VZCZCXRO7544
RR RUEHLH RUEHPW
DE RUEHIL #3763/01 3381352
ZNR UUUUU ZZH
R 031352Z DEC 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 0504
INFO RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEHRC/USDA FAS WASHDC 4288
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/SECDEF WASHINGTON DC
RUEHKP/AMCONSUL KARACHI 0725
RUEHLH/AMCONSUL LAHORE 6456
RUEHPW/AMCONSUL PESHAWAR 5315
RUEHNE/AMEMBASSY NEW DELHI 4131
RUEHBUL/AMEMBASSY KABUL 9507
RUEHKT/AMEMBASSY KATHMANDU 9320

UNCLAS SECTION 01 OF 03 ISLAMABAD 003763 
 
 
SENSITIVE 
SIPDIS 
 
REF: A. ISLAMABAD 03699 B. ISLAMABAD 03560 
 
E.O. 12958:  N/A 
TAGS: ECON ETRD EAID EFIN EINV PK
SUBJECT: STAKEHOLDER REACTIONS TO THE IMF PROGRAM 
 
¶1. (SBU) SUMMARY.  All stakeholders surveyed agree that Pakistan's 
Stand-by Agreement (SBA) with the International Monetary Fund (IMF) 
was inevitable and will provide much needed economic stability in 
the short-term.  The SBA document is not yet fully public so 
stakeholders are reacting to interest rate increases, the rupee 
exchange rate, and the fiscal deficit.  The IMF's Resident 
Representative clarified on November 28 that the SBA does not have 
specific requirements for how government revenues should be 
increased beyond improving the effectiveness of income tax 
collection, but stakeholders are worried about possible increases in 
tax coverage of the agricultural income, real-estate profits, and 
other capital gains. 
 
¶2. (SBU) SUMMARY CONTINUED.  The reactions in the financial markets 
are broadly positive but have only halted Pakistan's economic 
downward spiral rather than markedly improving indicators.  The 
business community has a generally favorable opinion of the IMF 
program because they expect it will impose fiscal discipline on the 
government, catalyze taxation reform and improve investor 
confidence.  They are concerned however, that higher interest rates 
and import costs will reduce competitiveness.  A spokesman of the 
opposition party Pakistan Muslim League (PML-N) said that the SBA 
will only be successful if it has a broad perspective and revives 
the economy but otherwise he thinks that Pakistan will remain an IMF 
program recidivist.  END SUMMARY. 
 
¶3. (SBU) Post has surveyed a variety of contacts from various fields 
to assess the local reaction to Pakistan's acceptance of an SBA with 
the IMF.  While the full details of the program have yet to be 
posted publicly on the State Bank website, information has been 
steadily printed in local media and numerous talk show programs have 
hosted question and answer programs related to the IMF program. 
While opinions vary, most commentators accept that under the current 
economic conditions, Pakistan's government had no other option than 
to seek IMF assistance. 
 
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MARKETS 
------- 
 
¶4. (SBU) The reactions in the financial markets are broadly positive 
but have only halted Pakistan's economic downward spiral rather than 
markedly improving sentiments.  The Pakistan rupee exchange rate 
appreciated from 80.8 rupees to the dollar at the beginning of 
November to 78.6 rupees on November 24, when the GOP officially 
requested the SBA.  Ratings agencies continue to hold Pakistan's 
debt ratings on review for further downgrades.  Foreign reserves 
stand at USD 5.98 billion as of December 2. 
 
¶5. (SBU) The Karachi Stock Exchange, by far the largest stock 
exchange in Pakistan, had a "floor" placed to halt rapidly declining 
stock values on August 28 which remains in place.  Local analysts 
expect that about USD 1 billion of the USD 2.2 billion foreign 
portfolio investors have in the stock market will exit once the 
floor is removed.  The IMF and GOP remain in consultation on how 
best to remove the floor, with no date set.  Trading off the market 
remains at a 30 percent discount to the artificial values despite 
the SBA.  Foreign investors made net withdrawals of portfolio 
investments in Pakistan of USD 26.4 million during November and USD 
278.4 million since July. (reftel B) 
 
¶6. (SBU) Sakib Sherani, Chief Economist for Pakistan at the Royal 
Bank of Scotland and member of the Economic Advisory Committee for 
the Government of Pakistan (GOP), said that the delay in approaching 
the IMF and GOP policy inaction have damaged Pakistan's economy and 
investor confidence.  He believes the IMF program will improve 
investor confidence and unblock assistance from the World Bank and 
the Asian Development Bank (ADB). 
 
