VZCZCXRO1775
RR RUEHLH RUEHPW
DE RUEHIL #0945/01 1231017
ZNR UUUUU ZZH
R 031017Z MAY 09
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 2554
INFO RHEHNSC/NSC WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHINGTON DC
RHMFIUU/FBI WASHINGTON DC
RUEHDO/AMEMBASSY DOHA 1642
RUEHLO/AMEMBASSY LONDON 0236
RUEHML/AMEMBASSY MANILA 3164
RUEHNE/AMEMBASSY NEW DELHI 4836
RUEHBUL/AMEMBASSY KABUL 0216
RUEHLH/AMCONSUL LAHORE 7173
RUEHKP/AMCONSUL KARACHI 1569
RUEHPW/AMCONSUL PESHAWAR 6108

UNCLAS SECTION 01 OF 02 ISLAMABAD 000945 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EAID PGOV PREL PK
SUBJECT: PAKISTAN UNLIKELY TO MEET ALL IMF TARGETS BUT IMF RESREP 
UNCONCERNED 
 
ISLAMABAD 00000945  001.2 OF 002 
 
 
¶1.  (SBU) Summary:   Pakistan is unlikely to meet all its IMF 
targets, but Islamabad Resident Representative Paul Ross seemed 
unconcerned.  Ross and noted Pakistani economist Dr. Ashfaque Hassan 
Khan told Econoffs that Pakistan is unlikely to meet its tax 
collection and fiscal deficit targets. Ross pointed out that 
fulfillment of pledges from the donors' conference will provide a 
needed economic stimulus that Pakistan could not otherwise finance, 
to fund social safety net and development projects.  Two areas to 
watch are the growth in remittances (which may indicate that 
Pakistanis have lost overseas jobs and are moving home) and 
decreases in exports.  Pakistan's textile exports are down, but 
overall exports remain at the same level due to healthy increases in 
agricultural and cement exports.  End summary. 
 
¶2.  (SBU)  In advance of the May IMF review, econ officers met 30 
April with IMF Resident Representative Paul Ross and former Ministry 
of Finance Special Secretary Dr. Ashfaque Hassan Khan regarding 
their views on Pakistan's ability to meet its IMF targets, including 
tax revenues, economic growth, monetary growth, the fiscal deficit, 
and inflation.  (Note:  Khan recently left government, and is now 
the Dean of the National University of Science and Technology (NUST) 
Business School.  End note.)  Pakistan's reserves continue to 
increase, and are now at USD 7.8 billion, up from USD 3.5 billion in 
October 2008. The exchange rate has stabilized at 80 to 81 rupees 
after a 13.2 percent devaluation between July and November 2008. 
 
Concerns Over Increases in Remittances 
- - - - - - - - - - - - - - - - - - - - 
 
¶3.  (SBU) Private inflows have slowed but Pakistan will not have a 
balance of payments deficit this fiscal year, according to Ross. 
Both economists agreed that despite current macroeconomic stability, 
the increase in remittances (which may indicate that overseas 
Pakistani workers are losing their jobs and transferring assets 
home) and decreases in exports (due to the worldwide economic 
recession) are two areas to watch.  Pakistan's textile exports have 
decreased by 2.71 percent but overall exports are flat, due to 
healthy increases in agricultural (29.3 percent increase), cement 
(102.61 percent increase), and chemicals (12.3 percent increase) 
exports. 
 
Tax Revenue Target Unlikely to Be Met 
- - - - - - - - - - - - - - - - - - - 
 
¶4.  (SBU)  Ross and Khan agreed that the GOP is unlikely to meet its 
annual IMF tax revenue target. The GOP has revised downwards the tax 
collection target from Rs.1360 billion ($16.90 billion) to Rs.1250 
billion (USD15.52 billion), but provincial expenditures are still 
based on the original target of Rs 1360 billion. Pakistan's tax base 
is very narrow, with no taxes on agriculture and most services. Ross 
commented that the GOP is likely to make up the tax revenue 
shortfalls through the petroleum levy.  (Note:  Pakistan pump prices 
are above current international market prices; the government 
pockets the difference.  End note.) 
 
