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RR RUEHLH RUEHPW
DE RUEHIL #0575/01 0771108
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R 181108Z MAR 09
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 1918
INFO RHEHNSC/NSC WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
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RUEATRS/DEPT OF TREASURY WASHDC
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RHEBAAA/DEPT OF ENERGY WASHDC
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RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHINGTON DC
RHMFIUU/FBI WASHINGTON DC
RUEHDO/AMEMBASSY DOHA 1634
RUEHLO/AMEMBASSY LONDON 9911
RUEHML/AMEMBASSY MANILA 3145
RUEHNE/AMEMBASSY NEW DELHI 4650
RUEHBUL/AMEMBASSY KABUL 0024
RUEHLH/AMCONSUL LAHORE 6959
RUEHKP/AMCONSUL KARACHI 1296
RUEHPW/AMCONSUL PESHAWAR 5886

UNCLAS SECTION 01 OF 03 ISLAMABAD 000575 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV PREL PK
SUBJECT: IMF Update - "Nascent Stability" 
 
¶1. (SBU) Summary.  In a briefing of G-7 countries, the IMF Resident 
Representative characterized Pakistan's economic situation as 
"nascent stability."  Revealing little new information, he commended 
the GOP's efforts to meet its numeric goals, but cautioned that tax 
revenue targets would be difficult to meet and that the global 
economic situation could throw off predictions.  In a separate 
meeting, Finance Advisor Shaukat Tarin was upbeat about bringing 
down inflation and interest rates, and told Ambassador that he would 
ask for eight times Pakistan's quota when he attends the Bank/Fund 
meetings in April.  Japan is concerned that the IMF quantify the 
amount Pakistan needs for the successful completion of its Stand By 
Arrangement, but the Fund rep said that the $4 billion target was 
not mentioned in the report that will be presented to the Board at 
the end of March.  End Summary 
 
¶2. (SBU)  On March 9, IMF Resident Representative Paul Ross 
(protect) briefed the G-7 embassies in an off-the-record session 
organized by Italy (as current president).  Ross confirmed previous 
reports that the IMF's first review went well and that the GOP 
showed strong commitment to meeting its goals.  The situation is 
fragile but stabilizing.  Inflation has gone down from 25 to 20.5 
percent, the exchange rate has stabilized, and the international 
reserve position has strengthened, both as a result of the IMF 
disbursement and increasing demand for Treasury bills. (Note: The 
latest inflation figures, which came out after the briefing, show 
that inflation increased slightly, to 21.1 percent, in February. 
End Note.)  Ross reported good progress in targeting those eligible 
for social safety net programs. 
 
¶3.  (SBU)  All the quantitative targets have been met - borrowing 
from the State Bank of Pakistan, level of net assets of the SBP, and 
budget deficit levels.  Plans to strengthen private banks and to 
deal with circular debt are due by the end of March.  The circular 
debt problem will be addressed quite soon by the issuance of $1.2 
billion of five-year, term finance certificates, at KIBOR (Karachi 
Interbank Offered Rate) plus 175 basis points.  A plan is in place 
to eliminate electricity subsidies by June 30.  Electricity prices 
are now at cost recovery levels, and the GOP has committed to a 
cumulative four percent increase by end-June; a one percent increase 
was announced in early March, but the GOP did not give a timetable 
for the remaining increases. 
 
Uncertainty due to World Economic Situation 
------------------------------------------- 
 
¶4.  (SBU)  In spite of the GOP's solid performance, many indicators 
depend on the state of the world economy and are thus difficult to 
predict, such as world demand for Pakistani exports, and the levels 
of foreign direct investment and workers' remittances, both of which 
currently are higher than expected.  Ross said that the decline in 
portfolio investment was less than the IMF had feared.  He predicted 
that growth and inflation would both decrease, with year-on-year 
inflation falling to only 10 percent by June, and declining further 
to 5-6 percent in the next fiscal year.  There has been a slight 
improvement in the balance of payment position ($6.25 million), due 
to a smaller current account deficit, although this was somewhat 
offset by a decrease in the capital account.  The IMF expects 2.5 
GDP growth this fiscal year, 4 percent in FY09-10, and 6 percent in 
FY10-11. 
 
Revenue Targets "Ambitious" 
-------------------------- 
 
¶5.  (SBU)  Ross said the mission had discussed next year's budget in 
broad parameters.  There will be an increase in tax revenue targets, 
and they expect resources to be freed up because of the elimination 
of subsidies.  This year's tax revenue target was reduced by $750 
million to reflect lower nominal GDP and lower inflation.  Even so, 
he characterized it as ambitious, noting that the Fund mission 
questioned the GOP's ability to raise this amount of revenue on 
technical grounds, but they said they wanted to keep the targets 
high, and would cut spending commensurately if revenue fell short. 
 
