C O N F I D E N T I A L SECTION 01 OF 02 ISLAMABAD 002315
SIPDIS
E.O. 12958: DECL: 07/03/2018
TAGS: EFIN, ECON, EINV, ENRG, PGOV, PREL, PK
SUBJECT: Pakistan Ministry of Finance explains its "fiscal
discipline" to Assistant Secretary Boucher
Classified by: Ambassador Anne W. Patterson for reasons 1.4 (b) and
(d)
Summary
- - - -
1. (C) Visiting Assistant Secretary Richard Boucher met with
Pakistan Ministry of Finance Secretary Farrukh Quayyum and Special
Advisor Dr. Ashfaque Hasan Khan July 2. The Minister was in Karachi
for a cabinet meeting. Quayyum gave a frank overview of recent
economic developments, emphasizing that the Government of Pakistan is
imposing fiscal discipline to "live within its means." Acknowledging
the $13 billion current account deficit, Quayyum noted that the
government is trying to restart the privatization program, and
looking at reaching agreement with the World Bank on the USD 500
million budget support loan to bridge the gap. He asked for renewed
budget support from the U.S. and vocational skills training for the
younger generation; Boucher highlighted that, while the U.S. Congress
is ready to help Pakistan, direct budget support is unlikely. The
Assistant Secretary also highlighted our efforts to streamline and
expedite Coalition Support Funds. He added that the Administration is
working on the Foreign Military Financing issue with Congress.
Boucher closed the meeting by highlighting three areas where the U.S.
hopes to see progress: finalizing the USD 500 million World Bank
loan; working for passage of the Reconstruction Opportunity Zone
legislation; and signing the bilateral investment treaty. Quayyum
promised to look into reinitiating investment treaty negotiations.
End summary.
Frank Economic Discussion
- - - - - - - - - - - - -
2. (C) Assistant Secretary Richard Boucher, National Security
Council Senior Director for South and Central Asia Mark Webber,
Senior Advisor Caitlin Hayden, and the Ambassador met with Ministry
of Finance Secretary Farrukh Quayyum and Special Advisor Dr. Ashfaque
Hasan Khan July 2 for an overview of economic issues. The Minister
was in Karachi attending a Cabinet meeting.
3. (C) After highlighting his positive experience with the U.S.
both as a student and during a posting at the Pakistani Embassy in
Washington, Quayyum emphasized that the current government is doing
all it can to address Pakistan's economic problems. He highlighted
the Prime Minister's July 1 statement that "Pakistan must live within
its means" and the government's efforts at fiscal discipline in the
current budget. In the absence of stringent measures, Quayyum noted
that the fiscal deficit is likely to rise to 9.5 percent of gross
domestic product. Currently the fiscal deficit is running at 7
percent of gross domestic product, with a projected target of 4.7
percent for the 2008-09 fiscal year which started July 1. He also
said that the government would phase out fuel and electricity
subsidies, but recognized that economic growth would suffer as a
result.
4. (C) Quayyum also discussed efforts to finance Pakistan's USD 13
billion current account deficit. He noted that thus far, the
government had financed the deficit by drawing down its reserves,
which had dropped from USD 16 billion in October 2007 to USD 11
billion (includes reserves in banking sector) in June 2008, but
acknowledged that this drawdown was making "investors nervous." The
government will resume privatization, but has not yet worked out
details. He asked for U.S. budget support, and hoped to conclude the
USD 500 million World Bank budget support loan negotiations soon.
The government had hoped to have this loan disbursed before the June
30 end of the fiscal year but the bank continued to "move the
goalposts."
Request for additional budget support
- - - - - - - - - - - - - - - - - - -
5. (C) The Finance Secretary also asked for renewed U.S. budget
support. Boucher explained that while the U.S. is looking at
increasing assistance for Pakistan, Congress "has no appetite for
budget support." On Coalition Support Fund reimbursements, Quayyum
asked that the process be expedited. Boucher recognized the cash
ISLAMABAD 00002315 002 OF 002
flow problems that the reimbursement delays cause for Pakistan, and
noted that this program has a USD 1.1 billion worldwide spending cap
and that other countries also receive reimbursement. He added that
the U.S. is trying to speed payments and wants to better define what
expenses qualify for reimbursement.
Foreign Military Financing
- - - - - - - - - - - - -
6. (C) On Foreign Military Financing, Quayyum pushed for delinking
the F-16 payments with this program. He wants to tie the missed June
15 payment and the July payment, and establish an adjusted payment
schedule because of Pakistan's foreign inflows shortage and current
account deficit. Boucher noted that, while the Administration has
been working with Congress on the possibility of using this funding
for F-16 mid-life upgrades, this issue will not be resolved before
the July payment is due.
Reconstruction Opportunity Zones
- - - - - - - - - - - - - - - -
7. (C) Quayyum characterized the Reconstruction Opportunity Zones as
"the best program Pakistan could have" and that putting this
legislation on a fast track will create a lot of good will. He noted
that textiles have the longest value chain of all of Pakistan's
exports, stretching from farm to factory, and that the sector is the
biggest employer of women in Pakistan. The Assistant Secretary
replied that the State Department, Office of the United States Trade
Representative and White House are working on a legislative strategy
for passage now that legislation has been introduced in the House and
Senate.
U.S. goals
- - - - -
8. (C) Boucher mentioned that U.S. has three short-term economic
goals in Pakistan: supporting the World Bank loan once negotiations
are completed; pushing for passage of the Reconstruction Opportunity
Zone legislation; and conclusion of the bilateral investment treaty.
He added that the investment treaty would help reverse the foreign
exchange outflows, keep investment in Pakistan, and improve the
investment climate. This treaty could also provide a suitable
deliverable for Gilani's July 28 meeting with President Bush.
Quayyum promised to examine the issue.
Request for establishment of an oil facility
- - - - - - - - - - - - - - - - - - - - - - -
9. (C) At the end of the meeting, Dr. Ashfaque asked whether
"anything could be done for international oil prices" and suggested
establishment of an oil support fund/soft loan facility. He urged
the Assistant Secretary to ask the Gulf states to establish such a
facility, adding that Kuwait had given Pakistan a 60 day deferred
payment plan. Boucher replied that he had encouraged the UAE and
Saudi Arabia to provide short term assistance to Pakistan and other
countries facing difficulties because of high oil prices.
10. (U) Assistant Secretary Boucher cleared on this message.
PATTERSON