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UNCLAS SECTION 01 OF 02 ISLAMABAD 001355 
 
SIPDIS 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV PREL PK
SUBJECT: Budget 2009-10: Depending on Foreign Assistance 
 
¶1.  (SBU) Summary:  On June 13, the GOP presented a consolidated 
budget of $36.21 billion with a fiscal deficit of 4.9 percent, 
slightly higher than the 4.6 percent target previously agreed to 
with the International Monetary Fund.  The budget is fairly 
expansive, with development expenditures increasing by 54 percent. 
Subsidies have been cut by $1.25 billion, but Tarin told reporters 
that the GOP "had not yet made up its mind" about completely 
eliminating electricity subsidies.  While tax targets are 17 percent 
above the current year, the new tax measures do not appear 
sufficient to raise this amount of revenue.  The IMF has expressed 
concern about whether some expenditures might be underestimated, as 
well as with the 4.9 percent deficit.  Finance Advisor Tarin, 
however, said that if promised Tokyo and IDP donor assistance 
pledges materialize, the deficit would be only 3.4 percent of GDP. 
As an added precaution, he has requested an additional $3 billion 
from the IMF as a back up credit, which the Fund's Board will 
consider when it meets in July.  Growth and inflation targets appear 
to be optimistic, given the current slump in the manufacturing 
sector and continuing energy shortages.  The National Assembly will 
debate the budget for the next ten days, but discussion is not 
expected to be particularly contentious.  End Summary 
 
Counting on Donor Assistance to Bring Deficit Down 
 
¶2.  (SBU) On June 13, Minister of State for Finance and Economic 
Affairs Hina Rabbani Khar presented the budget for the fiscal year 
beginning July 1 to Parliament.  The consolidated federal and 
provincial budgets came in at $36.2 billion: total resources are 
expected to be $27.2 billion, leaving a deficit of $9.03 billion, or 
4.9 percent of GDP.  Development expenditures are $9.79 billion - up 
54 percent from last year.  Of this, slightly over $8 billion will 
be for the public sector development program (PSDP); $875 for the 
Benazir Income Support Program; and $625 million for internally 
displaced people.  The new "IDP tax" - a 5 percent charge on 
individuals whose taxable income exceeds $12,500 - is expected to 
raise an additional $17 million for the displaced persons of Swat, 
Dir and Buner.  Government employees and retirees will receive a 15 
percent increase in salaries and pensions, and military personnel 
will receive bonuses for service on the western front. 
 
¶3.  (SBU) Finance Advisor Shaukat Tarin explained that the 4.9 
percent deficit would fall to 3.4 percent if international 
assistance materialized as promised.  Tarin said that the GOP had 
requested an additional $3 billion from the IMF, but that it would 
be used only as back-up, in case other assistance was not 
forthcoming. 
 
Focus on Manufacturing, but no Concrete Measures 
 
¶4.  (SBU) In a June 14 press conference, Tarin said the current 
budget would phase out unproductive subsidies and prioritize 
government spending.  The GOP will focus on reviving the 
manufacturing sector, which had shrunk by 3 percent in FY08-09, 
"through easy monetary and realistic exchange rate policies."  The 
GOP is planning for a 3.8 percent growth in agriculture, 1.8 percent 
growth in manufacturing and 3.9 percent growth in services, for an 
overall GDP growth rate of 3.3 percent.  Inflation is projected to 
be 9.5 percent over the course of the fiscal year.  Exports are 
projected to be $18.3 billion, while imports are expected to drop by 
5.6 percent to $28.9 billion.  The trade deficit is projected at 
$10.7 billion in FY09-10. 
 
