UNDER SECRETARY JEFFERY'S MEETING WITH FINANCE MINISTER

C O N F I D E N T I A L SECTION 01 OF 02 ISLAMABAD 002466

SIPDIS

E.O. 12958: DECL: 07/22/2018
TAGS: ECON EFIN EINV PGOV PREL PK
SUBJECT: UNDER SECRETARY JEFFERY'S MEETING WITH FINANCE MINISTER
NAVEED QAMAR

Classified by Ambassador Anne Patterson, reasons 1.4 (b) and (d)


1. (C) Summary: In a July 18 meeting with Under Secretary for
Economic, Energy and Agricultural Affairs Reuben Jeffery, Acting
Minister of Finance Naveed Qamar described this year as one of the
most difficult in Pakistan's economic history. He highlighted recent
steps taken by the Government of Pakistan (GOP) to improve
macroeconomic indicators and expressed hope that economic stability
would be achieved by the end of 2008. He predicted that following
GOP plans to decrease imports, reduce energy subsidies and stabilize
Pakistan's foreign exchange position, overall economic health will
greatly improve. Qamar lamented on the current state of Pakistan's
agricultural sector and requested U.S. food assistance to target the
country's most vulnerable citizens. Describing Prime Minister
Gilani's upcoming visit to Washington as a platform for serious
bilateral discussions, Qamar remained noncommittal on Under Secretary
Jeffery's suggestion to restart Bilateral Investment Treaty (BIT)
negotiations. End Summary.


2. (C) Under Secretary for Economic, Energy and Agricultural Affairs
Reuben Jeffery and the Ambassador met with Acting Minister of Finance
Naveed Qamar on July 18. Qamar, who sits on the Pakistan Peoples
Party (PPP) Central Executive Committee, was named acting Minister of
Finance following the May 12, 2008 departure of Pakistan Muslim
League-Nawaz (PML-N) ministers from the federal cabinet.


3. (C) Qamar described this year as one of the worst in Pakistan's
economic history. He faulted the previous government for inaction,
allowing the budget deficit to soar as global energy and food prices
skyrocketed. The Minister hoped that some degree of economic
stability would be achieved by the end of 2008, paving the way for
future reforms. "We hope to return to previous growth levels within
a few years," he continued, recognizing that monetary tightening and
restricted growth would be necessary in the short term to combat
inflation. Qamar emphasized that one of his main goals is to
stabilize Pakistan's foreign exchange reserve position by decreasing
the import of non-essential luxury goods and lowering energy import
levels. Timely Coalition Support Fund (CSF) reimbursements from the
U.S. are key to improving Pakistan's reserve situation, he concluded.


COMMITMENT TO REFORM
- - - - - - - - - -


4. (C) Under Secretary Jeffery highlighted the importance that
perception plays in attracting foreign investment. The perception
among investors, he observed, is that Pakistan is adrift and at risk
of a serious financial crisis. Budgetary support from bilateral and
multilateral donors such as the U.S. and World Bank will not be
sufficient to address Pakistan's broad economic problems. Ministry
of Finance Secretary Farrukh Qayyum conceded that while negative
market perceptions are hurting Pakistan, the GOP's recent economic
performance has been positive. In the past three months, exports are
up 23 percent, FDI has been sustained at 2006-07 levels and
remittances have hit an all time high. He complained that while the
GOP has taken a number of steps to sustain the economy, the World
Bank and other international financial institutions have simply "sat
on the fence."


5. (C) Refuting the perception that the GOP had taken no demonstrable
policy steps to arrest the deterioration in macroeconomic indicators,
Finance Minister Qamar emphasized that the GOP has the courage and
political will to make the difficult decisions necessary to sustain
the economy. The fiscal year 2008-09 budget caps the budget deficit
at 4.7 percent of GDP, a figure that Qamar pledged to "defend at any
cost." Despite multiple GOP agency requests for increased funding,
Qamar reported that he has the Prime Minister's support to deny many
of these proposals. The GOP has also undertaken the unpopular but
necessary step of decreasing energy subsidies. Consumer petroleum
prices have been raised three times since the PPP-led government took
office in March 2008. Conceding that higher energy prices will fuel
inflation, Qamar stated that raising fuel prices was necessary to
reduce the GOP's energy expenditure and lower Pakistan's oil import
bill. Higher interest rates will help tame inflation, currently
running in the double digits.

FOOD SHORTAGES AND AGRICULTURAL REFORM

ISLAMABAD 00002466 002 OF 002


- - - - - - - - - - - - - - - - - - -


6. (C) Turning to Pakistan's food shortages, Qamar reported that this
year's wheat production is well below target. Qamar opined that
while increased wheat smuggling to Afghanistan remains a challenge,
mismanagement of the agricultural sector is mainly to blame for
Pakistan's food shortages. "Pakistan should not be in this mess," he
concluded, pointing out that while Pakistan is an agriculturally rich
country, past governments have not provided adequate support and
incentives to farmers. He spoke of offering incentives to farmers
while bringing agricultural commodity prices in line with global
levels. Qamar cited the recently-approved crop plan insurance scheme
as an example of the GOP's commitment to promote growth in the
agricultural sector. Expressing confidence that future wheat
harvests would exceed domestic demand, Minister Qamar reported that
Pakistan was in need of food assistance this year.


7. (C) Due to higher than expected wheat shortages, Pakistan will
import 2.5 million metric tons of wheat to meet domestic demand.
Minister Qamar estimated that after imports, Pakistan would still
need an additional one million metric tons of wheat. While
supportive of the World Food Program's (WFP) recent emergency appeal
for an additional USD 82 million in food aid, Qamar believes that
Pakistan needs closer to USD 750 million in assistance. He requested
additional food aid from the U.S. in the form of a "PL-480 or similar
program." Under Secretary Jeffery commented that reform of the
agricultural sector is necessary to prevent future food shortages.
Finance Minister Qamar concurred, describing the agricultural sector
as the key to future economic growth.

U.S. ECONOMIC PRIORITIES
- - - - - - - - - - - -


8. (C) The Ambassador raised the prospect of securing GOP approval
for the U.S.-funded USD 20.7 million U.S. Geological Survey and Naval
Research Lab joint airborne geophysical survey of Pakistan. The
survey, a multi-year, bilateral cooperative effort to collect
scientific information for the purposes of natural resource
identification, hydrology and civil infrastructure planning, has been
on hold since 2006. (Note: While civilian GOP agencies have been
supportive of the proposal in the past, military and intelligence
organizations have blocked the survey's approval on national security
grounds despite U.S. offers to allow full military participation in
the survey. End Note.) Qamar expressed support for the energy
implications of the project and promised to examine the proposal
further.


9. (C) Under Secretary Jeffery expressed U.S. commitment to
Reconstruction Opportunity Zones (ROZs) and suggested restarting
negotiations on the U.S.-Pakistan Bilateral Investment Treaty (BIT)
from "where we left off" in 2006. Minister Qamar reiterated that the
GOP would like ROZ approval expedited. He stated that while BIT
negotiations had made significant progress before faltering in March
2006, perhaps both countries would need to start negotiations from
the beginning because "all the players have changed." He remained
noncommittal on restarting BIT negotiations. Describing the
U.S.-Pakistan relationship as "a partnership to move us through this
difficult time," Finance Minister Qamar reiterated strong GOP support
for Prime Minister Gilani's upcoming visit to Washington as a
platform for serious discussions.


10. (U) This cable has been cleared by Under Secretary Jeffery.

PATTERSON