PAKISTAN EARTHQUAKE: MBS GEARING UP FOR

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SUBJECT: PAKISTAN EARTHQUAKE: MBS GEARING UP FOR
RECONSTRUCTION ASSISTANCE IN ADVANCE OF OCTOBER 26 GENEVA
MEETING AND NOVEMBER 18 ISLAMABAD DONOR CONFERENCE



1. (SBU) Summary: Although the detailed needs assessment is
just beginning, multilateral development banks (MDBs) are
trying to come up with funds to support reconstruction needs
following Pakistan's October 8 earthquake. The World Bank
board will vote October 25 on a $200 million package of
earthquake-related enhancements to two existing Bank
projects; the board will also take a first look at upcoming
initiatives to provide an additional $270 million for
earthquake reconstruction ($240 million in new funds for
existing projects, $30 million in reprogrammed funds from
savings identified in existing programs). The Asian
Development Bank (ADB) is trying to come up with $200 million
($80 million in grant aid, $120 million in Asian Development
Fund concessional lending),and is also trying to obtain GOP
agreement to reprogram $100 million in savings from some
long-standing existing projects to earthquake relief. The
International Monetary Fund (IMF) has, consistent with past
practice in similar disasters, offered Pakistan a
concessional emergency loan of $375 million (or roughly one
quarter of Pakistan's IMF quota); having successfully argued
to the IMF it would not agree to Post-Program Monitoring by
the Fund, the Government of Pakistan (GOP) must now decide if
it wishes to draw on the loan. The Islamic Development Bank
(IDB) has offered $252 million in earthquake support, but
$200 million of that would be for import finance and lease
finance at LIBOR or similar rates.


2. (SBU) The World Bank and ADB have just launched a jointly
coordinated reconstruction needs assessment in the affected
areas, with the participation of the GOP and major donors,
and results will be presented to the GOP on November 5. That
document will be the basis for a major Pakistan
reconstruction conference scheduled in Islamabad for November
18, to which the GOP has reportedly already invited World
Bank President Paul Wolfowitz and UNSYG Kofi Annan, who
apparently has plans to be in the region at that time. End
Summary.


3. (SBU) Comment: It appears that the MDBs appreciate the
magnitude of the reconstruction job ahead, though their
current plans may need to be scaled up if the needs
assessment reveals greater financing needs than anticipated.
Given the compelling humanitarian need and the GOP's record
of strong economic management over the past few years, MDBs
think that obtaining their boards' approval for these plans
shouldn't be difficult. We are pleased to see that even if
it is just a negotiating tactic, the GOP for now is holding a
firm line, saying it does not want MDBs shifting resources
away from existing projects designed to meet urgent
development needs in social sectors and infrastructure. End
comment.

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WORLD BANK: IDENTIFYING $470 MILLION
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4. (SBU) John Wall, Country Director for Pakistan (protect),
explained that the World Bank was looking at a near-term
figure of roughly $470 million for reconstruction and
rehabilitation. This would be comprised of additional funds
pumped into existing Bank projects in Pakistan, circumventing
the need for the Bank's usually extensive review of new
projects/designs, and facilitating the rapid disbursal of the
new funds. Two of these project expansions would be voted on
SUBJECT: PAKISTAN EARTHQUAKE: MDBS GEARING UP FOR
at the Bank's October 25 board meeting: $50 million more for
the Development Policy Credit for North West Frontier
Province and $150 million more for the Poverty Reduction
Support Credit (a nationwide program that, inter alia, funds
provincial operations in Azad Jammu Kashmir since AJK is not
officially counted as one of Pakistan's provinces). The
rationale for the infusion of new credit into these programs
would be that since both programs were appraised and designed
based on a three-year projection of provincial policies and
expenditures, any significant change in those -- as the
earthquake will certainly require for both AJK and NWFP --
will require adjustments of the projects' finances (so the
provinces aren't forced to dislodge other necessary
expenditures in order to meet their obligations under these
two Bank projects). The documentation for the expansion of
these two projects was complete, and it was expected the Bank
board would vote to support their expansion.