¶5.  (SBU)  Khan highlighted areas where the government is not 
collecting tax revenues, including withholding taxes where the 
government loses Rs. 200-250 billion (USD 2.48 - 3.1 billion) 
annually after introduction of a self-assessment system without a 
robust audit system.  Khan also criticized the IMF program tax 
target which increases tax collection from Rs 1250 billion (USD 
15.52 billion) to Rs 1360 billion (USD 16.9 billion) when customs 
revenue was dropping due to an IMF mandate to decrease growth in 
imports to one percent.  Imports grew 23.8 percent in FY 2007-2008. 
Since tariff collections from imports represent approximately 45 
percent of tax receipts, the IMF target is virtually impossible to 
meet, according to Khan. 
 
Falling Short on the Fiscal Deficit Target, Too 
- - - - - - - - - - - - - - - - - - - - - - - - 
 
¶6.  (SBU)  As a result of the anticipated tax collection shortfall, 
Pakistan will have difficulties reaching its fiscal deficit target 
 
ISLAMABAD 00000945  002.2 OF 002 
 
 
of 4.3 percent, according to Khan.  Ross commented that the GOP is 
making serious efforts to meet its target, and has eliminated fuel 
subsidies.  However, he is concerned that it will be difficult to 
phase out the electricity subsidies by the June 30 end of the fiscal 
year.  Elimination will require a four percent tariff increase, but 
a rate increase combined with blackouts has led to serious 
demonstrations in the past.  Ross and Khan agreed that Pakistan 
should tax agriculture, which accounts for 20 percent of GDP but 
only one percent of tax revenue.  Most farmers pay no income tax. 
Currently the federal government argues it cannot tax agriculture 
since the provinces regulate the sector. 
 
But Still Positive Growth - Barely 
- - - - - - - - - - - - - - - - - - 
 
¶7.  (SBU)  The Ministry of Finance continues to project a 2.5 
percent growth rate, based on forecasts for a good harvest and 4.2 
percent growth in the service sector.  Ross thought that Pakistan 
would reach two percent growth, which given Pakistan's two percent 
annual population increase essentially reflects zero growth.  Khan 
projected a one percent or even negative growth rate. 
 
¶8.   (SBU)  Economic growth has slowed in large part due to tight 
monetary policy.  While the IMF stipulates a 10.8 percent growth for 
M2 money supply, Khan commented that M2 will only grow by 4.5 
percent.  With negative net foreign asset inflows, domestic assets 
cannot grow sufficiently in the absence of borrowing from the State 
Bank of Pakistan.  Despite the tight monetary policy and decreases 
in international commodity prices, core inflation remains at 17.9 
percent.  Part of this stickiness is due to the composition of the 
core inflation index, where housing rental costs (which many 
Pakistanis do not pay) is a principle component of the index. 
 
Donor Pledges as Economic Stimulus 
- - - - - - - - - - - - - - - - - - 
 
¶9.   (SBU)  Ross highlighted that fulfillment of the donors' 
conference pledges will provide an important economic stimulus to 
the slowing Pakistani economy that the government could not afford 
to fund on its own and still meet the IMF targets.  While the 
financial inflows are helpful for Pakistan's balance of payments and 
reserve buildup, these funds will allow Pakistan to implement social 
safety net and development programs eliminated to meet its fiscal 
target. 
 
Comment 
- - - - 
 
¶10.  (SBU) Comment:  Ross and Khan appeared unconcerned about 
Pakistan's slippages in meeting its IMF fiscal deficit and tax 
collection targets.  Pakistan has taken a number of difficult 
economic decisions over the past few months - elimination of central 
bank borrowing and deep cuts in expenditures for social safety net 
and development programs.  As a result, it is important that donors 
honor their conference commitments to provide Pakistan a needed 
economic stimulus and broaden the social safety net.  However, in 
order to ensure continued economic growth, Pakistan still needs to 
make structural reforms, including broadening its tax base and 
making the energy sector more attractive to investors.  End 
comment. 
 
FEIERSTEIN