PAKISTAN IMPOSES 35 PERCENT DUTY ON FLOUR EXPORTS

1. (U) This cable has been coordinated with Consulates Lahore and
Peshawar.



2. (SBU) Summary: The Government of Pakistan (GOP) has imposed a 35
percent duty on the export of wheat products in an attempt to
discourage exports, bolster domestic supplies and reduce the
domestic price of flour. Flour exports are destined almost
exclusively for Afghanistan. The GOP has been unable to bring down
the domestic price of flour, prompting the move to restrict flour
exports to Afghanistan, reported at 600,000 metric tons annually.
End Summary.



3. (SBU) Federal Board of Revenue Chairman Yusuf explained to the
Ambassador and Economic Counselor during a courtesy call December 7
that the 35 percent export duty was imposed because the cost of
domestic flour is half that of imported flour, in part because of
the GOP's domestic wheat support program. As a result of the price
differential, exports have increased, resulting in flour shortages
and high prices in Pakistan, despite a bumper wheat crop. Yusuf
explained that Pakistan is now importing one million metric tons of
wheat at international prices to cover domestic shortages.



4. (SBU) The 35 percent duty went into effect immediately. Domestic
wheat prices have risen dramatically in recent months, increasing
fifty percent in the Northwest Frontier Province (NWFP) bordering
Afghanistan. Pakistan needs to produce over 23 million metric tons
of wheat per year to be self sufficient. Although the country
produced a record 23.5 million metric tons of wheat in 2006, cross
border trade and smuggling pushed Pakistan's wheat stockpile below
the 23 million metric mark, prompting price increases. Pakistan's
wheat exports to Afghanistan have remained steady at around 600,000
metric tons annually.



5. (SBU) Provincial governments previously advocated central
government intervention in the price of wheat flour. Despite
unsubstantiated reports of truck seizures along the border,
Consulate Peshawar contacts report that trucks are currently
crossing the Afghan-Pakistan border unimpeded and no ban on the
export of wheat flour has been put into place. The NWFP is
dependent on wheat flour from the neighboring Punjab, Pakistan's
most populous province. While there is no restriction on the
transportation of wheat flour between provinces, NWFP officials
allege that Punjab provincial authorities are restricting the flow
of wheat out of the province in an attempt to manipulate the flour
supply. Wheat flour delivery disruptions have been reported in NWFP
markets.



6. (SBU) Comment: The duty imposition is largely seen as damage
control exercise by the GOP. With general elections scheduled for
January 8, governments -- both federal and provincial -- are eager
to bring down the cost of basic commodities, including wheat flour.
High food prices are frequently cited in polls as the middle and
lower classes' primary concern. While the imposition of the duty
will have an effect on the volume of wheat that is traded to
Afghanistan via official channels, cross border smuggling will
undoubtedly increase, fueled by increased demand and profits. End
Comment.

PATTERSON