¶7. (SBU) Sherani projected that even after the SBA, Pakistan still 
has an external financing gap of around USD 2 billion.  He assumes 
the current account deficit will be USD 8.5 billion, portfolio 
outflows from the stock market of USD 1.5 billion, debt servicing of 
USD 2.5 billion putting the total financing need at USD 12.5 
 
ISLAMABAD 00003763  002 OF 003 
 
 
billion.  He projected this total financing need will be partially 
offset by foreign direct investment of USD 3 billion this year; loan 
disbursements from the IMF of USD 4.5 billion; funds from the World 
Bank and the ADB of USD 1 billion each; and assistance from the 
Islamic Development Bank, the UK's Department for International 
Development, and other bilateral sources of USD 1 billion. 
 
-------------- 
INDUSTRIALISTS 
-------------- 
 
¶8. (SBU) According to Majyed Aziz, a leading industrialist  and 
former president of the Karachi Chamber of Commerce and Industry 
(KCCI), the business community has a generally favorable opinion of 
the IMF program because they expect it will: (1) impose fiscal 
discipline and narrow the budget deficit, (2) reassure the 
multilateral institutions, releasing World Bank and ADB projects, 
(3) promote documentation of the informal economy, (4) catalyze 
taxation of the agricultural sector and real-estate, and (5) improve 
investor confidence and FDI inflows (if the law and order situation 
improves). 
 
¶9. (SBU) Anis-ul-Haq, the Director of the All Pakistan Textile Mills 
Association (APTMA), said that he was assured by de facto Finance 
Minister Shaukat Tareen that the IMF conditionality is not harsh. 
Haq expects that the IMF program will reduce inflation and stabilize 
the exchange rate.  Haq said that rupee stability helps the textile 
industry by increasing predictability of domestic and imported 
cotton prices. 
 
¶10. (SBU) Anticipating that the SBA will address exchange rate 
flexibility, Aziz and Haq emphasized that Pakistani production 
heavily relies on imports.  Aziz also pointed out that while global 
prices have declined, some producer costs are still high because 
contract commitments add a lag to price and policy changes, adding 
additional pressure on producer costs.  Aziz estimates that 30 to 35 
percent of all inputs are imported, so a depreciating rupee has 
mixed effects on the costs of production and competitiveness.  Aziz 
thinks that if the exchange rate remains around 78 rupees to the 
dollar then producers will have the necessary "breathing space." 
Haq said APTMA expects the rupee will appreciate to 75 per dollar. 
 
¶11. (SBU) A prior condition of the IMF program was to increase the 
policy rate from 13 percent to 15 percent.  Aziz says lending rates 
are high, around 20 percent for the average customer.  Haq said that 
the textile association is very concerned by interest rate increases 
because members borrowed money from banks at 5 to 6 percent for 
capital improvements but will have to repay at 17 percent to 18 
percent.  APTMA has taken up this issue with the government and is 
demanding compensation from the government for interest rate hike. 
COMMENT: Consumer price inflation in FY '08-'09 is 23 percent, so 
while rates are higher they remain negative in real terms.  END 
COMMENT. 
 
¶12. (SBU) Aziz believes that IMF funds will not have an immediate 
affect on the rupee economy, but the program will likely decrease 
inflationary pressure and remove subsidies on food and fuel.  Aziz, 
however, feared that a rise in gas and electricity prices will 
negatively impact the poor.  Aziz also fears that the current 
government might not successfully implement the IMF program.  He 
said, "This government backtracks in hours and may not be able to 
handle [IMF] conditionalities." 
 
---------- 
PARLIAMENT 
---------- 
 
¶13. (SBU) As a member of the most influential opposition party, 
Ahsan Iqbal, Chief Coordinator & Information Secretary of the 
Pakistan Muslim League (PML-N), criticized the SBA.  He emphasized 
that the IMF loan must be repaid with interest so it has to be 
applied to productive uses.  Iqbal said the policy rate hike will 
result in stagflation by making it difficult for businessmen to 
finance even their working capital needs.  He said that an 
 
ISLAMABAD 00003763  003 OF 003 
 
 
agriculture tax is not a good idea because it will not yield 
significant revenue but will have very adverse political 
ramifications.  Iqbal was also critical of devaluation, saying 
"devaluation never helps" Pakistan because of its heavy reliance on 
imports. 
 
¶14. (SBU) Iqbal said that the IMF program will only be successful if 
it has a broad perspective and its goal is to revive the economy. 
Otherwise Pakistan will keep moving from one IMF program to another. 
 "The GOP should rationalize its own interests," rather than just 
following the instructions of the IMF.  He continued, "The IMF's 
agenda is to get its money back.  We need to understand our own 
agenda." 
 
¶15. (SBU) COMMENT.  While many details have been openly discussed on 
local media, stakeholders can only speculate on policy implications 
until the SBA requirements are fully public.  The first tranche of 
USD 3.1 billion is already on deposit at the State Bank of Pakistan 
and seems to be providing additional comfort that the GOP will meet 
current payment obligations.  Post will continue to closely monitor 
implementation of the SBA and report accordingly.  END COMMENT. 
 
PATTERSON