Revenue Targets up 23 Percent 
 
¶5.  (SBU) Despite pressure from the IMF and other international 
financial institutions to increase its tax-to-GDP ratio, Tarin said 
this would remain at 9 percent for the upcoming year.  Revenue 
targets are planned to increase by 23.3 percent, however, to $17.15 
billion.  Tax revenue targets are up 17 percent.  (Note:  The 
tax-to-GDP ratio will remain relatively unchanged since nominal GDP 
will increase by 12.8 percent.  End Note.)  To meet this goal, the 
GOP has instituted several new tax measures, although the sacred cow 
- agriculture - remains untouched.  It has levied a 16 percent 
excise tax on services provided by banking and financial companies, 
insurance companies, port/terminal operators, and stock brokers, as 
 
ISLAMABAD 00001355  002 OF 002 
 
 
well as a 16 percent tax on print advertisements.  The government 
has increased both the tax rate on the transfer of real estate and 
the withholding tax on imports from 2 to 4 percent. 
 
Overall Subsidies Down, Fate of Electricity Subsidies Unclear 
 
¶6.  (SBU) GOP spending on subsidies has been reduced from $2.75 
billion to $1.5 billion for the coming year.  Of this amount, $846 
million is for wheat and $837 million is for power.  Of the latter, 
$125 million will subsidize FATA electricity, $375 million will pay 
interest on Pakistan Electric Power Corporation's debts, and $150 
million is to clear tariff differential arrears or "circular debt." 
However, it is not yet clear whether the GOP will fully live up to 
its commitment to the IMF to phase out electricity subsidies overall 
or to fully recover costs for electricity production, which would 
require raising tariffs by 17.5 percent.  In his June 14 press 
conference, Tarin said the government "had not yet decided" by how 
much it would increase the electricity tariff. 
 
¶7.  (U) The provincial share of federal revenue is estimated at 
$8.19 billion for FY09-10, a 15.3 percent increase over last year. 
The defense budget for 2009-10 has been increased to $4.29 billion 
from $3.89 billion. 
 
Agriculture and Industry Ministries Get More Funds 
 
¶8.  (SBU) The Agriculture Ministry will receive an additional $50 
million this year, for a total budget of $225 million.  In addition, 
two new R&D laboratories - one for wheat and one for cotton - will 
be established.  In other agriculture related spending, water course 
improvements have been allocated $125 million, improvements to the 
Mangla Dam have been given $150 million, small and medium dams 
received $94 million, and $187 million was allocated for irrigation 
system rehabilitation.  The budget for the Industries Ministry was 
increased from $25 million to $109 million. 
 
Petroleum Levy Replaced By Carbon Tax 
 
¶9.  (SBU) The petroleum development levy (PDL) was replaced by a a 
"carbon tax" on petroleum products and compressed natural gas, in 
response to a ruling by the Supreme Court that declared the PDL 
unfair.  The government expects to earn $1.675 billion from the new 
tax, an amount similar to that raised by the PDL. 
 
Tax Incentives for Industry 
 
¶10.  (U) The five per cent excise tax on cars has been withdrawn and 
exemptions granted for inputs necessary for manufacturing parts and 
components for engineering sector.  The government has reduced the 
excise tax on telecommunication services from 21 to 19 percent, and 
halved the activation charges on cell phones from $6.25 to $3.12. 
 
¶11. (SBU) Comment:  The budget has met a generally luke-warm 
reception.  A former Commerce Secretary told us that the budget 
lacked a unifying theme to rally the Pakistani people, such as 
stressing the security situation or asking for sacrifices in the 
face of the IDP crisis, but focused instead on "business as usual." 
Several interlocuters remarked that the GOP had not tightened 
discretionary spending, observing that such an expansionary budget 
would create excessive demand, which, coupled with rising 
international oil prices, could reverse recent improvements in the 
current account deficit.  The IMF Res Rep noted that special 
interests continued to receive preferential treatment, and that the 
Fund had concerns about the ability of the GOP to stick to its 
spending plan if the global situation did not improve.  Former 
Finance Minister Salman Shah noted that the revenue targets were 
quite ambitious for a stagnating economy.  Pakistan is counting 
heavily on foreign assistance, but there is uncertainty as to the 
timing as well as the form of promised assistance.  If assistance 
does not materialize as budget support, Pakistan may have to raise 
money domestically or cut development spending, which could have 
negative implications for growth and inflation, as well as on public 
opinion. 
 
PATTERSON