5. (SBU) Bank staff would also on October 25 be bringing
before the board - not for approval, since the necessary
paperwork hasn't been completed, but to give the board a
heads up that these projects will be ready for approval
within a few weeks - the expansion of several other existing
Bank projects to include earthquake reconstruction: $100
million more for the National Highways Project (although the
highway project is designed to upgrade the main
Karachi-Lahore artery, it would be expanded to cover three
damaged roads connecting the quake-affected areas with
central Pakistan where the main highway runs); $100 million
more for the Pakistan Poverty Alleviation Fund (to expand the
operations of the 61 partner NGOs currently working on
microcredit, community infrastructure and capacity building,
and mobilize them to rebuild communities); and $30-40 million
more for the NWFP and AJK Community Infrastructure Project
(to build out infrastructure including water, roads and
schools). In addition, Bank staff would preview for the
Board roughly $30 million in undisbursed funds from existing
projects that they hope to reprogram to support cash grants
for livelihood support and housing reconstruction.


6. (SBU) Subsequent to this initial package, after the World
Bank/ADB joint needs assessment is completed in November, the
Bank will consider whether it is necessary to fund an
Emergency Recovery Credit (ERC) for Pakistan. ERCs were
announced for India after the Gujarat earthquake and for Sri
Lanka after the tsunami, worth several hundred million
dollars, but those were funded out of undisbursed balances on
Bank projects in those countries. Since undisbursed balances
on Bank projects in Pakistan totals only $30 million (see
para 4),any funding for an ERC for Pakistan would have to
come from new funds.


7. (SBU) Wall said it wasn't clear to him if the Bank's
plans would be announced at the Geneva conference on October
26, noting that strictly speaking the conference was about
raising money for the United Nations' flash appeal for relief
rather than for longer term reconstruction (this theme
reappeared in discussions with most MDBs). It wasn't even
clear who from the Bank would be attending the Geneva
conference, but not the Bank's President. That said, Wall
noted the timing of the October 25 Board meeting would allow
the Bank to announce it had identified $470 million in
reconstruction financing for Pakistan's reconstruction, and
SUBJECT: PAKISTAN EARTHQUAKE: MDBS GEARING UP FOR
that the Bank's Board had already approved $200 million in
expanded projected finance.

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ADB: LIKELY TO OFFER $200-300 MILLION
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8. (SBU) ADB's Ed Haugh (protect) said ADB was trying to
identify earthquake reconstruction funds, since its
three-year allocation for Pakistan was already settled and
the GOP had made clear it didn't want any cannibalization of
projects already in that three-year plan. In view of that,
the ADB was planning to come up with $200 million in new
money -- $80 million in grant aid, and $120 million from the
Asian Development Fund concessional resource (on
IDA-equivalent terms). Beyond that, the ABD was hoping to
persuade the GOP to agree to identify savings of $100 million
in some long-standing, lingering projects dating back to the
early 1990's, and reprogram the money from those projects to
earthquake assistance (but not cancel those projects).
Longer term, the ADB was thinking of ways it could rejigger
existing projects to meet reconstruction needs -- for
example, the existing NWFP social sector project could shift
its focus from programs to school reconstruction.


9. (SBU) Asked how this compared to the kind of assistance
ADB provided in response to the tsunami, Haugh explained that
after the tsunami, the ADB took the unprecedented step of
dipping into its own resources to fund a $600 million Tsunami
Relief Fund. The largest recipient, Indonesia, ended up
receiving roughly $290 million from that Fund, so if the ADB
were to announce $200-300 million for Pakistan earthquake
relief, the amount would be roughly comparable. Haugh
mentioned the Tsunami Fund currently contained $30-40 million
in unspent funds, which might be added to the Pakistan
earthquake relief (aternatively, the fund might be
re-designated the Asian Emergency Fund).


10. (SBU) Haugh noted that while the size of contributions
was important, both for reconstruction and for sending a
political message of support, what was equally important was
the effectiveness of the aid--specifically, that it
materialize quickly, and be spent within a year or two.
Gujarat earthquake aid had been effective in this regard,
particularly because there was good local institutional
capacity to build on for rapid disbursement; tsunami
assistance had been less effective. Cash grants -- for
rubble clearance and for housing -- would be critical. Haugh
noted that NWFP, whose capital Peshawar was not seriously
damaged by the earthquake, would be in a much better position
to administer assistance than AJK, whose capital Muzaffarabad
was one of the worst hit cities.

