SCENESETTER FOR CODEL CARDIN

UNCLAS SECTION 01 OF 02 ISLAMABAD 002201

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: PREL PTER PGOV PK
SUBJECT: SCENESETTER FOR CODEL CARDIN


1. (SBU) Summary. Pakistan's newly elected civilian
government remains a fragile coalition beset by differences
over how to restore the deposed judiciary and President
Musharraf's future. Continuing political deadlock over the
judiciary has seriously undermined the GOP's ability to
tackle growing economic and security challenges. We look
forward to briefing you on political, economic and security
developments. End Summary.

Political Overview
--------------


2. (SBU) The coalition government between the Pakistan
People's Party (PPP) and the Pakistan Muslim League-N (PML-N)
continues to hold despite strains over how to restore the
judges fired by President Musharraf in November 2007. Until
that issue is resolved, the PML-N ministers have withdrawn
from the cabinet. The ongoing deadlock has seriously
undermined the GOP's ability to tackle growing economic and
security challenges. PPP leader Asif Zardari and PML-N
leader Nawaz Sharif agreed to passage of a budget June 21
that expands the number of Supreme Court justices from 16- to
9; that should allow the government to bring the deposed
judges back on board. Still undetermined, however, is the
fate of former Chief Justice Iftikhar Chaudhry.


3. (SBU) According to a recent poll, Nawaz's popularity has
risen to 86%; the poll indicates that if an election were
held today, the PML-N would win 42% of the vote compared to
32% for the PPP. Nawaz has been touting a simple
pro-judiciary/anti-Musharraf message. Zardari's position is
more nuanced; he is calling for restoration of the judiciary
minus Chaudhry via a package of constitutional reforms that
would denude the presidency of key powers. He also is
proclaiming that a PPP member will soon be in the presidency
but has stopped short of supporting outright impeachment of
Musharraf. Although the PPP remains the dominant party in
the coalition, Nawaz's strength is growing. He will win a
National Assembly seat in the June 26 by-elections, and his
brother Shahbaz Sharif has just become Chief Minister in
Punjab, the political and economic heartland of Pakistan.


4. (SBU) Musharraf has said publicly that he will not
resign but will accept whatever the parliament decides about
his fate. Should a motion of impeachment be brought against
him, Musharraf will have an opportunity to defend himself in
parliament. A two-thirds majority of a joint sitting of the
National Assembly and the Senate is required to impeach a
president; Musharraf's party and its allies still control the
Senate, and there is debate over whether the coalition
currently has the votes to impeach. Indirect Senate
elections in March 2009 will likely bring the PPP and/or the
PML-N to power in the Senate.

Security Situation
--------------


5. (SBU) We will provide you with an in-depth security
brief when you arrive. The GOP has announced a new policy of
outreach, not (they insist) to militants, but to tribal
leaders who provide support networks for the Taliban, foreign
al Qaeda militants, and a growing coterie of criminals who
are colluding with militants. We remain skeptical that
negotiated and pending agreements with these tribal leaders
are enforceable. We have expressed our concern that these
agreements must prohibit cross-border attacks on U.S./ISAF
forces in Afghanistan. Cross-border attacks have doubled
compared to the same period last year.


6. (SBU) Pakistan has agreed to participate in a combined
investigation (with the U.S. and Afghanistan) of the June 10
incident in which 11 Pakistani military personnel were killed
by U.S. strikes. The U.S. regrets the loss of life that
occurred. Until this investigation is complete, however, we
are refraining from further public comment. We are
encouraging Pakistan to move forward on manning a tripartite
Border Coordination Center at Torkham, Afghanistan (the first
of six BCCs) as a way to provide real-time intelligence that
could prevent future incidents.

Economic Situation
--------------

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7. (SBU) Following five years of seven percent annual
economic growth, Pakistan is currently facing severe economic
challenges. Rolling electricity shortages, rising food costs
and the GOP's decision to subsidize fuel and energy have
contributed to deterioration of all major economic
indicators. Economic growth for the current fiscal year is
expected to be 5.8%, well below a target of 7.2%. The fiscal
deficit is projected to be 7% of GDP versus a target of 4%;
GOP borrowing from the State Bank of Pakistan (SBP) reached
an all-time high of USD eight billion for the first ten
months of the fiscal year. As of early May 2008, the GOP had
USD 13.98 billion in outstanding debt to the SBP, or 9% of
GDP. Pakistan's trade deficit rose to USD 17 billion, up
from USD 11 billion last year, as lackluster export growth
fell far short of increasing imports. Savings and foreign
investment both declined, further impacting overall GDP
growth.


8. (SBU) The GOP passed its USD 31 billion 2008-2009 fiscal
year budget on June 21. In addition to setting revenue
targets and expenditure levels, the budget also includes
assumptions on economic growth and economic policy measures,
setting an overly optimistic growth figure of 5.5%. The GOP
plans to reduce the fiscal deficit from 9% to 4.7% of GDP;
the imposition of additional taxes will increase revenue
collection by 25%. Resumption of the privatization program,
decreases in subsidies and increased duties on luxury goods
are expected to decrease the current account deficit from 7%
to 6% of GDP.


9. (SBU) Energy is a growing concern for Pakistan and
threatens to further impact the economy. Not a single
megawatt has been added to the national grid since 2000,
despite population growth and economic expansion. Pakistan
currently suffers from an energy shortfall of between 4,000
to 4,500 megawatts per day with some regions and cities
suffering from blackouts for up to 12 hours per day.
Industrial production is threatened as factories are unable
to produce goods and unemployment is rising. Petroleum and
electricity subsidies account for the bulk and have continued
to rise as international oil prices have skyrocketed. The
GOP is paying USD 554 million per month for subsidies on
petroleum and will attempt to reduce these subsidies in the
coming fiscal year despite the intense popularity of such
measures with the public.


10. (SBU) The prices of basic agricultural commodities have
steadily risen over the past year, including the cost of key
staples such as wheat, rice and cooking oil. Pakistan has
been suffering from monthly double digit food price inflation
since September 2007. Over 100 million Pakistanis live on
less than 2 dollars per day, including 25 million living on
less than one dollar per day. The World Food Program
recently identified Pakistan as one of 40 countries at risk
of food insecurity and recently raised its estimate of
at-risk individuals from 60 to 77 million, or 48 percent of
Pakistan's population.

FATA Development Plan
--------------


11. (SBU) USAID's Office of Transition Initiatives has
begun work on small projects in all seven agencies of the
Federally Administered Tribal Areas (FATA). Working with the
FATA Secretariat, we have also begun to implement our
livelihoods, health/education and capacity development
projects. We would be happy to brief you on these projects,
our measures to monitor spending of this project-based
assistance, and efforts to improve coordination among other
donors.





PATTERSON