SAUDI ARABIA AGREES TO DEFER PAKISTAN'S OIL PAYMENTS BUT

UNCLAS ISLAMABAD 002405



SIPDIS

E.O. 12958: N/A
TAGS: ENGY EFIN ECON EINV PREL PK
SUBJECT: SAUDI ARABIA AGREES TO DEFER PAKISTAN'S OIL PAYMENTS BUT
DETAILS REMAIN UNRESOLVED


1. SUMMARY: (SBU) Pakistan is once again asking for assistance from
Saudi Arabia to bail out the country's faltering economy by
providing deferred oil payment concession. Details on the size and
duration of this concession are still being finalized with Saudi
authorities and are not publicly available. This may be an
opportunity for Pakistan to correct the domestic petroleum pricing
imbalances and phase out energy subsidies. END SUMMARY.


2. (U) Local media reports that Saudi Arabia has agreed to provide
crude oil worth USD 5.8 billion to the Government of Pakistan (GOP)
with deferred payments during the current GOP fiscal year (July
1-June 30). If implemented, this concession will provide a
significant boost to Pakistan's economy at a time of fast-mounting
political and economic difficulties. The huge current account
deficit and balance of payment problems are largely due to the world
oil price hike. Pakistan's Finance Minister Naveed Qamar said in a
local press interview that "the modalities are being worked out" but
Qamar restrained from disclosing the time span covered by the
deferred oil payments.

3. (U) While not disclosing specific details of the oil deal, Dr.
Ashfaque Hasan Khan, Special Secretary Finance would only confirm
that "Saudi Arabia has given positive signals to provide oil on
deferred payments" and further elaborated that negotiations for
specific terms were ongoing. The Prime Minister Syed Yousuf Raza
Gilani and Pakistan Peoples Party's co-chairperson Asif Ali Zardari
requested 3-4 years deferred oil payment facility during their
meeting with Saudi King Abdullah bin Abdulaziz in June. According
to local press, the Finance Minister Syed Naveed Qamar met Saudi
Ambassador Ali Awadh Asseri on June 10 to discuss more specific
details regarding the oil concession.

4. (U) Ambassador talked to the Saudi Ambassador who noted that his
government is inclined to be sympathetic and further noted that the
Saudi Ambassador in Washington would have all of the details. Sakiq
Sharani, Member Economic Advisory Committee of the Government of
Pakistan (GOP) told EconOff that "details of the agreement when
disclosed will determine how useful this facility will be for
Pakistan." Further noting that if this is a grant, Pakistan will
have a unique opportunity to charge the retail price of oil for
domestic customers and make structural adjustments in the economy
such as the "phase out oil subsidies in two to three years."
Sharani further stated that if this is a deferred payment than the
ability of the GOP to phase out subsidies will be severely limited.
He added that in either case the USD 5-6 billion financing if made
available through this concession will help finance the current
account deficit of USD 15 billion.

5. (U) Pakistan roughly imports 110,000 barrels of Arabian light
crude oil daily and over 40 million barrels annually which, if
calculated at the June price of USD 121 a barrel, amounts to about
USD 4.8 billion. Currently the GOP is getting a 60-day deferred
payment plan with the price of USD 121 per barrel. Under the new
agreement being negotiated, Pakistan is reportedly seeking a longer
oil concession for 3 to 4 years.

6. (U) Pakistan first received a USD 1 billion Saudi oil concession
in 1998 when it faced international sanctions for testing nuclear
devices. This concession was intact until 2003 when the Pakistan
made final payment.

7. (U) The local press also reports that Saudi Arabia has also
promised to encourage investment in Pakistan's privatization program
which aimed to generate USD 2 billion during the current FY08 fiscal
year. Pakistan plans to hold two international conferences in Jeddah
and Riyadh soon to attract foreign investment in the oil and gas,
agriculture, information technology, construction and real estate
sectors.

8. (SBU) COMMENT: Post will continue to monitor developments and
seek further details as they become available. While the GOP may
realize that continuation of fuel subsidies will further undermine
the economy, they have yet to formalize a plan for phasing out the
subsidies and passing on the increased costs to the public. While
negotiations with the World Bank for a loan hinge on further subsidy
phase outs, the current cost at the pump for the Pakistani consumer
hovers around USD 76 per barrel and even modest price increases are
being met with protests and riots. Given that the subsidies have
been in place in Pakistan for such an extended period of time,
without an oil concession from either the Saudis or another oil
producing country, the GOP faces the impossible situation of
balancing public outrage and skyrocketing international prices.
PATTERSON