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R 280451Z FEB 09
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 1668
INFO RHEHNSC/NSC WASHINGTON DC
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RUEATRS/DEPT OF TREASURY WASHDC
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RUEAIIA/CIA WASHDC
RUEHDO/AMEMBASSY DOHA 1631
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RUEHML/AMEMBASSY MANILA 3142
RUEHNE/AMEMBASSY NEW DELHI 4535
RUEHBUL/AMEMBASSY KABUL 9912
RUEHLH/AMCONSUL LAHORE 6840
RUEHKP/AMCONSUL KARACHI 1157
RUEHPW/AMCONSUL PESHAWAR 5768

UNCLAS ISLAMABAD 000440 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EINV EAID PGOV PREL PK
SUBJECT: PAKISTAN MEETS FUND TARGETS; MORE LEEWAY AS GROWTH SLOWS 
 
REF: A. Islamabad 0238 
      ¶B. Islamabad 0315 
 
¶1. (SBU) Summary.  The IMF finished its first "generally positive" 
review of Pakistan's Standby Arrangement on February 25.  While the 
program remains on track, the Fund has relaxed its fiscal deficit 
and tax revenue targets slightly, based on a deteriorating global 
economic environment.  Finance Advisor Tarin said that the IMF had 
predicted GDP growth at 2.5 percent, down from 3.5 percent.  The 
Fund's press release emphasized the necessity for additional 
external budget assistance.  End Summary. 
 
¶2. (SBU) The International Monetary Fund (IMF) concluded its first 
review under Pakistan's Stand-By Arrangement, along with its 2009 
Article IV consultations, on February 25, after 12 days of meetings 
in Islamabad and Dubai.  In a press statement, the IMF said the 
program remains on track, characterizing initial developments as 
"generally positive."  The Fund was impressed by the GOP's "strong 
resolve" to sustain prudent macroeconomic policies.  Pakistan met 
all of the program's quantitative performance criteria for 
end-December 2008, an outcome that had been widely anticipated (Ref 
A). 
 
¶3. (SBU) The exchange rate has remained broadly stable and 
Pakistan's international reserves position has strengthened 
significantly, with the State Bank's gross reserves exceeding $6.8 
billion at the end of January.  The Fund's statement said that 
structural reforms have proceeded broadly as envisaged.  A 
contingency plan for handling problem banks has been prepared and is 
being strengthened, and an action plan to reform tax policy and 
administration has been adopted and will be implemented with 
technical assistance from the Fund and the World Bank.  The GOP 
reiterated its commitment to end electricity subsidies by June (by 
phasing in a one percent increase monthly from March through June) 
and a plan has been designed to address the circular debt issue (Ref 
B). 
 
¶4. (SBU) The IMF agreed that the GOP can reduce interest rates as 
inflation decreases.  "The authorities and the IMF team agreed that 
the current monetary policy stance was appropriate and will continue 
to promote domestic and external stability.  If both headline and 
core inflation decline, there should be scope for lower rates, 
provided that the international reserves position continues to 
improve and the government avoids resorting to SBP financing."  The 
IMF Res Rep told us in early February that inflation was proving 
unexpectedly stubborn, in spite of falling global food and oil 
prices. 
 
¶5. (SBU) Finance Ministry officials confirmed that the IMF had 
scaled down Pakistan's growth rate from 3.5 to 2.5 percent, and had 
reduced its tax revenue target to Rs. 1.3 trillion.  As a result the 
fiscal deficit target will increase slightly from 4.2 to 4.3 percent 
of GDP, with a fiscal gap of Rs. 562 billion.  The Fund has revised 
its estimate of the current account deficit, from 6.5 to 5.6 percent 
of GDP, as the rate of import growth (-14.5 percent) is expected to 
decline more than the growth rate of exports (-5.5 percent). 
 
¶5.  (SBU)  Comment:  The IMF Resident Representative (protect) 
predicted privately in early February that Pakistan's GDP growth 
rate might approach negative two percent this fiscal year.  With a 
fast growing working-age population and a large number of poor, an 
economic slow-down will hit the country hard.  This makes it even 
more important that the GOP effectively structure its social safety 
net programs to target the most vulnerable segments of the 
population.  Generous external financial assistance provided at the 
upcoming donors' conference is also crucial, a fact that the IMF has 
emphasized in its public and private statements, although it has 
made clear that direct budgetary assistance would be preferable. 
 
FEIERSTEIN