ISLAMABAD 00000575  002 OF 003 
 
 
A full-fledged value added tax will be introduced in FY10-11, Ross 
said; the IMF and World Bank are providing technical assistance on 
tax reform and tax policy design. 
 
Fiscal Stimulus Not Possible without More Assistance 
--------------------------------------------- ------- 
 
¶6.  (SBU)  In the face of the global financial crisis, many 
countries are stimulating their economies through lower interest 
rates and increased government spending, Ross said, but Pakistan did 
not have adequate reserves to pursue such counter-cyclical policies. 
 The GOP told the Fund that they want to consolidate the 
stabilization (inflation and fiscal position) before moving to 
counter-cyclical measures.  While the budget deficit target will be 
maintained in rupee terms (Rs 562 billion or $7 billion), due to 
slowing growth, it will now constitute 4.3 percent rather than 4.2 
percent of GDP.  In the coming fiscal year, the authorities plan to 
reduce the fiscal deficit by a further 0.9 percent - from 4.3 to 3.4 
percent.  The GOP plans to increase development expenditures from 
3.2 percent of GDP this year to 4 percent next year. 
 
May IMF Mission to Focus on Next Year's Targets 
--------------------------------------------- -- 
 
¶7.  (SBU)  The next IMF mission, scheduled for mid-May, followed by 
a board review/tranche disbursement at the end of June, will work 
out more detailed targets for the next fiscal year with the GOP. 
Ross emphasized the need for additional financing to provide some 
space for counter-cyclical policies.  If 0.5 percent of GDP were 
available to the GOP, it would spend more on social safety net 
programs, such as health insurance and providing 
vocational/technical training to one member of the 7 million 
households that will be targeted for assistance under the Benazir 
Income Support Program. 
 
$4 Billion Figure not Specified in IMF Written Report 
--------------------------------------------- -------- 
 
¶8.  (SBU)  In answer to a question from the Japanese economic 
counselor, who emphasized the need for the IMF to validate 
Pakistan's assistance needs, Ross reaffirmed that the IMF still 
estimates Pakistan's needs at $4 billion over the life of the 
Stand-By Arrangement (which ends in June 2010).  When pressed, he 
said that this figure was not specifically mentioned in the report 
to the IMF Board, however.  Ross explained that the figure does not 
represent the financing gap, but is desired additional funding. 
(Note:  According to an MOF source, the actual financing gap for 
this fiscal year is only $100 million.  End Note.) Ross noted that 
the IMF had an adjustor in the program to allow for more 
expenditure, and that the Fund would prefer that assistance in the 
form of budget support, or concessional financing, preferably 
grants. 
 
¶9.  (SBU)  Ross remarked on the recent press reports in which the 
GOP asked for a larger multiplier of its quota, wondering why the 
GOP was dealing with the press rather than approaching the Fund 
directly. He indicated, however, that the Fund would not necessarily 
be opposed to increasing its lending. 
 
Tarin Will Ask Fund for More Money in April 
------------------------------------------- 
 
¶10.  (SBU) Financial Advisor Shaukat Tarin, in a March 13 meeting 
with the Ambassador, said he planned to ask for eight times the 
GOP's quota (they are receiving five times quota under the current 
arrangement) at the upcoming Bank/Fund meetings in order to provide 
a foreign exchange cushion of 4-6 months of imports to protect the 
country against exogenous shocks.  Tarin also confirmed that revenue 
targets would be difficult to meet, as 58 percent of all taxes are 
paid by the manufacturing sector, which is shrinking.  He was upbeat 
on interest rates, noting that KIBOR had fallen from 15.5 percent to 
12.5 percent in one month (Note: As of March 16, it had dropped even 
 
ISLAMABAD 00000575  003 OF 003 
 
 
further, to 11.65 percent.  End Note.)  Tarin predicted that 
inflation would drop rapidly, although the sensitive price index (a 
list of products whose prices affect the poor disproportionately) 
was up in February due to surges in sugar and onion prices.  He said 
that remittances were growing faster than expected, at 19 percent, 
and that the $500 million from the World Bank would be coming in 
soon, with another $500 million from IDA and a further $500 million 
from the Asian Development Bank before the end of June. 
 
 
PATTERSON