STATE BANK OF PAKISTAN PAINTS GLOOMY PICTURE FOR UNDER

C O N F I D E N T I A L SECTION 01 OF 02 ISLAMABAD 002463

SIPDIS

E.O. 12958: DECL: 07/19/2018
TAGS: ECON EFIN EINV PGOV PREL PK
SUBJECT: STATE BANK OF PAKISTAN PAINTS GLOOMY PICTURE FOR UNDER
SECRETARY JEFFERY

Reftel: Islamabad 2428

Classified by: Anne W. Patterson for reasons 1.4 (b) and (d)

Summary
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1. (C) Summary: In a July 17 meeting with Under Secretary for
Economic, Energy and Agricultural Affairs Reuben Jeffery, State Bank
of Pakistan (SBP) Governor Shamshad Akhtar explained her efforts to
address Pakistan's worsening macroeconomic situation and expressed
concern that the lack of political will complicates already difficult
economic decisions to cut subsidies and take measures to stem the
steady decline in Pakistan's reserves. She recognized the toll that
the bank's actions were taking on the private sector, but stated she
had no choice. She also stressed the need for additional foreign
currency inflows to alleviate the situation, adding that what happens
to Pakistan affects the whole world. End summary.


2. (C) Under Secretary of State for Economic, Energy and
Agricultural Affairs met with State Bank of Pakistan (SBP) Governor
Shamshad Akhtar in Karachi on July 17. Akhtar commented that the
government is making efforts to stabilize Pakistan's economy in a
"difficult world economic environment." What happens in Pakistan
affects the whole world, she added. The SBP began FY 07-08 July 1,
2007 with USD 14-15 billion in reserves; current levels are USD 7.8
billion, with the depletion beginning in earnest in December 2007.
As reserves decreased, Akhtar noted, investor nervousness increased.
As evidence, she cited that the Karachi Stock Exchange had lost 400
points July 17, and protestors caused damage to the exchange July 18.


3. (C) Akhtar commented that Pakistan's foreign exchange markets had
been difficult to manage. The rupee had been stable until recently,
to the point where the International Monetary Fund (IMF) "used to
accuse the SBP of artificial management." However, with the
depletion of reserves and the constant increases in oil prices, the
rupee had become much more volatile, losing 22 percent of its value
since July 2007. The Prime Minister was supportive of the measure
that Akhtar had taken on May 22, when the SPB tightened monetary
policy by raising interest rates 150 basis points (bp). Akhtar
summarized the June 10 measures to stabilize the rupee (reftel),
including increasing margins for letters of credit, tightening
foreign exchange company regulations, and limiting foreign exchange
trading hours.


4. (C) According to Akhtar, economic assistance will be necessary to
stabilize the economy. Foreign inflows have decreased, with
remittances as the only bright spot. Exports have grown by 15
percent because of exchange rate depreciation. She estimated that
Pakistan needed approximately USD 12 billion to maintain appropriate
import coverage. In response to Jeffery's question regarding Saudi
help on oil payments, Akhtar replied that the Finance Minister had
spoken to the Saudi Ambassador, who was "in principle supportive" but
the amount and timing was "not certain." She added that Pakistan's
monthly oil bill is USD 1.4 billion.


5. (C) Akhtar stated that the government needs to pass through
international oil price increases, establish a social safety net,
implement "severe" oil conservation measures, broaden the tax base,
increase exports, and increase agricultural production, especially
wheat. She complained that the previous government had not taken any
"substantive economic policy measures."


6. (C) Commenting on the previous day's cabinet meeting on economic
policy, Akhtar said that some Ministers do not understand that
"Pakistan is in economic crisis." "There are too many cracks within
the party and in the coalition. The problem is that we need consensus
to make decisions." Comments and war rumors coming out of
Afghanistan are not helping; economic activity in the North West
Frontier Province "is ceasing" due to increased talibanization; and
economic activity in the rest of Pakistan has slowed. Despite
Karzai's recent comments, however, she emphasized that Pakistan
continues to help Afghanistan meet its food requirements by providing
1.8 million tons of wheat through government and private sales.


7. (C) Akhtar admitted that there were calls for her removal, and
that she was risking her own job by taking unpopular but necessary
measures to tighten monetary policy and provide access to foreign
exchange. The Prime Minister does not want to risk the political cost

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of bringing in the IMF.


8. (C) Jeffery asked what the U.S. can do to help. Akhtar asked for
help to "create political stability." She related that the Karachi
business community told Qamar that it needs "a decision-making
government" because currently "there is no certainty." The business
community needs "sound government and security." "The mood on the
street is getting tougher," she added, with crimes, including
kidnapping and robbery, on the rise throughout Pakistan. Akhtar
expressed concern that slowing economic activity could lead to
unrest.


9. (C) Jeffery asked about capital flight. Akhtar responded that
locally-held foreign exchange deposits are stable, but that a run on
the special convertible rupee accounts would be a "huge crisis."
(Note: These accounts are have a net outflow of USD 110.8 million for
the period July 2007 to date. End note.) She remarked that she and
Acting Finance Minister Qamar are "on the same page" regarding
capital flight.


10. (U) Under Secretary Jeffery cleared this cable.

PATTERSON