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C O N F I D E N T I A L SECTION 01 OF 03 ISLAMABAD 000444

SIPDIS

E.O. 12958: DECL: 02/20/2020
TAGS: PGOV PREL ECON EAID EFIN PK
SUBJECT: TARIN OUT, SHAHAB-UD-DIN -- AND NASIM BEG? -- IN

ISLAMABAD 00000444 001.2 OF 003

Classified By: Ambassador Anne W. Patterson for reasons 1.4 (b) and (d)

¶1. (C) Summary: On February 23, Prime Minister Yousuf Gilani accepted the resignation of Finance Minister Shaukat Tarin, and his successor remains unknown. According to conversations on February 24 with Treasury Attache and Embassy EconOff, it is not entirely certain which of the two leading candidates, current Minister of Health, Shahab-ud-Din, or CEO of Arif Habib Group, Nasim Beg, will assume control of the Ministry of Finance. Media coverage February 23 to the contrary, the GOP has not made an official pronouncement who will replace Tarin, and there is reportedly a dispute between Zardari, who prefers Beg, and Gilani, who prefers Shahab-ud-Din. Between the two, Shahab-ud-Din is considered to be stronger politically, but weaker in his knowledge of finance and economics. However, Dr. Hafez Pasha, Chairman of the Tax Advisory Council and a member of the Prime Minister's Panel of Economists, seems to be the preferred candidate of those outside government, including the international community. While views on candidates vary, the worst case scenario is a prolonged leadership void at the Ministry of Finance. We will work with Pakistan's leadership to avoid this. End Summary.

Unexpected Departure
--------------------

¶2. (C) Shaukat Tarin resigned on February 23. Tarin first signaled his intention, privately, to resign a few months ago because Silkbank, where Tarin had previously borrowed $33 million for 22 percent ownership share, is nearly bankrupt. Tarin now needs to raise more than $75 million to pay off the loan and to ensure the bank has sufficient capital. While there had been widespread speculation in the media that Tarin may resign, no senior Government official confirmed these rumors publicly until Gilani told Nawaz Sharif that Tarin was departing - and what he thought was a private conversation captured live on television. Adnan Afridi, Managing Director of the Karachi Stock Exchange, told Treasury Attache that he had been standing next to Tarin, at a party for Tarin's wedding anniversary, when Tarin saw the remark on television. According to Afridi, Tarin was visibly shocked and angry over the incident. He resigned the next day. At least one senior official personally recruited by Tarin, Mansoor Qureshi, Director General of Debt, has already submitted his resignation, although he said he will remain at his post for another “month or two” in order to complete several outstanding projects.

Shahab-ud-Din Still at the Health Ministry
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¶3. (C) The press reported several hours after Tarin's resignation that the newly appointed Minister of Health, Shahab-ud-Din, would replace Tarin, but there has been no official confirmation from the government. Although an experienced politician for the Pakistan People's Party, business leaders and government officials characterize Shahab-ud-Din as either an unknown or a neophyte on finance and economic issues. Furthermore, the Director General Health, Dr. Rasheed Jooma confirmed to EconOff February 24 that Shahab-ud-Din had not expressed any intention of departing his post there.

The Two Leading Candidates
--------------------------

¶4. (C) Shahab-ud-Din is currently Minister of Health, where he was welcomed to replace the corrupt Mir Aijaz Hussain Jkhrani. He also served as Minister of State for Economy from 1993 - 1996, and held the Ministerial posts of Planning and Development, Petroleum and Natural Resources, Food and Agriculture, and Irrigation and Power. However, Amjad Mahmood, Deputy Secretary Finance, confided his view that Shahab-ud-Din would need a “a large cadre” of experienced advisors and officials to compensate for his inexperience. Adnan Afridi was more concerned. The day Tarin resigned and the news announced Shahab-ud-Din as the likely successor, the Karachi Stock Exchange dropped 160 points. Moreover, he said multiple brokers and investors had expressed concern about the prospect of continuing reforms and the state of the economy.