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IMF: HAS OFFERED $375 MILLION EMERGENCY LOAN
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11. (SBU) The IMF's ResRep Henri Lorie (protect) confirmed
press reports that IMF Managing Director Rato had, on a brief
October 17 visit to Pakistan, extended a $375 million
emergency assistance loan, with a 3-5 year repayment term and
0.5 interest rate. This amount would be roughly equivalent
to 25 percent of Pakistan's IMF quota; extension of a Fund
loan of this magnitude is fairly customary following major
natural disasters (both Sri Lanka and the Maldives borrowed
SUBJECT: PAKISTAN EARTHQUAKE: MDBS GEARING UP FOR
on these terms from the Fund after the tsunami, and Turkey
did after its earthquake). Lorie noted the GOP had been
adamant with Rato it would not draw on such a loan if it
would involve Post-Program Monitoring (PPM) (which had also
been a sticking point when the GOP concluded its special IMF
program in December 2004 -- and the Fund had relented).
Rato had said given the generally sound state of Pakistan's
macroeconomy, the Fund would not insist on PPM (Lorie noted
this was a judgment call. Since Pakistan is already
borrowing close to 100 percent of its IMF quota, borrowing an
additional 25 percent would push Pakistan's borrowing to the
level where the Fund could insist on PPM, but given IMF
confidence in the GOP's economic policy team, Rato did not
think it necessary). This exchange has already been
reported in the Pakistani press, with Pakistan's refusal to
accept PPM being characterized as a point of national honor
(as was the "breaking of the begging bowl" associated with
ending of the IMF program in 2005). The GOP even asked the
IMF for written confirmation of Rato's statement that the
Fund would not insist on PPM--an odd request to make of the
Fund Managing Director, Lorie noted, but one that would
likely be addressed in Rato's letters to his GOP
interlocutors thanking them for a productive visit. This
"victory" could give the GOP the cover it needs to draw on
the IMF emergency loan.


12. (SBU) Mechanically, Lorie said no further IMF action was
necessary to offer the loan; all that remained was for the
GOP to send in a letter formally requesting it. (Note: we
understand such a loan would require IMF board approval. End
note.) Therefore, Lorie noted, it was possible that the Fund
might choose the occasion of the Geneva conference to
officially confirm it has extended such a loan to Pakistan.
But Lorie noted the U.N. conference on relief was not really
a Fund function, and he was not even aware if an IMF
representative would attend.

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IDB: HAS ANNOUNCED AID PACKAGE TOTALLING $252 MILLION
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13. During an October 23 meeting with Prime Minister Shaukat
Aziz, IDB President Ahmad Mohammed Ali (accompanied by OIC
SecGen Ekmeluddin Ihsanoglu) announced that IDB would provide
$251.6 million to Pakistan as emergency assistance. $1.6
million of that amount would be grant funding; $50 million as
a Sharia interest-free loan (but up to a 1.25% service charge
on actual expenses); $100 million would be lease finance (for
such things as equipment purchases) with a rate of 3.825
percent, five-year grace period, and 25 year repayment term;
and $100 million would be trade finance for the import of
petroleum products, with a concessional rate of one year
LIBOR (currently approx 4.4%) and 18 month repayment. IDB
Resident Rep Shahid Miah reported that IDB President Ali
initially maxed out his individual authority by offering $11
million in emergency assistance and then approached the IDB
Board. The IDB Board, "in the spirit of Ramadan," expanded
the package to $251.6 million. When asked about the
relatively high interest rates, Miah explained that while not
competitive with other MDBs, they were lower than what IDB
normally charges (approximately 5% for petroleum products and
5.1% for lease financing). Miah also noted that OIC
financing includes a preference for purchasing products from
OIC countries, including in cases where lowest bids may be
SUBJECT: PAKISTAN EARTHQUAKE: MDBS GEARING UP FOR
from non-OIC countries.

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NEXT STEPS: PREPARING FOR NOVEMBER 18 DONORS CONFERENCE ON
RECONSTRUCTION
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14. (SBU) The MDBs and major donors have agreed on a needs
assessment that will begin imminently. Of the 15 functional
areas the needs assessment will survey, the World Bank will
take the lead on nine and the ADB will take the lead on six;
GOP technical experts will participate in all the teams, and
the project coordinators will meet on a weekly basis with de
facto Finance Minister Salman Shah and Chairman of the new
Earthquake Reconstruction and Rehabilitation Authority LTG
Zubair. The assessment team will present its report to the
GOP on November 5. That will be followed by a November 18
Donors conference in Islamabad on reconstruction. Prime
Minister Aziz has already asked World Bank President Paul
Wolfowitz to represent the Bank at that event, and has also
invited Kofi Annan, who reportedly has plans to be in the
region at that time.
CROCKER