ECONOMIC SCENESETTER FOR CODEL PELOSI

UNCLAS ISLAMABAD 000389

SIPDIS


SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: OVIP ECON EFIN EAID ETRD PREL PGOV PK
SUBJECT: ECONOMIC SCENESETTER FOR CODEL PELOSI


1. (SBU) The U.S. Mission in Pakistan warmly welcomes your January
27-28 visit to Islamabad. Your visit coincides with a period of
expanding and deepening engagement between the U.S. and Pakistan on
a range of key economic and trade issues. Reforms pioneered in 1999
by Prime Minister Shaukat Aziz in his earlier role as Finance
Minister, and strongly supported by President Musharraf, have been
very successful in taking Pakistan from the brink of collapse,
through a smooth recovery, and on to steadily improved economic
growth. In 2005, Pakistan's 8.4 percent GDP growth was second best
in Asia, although in the fiscal year ending June 2006, growth slowed
slightly to 6.6 percent, due in large part to higher energy prices.
For FY 2007, growth is expected in the 6.5 to 7 percent range,
fairly balanced across all sectors, although services, especially
telecommunications and banking, are particularly strong. Inflation
spiked beyond ten percent last year, but the State Bank of Pakistan
has taken steps to address the issue and it is now in the seven
percent range. Concerns remain, however, about the lack of
diversity in Pakistan's exports, which continue to be dominated by
textiles and apparel, and a growing current account deficit.


2. (SBU) The U.S. is the largest export market for Pakistani
products; in 2005, Pakistan exported USD 3.3 billion of goods to the
U.S., while the U.S exported USD 1.2 billion to Pakistan. The U.S.,
cumulatively, is the largest foreign investor in Pakistan. There
are over 80 U.S. companies operating in Pakistan, primarily in the
pharmaceutical, IT, oil and gas, financial services and restaurant
sectors.


3. (SBU) The GOP's top leadership has installed a team of trusted
technocrats and ministers who have carried out a comprehensive
overhaul of Pakistan's economic policies. This effort initially
focused on core problems such as reining in government deficit
spending, privatizing the financial sector, and increasing education
and development spending. The GOP has built on these successes and
is now focusing on additional banking, tax, capital market, and
judicial reforms, as creating an environment conducive to doing
business. The GOP has implemented an aggressive privatization
program, which includes selling shares in a number of state-owned
companies (e.g., Pakistan Telecom and Karachi Electric Supply
Corporation). Proceeds from these privatizations have generated
large inflows of capital.


4. (SBU) We launched a U.S.-Pakistan Dialogue in March 2006, which
Under Secretary of State for Economic and Business Affairs Sheeran
inaugurated. In addition to offering support with domestic reforms
- such improved Intellectual Property Rights protection - and
regional economic integration, the Dialogue has a sectoral focus on
education, science and technology, and energy.


5. (SBU) Bilateral Investment Treaty (BIT): After coming close to
an agreement on a BIT with Pakistan in the run-up to President
Bush's March 2006 visit, progress was dormant until early September
2006, when, at the instigation of the Prime Minister's office,
negotiating sessions re-started. Pakistan's Attorney General took
the lead on the GOP side, but progress stalled after several weeks.
The GOP is now forcefully pushing linking an agreement on a BIT to a
Free Trade Agreement with the U.S.


6. (SBU) Container Security: The GOP expressed strong interest in
participating in the U.S. Container Security Initiative (CSI),and a
CSI agreement was signed during President Bush's March 2006 visit.
We expect that a CSI cargo container scanning facility at Port
Qasim, near Karachi, will be up and running by February 2007. This
facility will combine high-speed transmission of scanned images and
checks of suspect containers by local USG Pakistani employees. CSI
should improve U.S. national security and expedite clearance of
Pakistani exports to the United States.


7. (SBU) Reconstruction Opportunity Zones (ROZs): High on the
bilateral list is the mutual desire to craft an ROZ proposal that
meets Pakistani and Afghan expectations to bring sustainable
economic benefits to underdeveloped areas, including earthquake
affected areas in Pakistan and Pak-Afghan border areas (particularly
the Federally Administered Tribal Areas (FATA),North West Frontier
Province, and Balochistan). The GOP believes that tariff benefits
must be of sufficient duration to make relocating industrial
production worthwhile, and textiles and apparel must be included.
In August and September, 2006, a team of consultants funded by USAID
spent several weeks in both countries researching possible products
and locations. They submitted their report in October, and
Washington stakeholders are currently drafting ROZ legislation to
present to Congress within the next few months. While it will
require a concerted effort, including infrastructure and marketing
support, to ensure their success, ROZ's are a critical component in
our overall counter terror and development strategy, and they have
the strong support of the Government of Pakistan.

Crocker