¶5. (C) While Prime Minister Gilani reportedly backs Shahab-ud-Din, President Zardari's candidate is CEO of Arif Habib Group, Nasim Beg. Nasim Beg told Treasury Attache that he has been formally approached by the government to “take charge of the Finance Ministry portfolio.” However, he said he will wait until the Government process plays out. Nasim confirmed that, if he accepted the position, he would continue with Tarin's commitment to implementing IMF program. Arif Habib, Chairman of Arif Habib Group, said that President Zardari formally offered the position of Advisor to the Prime Minister on Finance (as close to Minister as a non-elected official can come, and one wich Shaukat Tarin held for months) to Nasim, but Nasim was originally reluctant to accept. Only after Arif Habib suggested this would be a good move for him and the country, did Nasim Beg warm up to the idea.

The View From the Banks
-----------------------

¶5. (C) Deputy Governor of the State Bank of Pakistan (SBP), Yaseen Anwar, opined that the IMF program provided the necessary roadmap for reforms for whomever came in as minister -- it was not necessary to have an economic genius at the helm provided he strictly followed the agreed plan. Absent a horrible policy mis-step, Yaseen did not feel that either Nasim or Shahab-ud-Din would have a negative affect on operations at the SBP. Muneer Kamal, CEO of KASB Bank, mentioned that it was important for the incumbent to be a Federal Minister, and thus an elected official. Kamal said that, until Tarin became a Senator, the Prime Minister had chaired the Economic Coordination Committee (ECC). As Advisor, Tarin also did not have full authority over the Federal Board of Revenue (FBR), resulting in frequent problems reforming the FBR, particularly merging the various collection departments.

Clear Chain of Command Required
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¶6. (C) Paul Ross, IMF Resident Representative, and Masood Ahmed, IMF Director Middle East and Central Asia Department, told the Ambassador that for the Fund to complete the fourth review and approve the fifth tranche of IMF funding (Note: Expected in late March. End Note), it was necessary for the Ministry to be led by an accountable minister to sign off on Pakistan's submissions to the Fund. Clearly concerned about a scenario whereby a Federal Minister of Finance would be augmented by an Advisor to the Prime Minister for Finance simultaneously, Ahmed said the Fund would also require a clear chain of command at Finance, so that the Fund can confidently hold the Government of Pakistan accountable to implement program reforms.

Pasha Still Remains a Possibility
---------------------------------

¶7. (C) Although not mentioned as frequently as Nasim Beg or Shahab-ud-Din Dr. Hafez Pasha -- who is the preferred candidate of Shaukat Tarin and Chief of the Army Staff Ashfaq Kayani -- is apparently still a potential candidate. The IMF's Masood Ahmed said that two weeks ago Pasha had told him that he has not been formally approached by anyone in the government. Several senior officials in the FBR also confided privately that Pasha was a known quantity, and someone they felt would be strong on continuing tax reforms. Zakir Mahmood, Chairman of Habib Bank Limited, said that Pasha is also his preferred candidate since he has both technical competence and a degree of political heft. Mahmood admitted that Pasha does not carry the weight of a sitting politician, but his name is well known and would inspire confidence in the market. Mahmood, who recently came from a meeting of the Pakistan Banker's association, and relayed this was also the sentiment of most of his colleagues.

¶8. (C) Comment: Tarin's sooner-than-expected departure has exposed the fact that the GOP has still not decided on a successor, despite its certain knowledge that Tarin was planning to depart. Post and others have been clear with President Zardari about the need for a credible replacement in which the donors, the business community, and the IMF have confidence. Masood Ahmad freely admitted to the Ambassador that the Fund was not alone in allowing Pakistan an extra measure of grace in meeting the terms of Pakistan's structural adjustment program with the Fund, largely because of the credibility the Fund attached personally to Shaukat Tarin. Ahmad confided that the Fund is already concerned that Pakistan's enthusiasm for completing its program is waning. He predicted that, without a driving force willing and able to stand up to the political leadership on tough issues such as tax reform (where Ahmed said the politicians are in perfect accord - to evade taxes) the number of missed targets and implementation delays will grow, leaving the program to “fizzle out” in the fall.

¶9. (C) Comment cont'd: Post is weighing in again with President Zardari, to stress our hope that his government's appointment be the best person to fill Tarin's shoes -- and inspire confidence among the business community donors and the IMF. While neither Shahab-ud-Din or Nasim Beg may be poor choices, there is unease among many, foreign and Pakistani alike, that neither candidate is the best. Hafez Pasha appears to be the candidate most often mentioned as inspiring the most confidence. The worst case scenario is prolonged confusion and absent leadership at the Ministry of Finance.
PATTERSON