHPW RUEHYG
DE RUEHBUL #2968/01 3140955
ZNR UUUUU ZZH
P 090955Z NOV 08
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 6098
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0681
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEKJCS/OSD WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUEABND/DEA HQS WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 KABUL 002968 
 
DEPT FOR SCA/FO, SCA/RA, AND SCA/A 
DEPT PASS AID/ANE 
DEPT PASS USTR FOR GERBER AND KLEIN 
DEPT PASS OPIC FOR ZAHNISER 
DEPT PASS TDA FOR STEIN AND GREENIP 
USOECD FOR ENERGY ATTACHE 
CENTCOM FOR CSTC-A 
NSC FOR JWOOD 
TREASURY FOR LMCDONALD, ABAUKOL, BDAHL, AND MNUGENT 
OSD FOR SHIVERS 
COMMERCE FOR DEES, CHOPPIN, AND FONOVICH 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958 N/A 
TAGS: ECON EFIN AF PK
SUBJECT: HOW PAKISTAN'S ECONOMIC TROUBLES AFFECT AFGHANISTAN 
 
REF: J. WOOD-DELL EMAIL OF 10/8/08 
 
¶1. (SBU) Summary.  Afghan exporters are complaining about the impact 
of depreciation of the Pakistani rupee on their bottom lines. 
Meanwhile, Afghan importers are taking advantage of the same 
situation, reportedly stocking up on imported goods to sell later 
if/when domestic prices rise.  Pakistan's economic difficulties are 
thus already having a negative impact on Afghanistan's balance of 
payments, though it is too soon to quantify this.  The extent of the 
macro impact on Afghanistan depends on how protracted and severe the 
crisis next-door will be.  Most contacts expect the situation in 
Pakistan to stabilize before Afghanistan suffers major damage. 
These and other bilateral economic issues will be discussed at the 
Joint Economic Committee meeting tentatively set for November 25-26 
in Kabul.  End summary 
 
¶2. (SBU) Afghan economic policymakers are beginning to consider, and 
some are worrying about, the impacts on the Afghan economy of 
current economic difficulties in Pakistan.  Sorting out the 
macroeconomic impacts is not easy, given both positive and negative 
effects, the prevalence of informal economic ties, the uncertainty 
of the course ahead for Pakistan, and weak statistical 
capabilities. 
 
¶3. (SBU) Afghan exporters are already dealing with and angry about 
the depreciation of the Pakistani rupee against the afghani. 
According to the head of the Export Promotion Agency of Afghanistan 
(EPAA), Suleman Fatimie, Afghan exporters try to secure a certain 
value for their sales in U.S. dollars, to which the afghani is 
virtually pegged.  (Note: the rupee has declined from about 60 to 
the dollar one year ago to over 80 now.)  He says that owing to 
depreciation of the rupee, exporters are earning 30 percent less in 
dollar/afghani terms for their goods than they did one year ago. 
EPAA is especially concerned about the impact on exports to Pakistan 
of carpets and fruits and vegetables, from which Afghanistan earns 
an estimated $300 million per year, roughly 3 percent of its (licit) 
GDP. 
 
¶4. (SBU) Pakistan is obviously crucial to Afghanistan's 
international economic fortunes, given the importance of transit 
trade, though Fatimie points out that of total Afghan exports to 
Pakistan, 70 percent are destined for end-use in the Pakistani 
market and just 30 percent for transit to third markets.  He fears 
things could get even worse if Pakistan should face default.  Should 
recession in Pakistan reduce total demand for Afghan goods, the 
effects could, indeed, go beyond the financial impact of rupee 
depreciation.  But Fatimie says the GIRoA does not yet have data 
showing a drop in the volume of Afghan exports to Pakistan. 
 
¶5. (SBU) The trade impacts are, of course, not solely, and maybe not 
even mainly, negative.  Rupee depreciation should help to moderate 
inflation in Afghanistan, which has been running at almost 40 
percent year on year.  Afghanistan already has a large trade deficit 
with Pakistan, suggesting that the positive currency effect on the 
import side could outweigh the negative currency effect on the 
export side.  Even exporters, many of whom rely on imported inputs 
from Pakistan, should enjoy this benefit.  Afghan consumers could 
enjoy a break from recently soaring food prices (assuming Pakistan 
is able to maintain food exports). 
 
¶6. (SBU) As elsewhere, consumers and importers are less well 
organized than producers.  In the face of exporter pressure, EPAA 
organized an October 23 forum for them to present their concerns to 
Minister of Commerce and Industry (MOCI) Farhang, who agreed to 
relay their concerns to the full cabinet.  According to Fatimie, the 
GIRoA will also raise concerns about rupee depreciation in the 
Afghanistan-Pakistan Joint Economic Committee, now scheduled to meet 
 
KABUL 00002968  002 OF 002 
 
 
in Kabul November 25-26.  That would presumably require support from 
the Finance Ministry, which co-chairs the GIRoA delegation with 
MOCI, but a deputy minister we consulted at MOF seemed unconcerned 
about the macro impacts of Pakistan's difficulties and said he had 
not heard complaints from any exporters. 
 
¶7. (SBU) According to the IMF resrep, Pakistan's troubles are 
already causing both Afghanistan's bilateral trade deficit with 
Pakistan and its global current account deficit to widen.  Afghan 
importers, he says, are taking advantage of rupee depreciation to 
stock up on imported goods, including food, which they will sell 
later in the winter when prices for these goods rise.  The volume 
effect outweighs the cheaper afghani price of imports, producing a 
net increase in the value of imports.  Remittances from Afghans 
living in Pakistan, an important component of capital inflows here, 
will decline, exacerbating the balance of payments impact. 
 
¶8. (SBU) Our contacts here agree the extent of the impact on 
Afghanistan depends on how protracted and severe the crisis is 
next-door.  According to EPAA's Fatimie, a full-blown debt crisis in 
Pakistan "would take Afghanistan down with it."  The IMF resrep 
agrees that a real implosion would be "devastating" to Afghanistan, 
but he does not/not believe that is the most likely scenario.  He is 
optimistic that the GOP and IMF will agree on a new Fund program 
that will stabilize the Pakistani economy and thus limit, in time 
and extent, the negative consequences for Afghanistan. 
 
WOOD