DCM'S MEETING WITH PAKISTANI FINANCE SECRETARY

C O N F I D E N T I A L SECTION 01 OF 02 ISLAMABAD 002935 SIPDIS E.O. 12958: DECL: 09/05/2018 TAGS: ECON EFIN ETRD PREL PGOV PK SUBJECT: DCM'S MEETING WITH PAKISTANI FINANCE SECRETARY WAQAR MASOOD Classified By: Anne W. Patterson, Reasons 1.4 (b) and (d) ¶1. (C) DCM and EconOff called on newly re-installed Finance Secretary Dr. Waqar Masood at his office on September 5. Masood noted that he had been back in office only four days but nevertheless, he was deeply engaged in managing the current economic crisis. He welcomed the visit by Embassy officers and declared that, although he had not asked the purpose of the appointment request, he had hoped it would be to discuss the overall economic situation. ¶2. (C) Masood launched into a standard analysis of the state of the Pakistani economy, insisting that the economy was demonstrating resilience even though it had suffered from twin oil and food price shocks. He insisted the challenge was management of the near-term economic problem but that Pakistan,s prospects over the longer term remained fundamentally sound. Indeed, the food price shock was self-inflicted, he said, as it was aggravated by the over-export of Pakistani wheat. Despite his optimism, Masood noted the energy crisis is beyond anything the country has observed in its history, commenting that load-shedding of six hours per day in Islamabad was a unique experience. He predicted new independent power producers would come on line soon that would ease the energy shortfall. ¶3. (C) Masood recounted the mis-steps of the previous administration, noting, for instance, that the budget deficit had reached about 8 percent, nearly double the 4.7 percent target. He expressed confidence that the new government could hold the deficit to 4.7 percent. Once Asif Zardari was elected President, he opined, it would bring more political stability, hence providing a window of opportunity to articulate and implement significant economic policy and continue economic reforms. He said the GOP was on track to end petroleum subsidies completely by the end of calendar year 2008 and had already reduced them from PKR 44-45 per liter to PKR 12-13 per liter. The end of fuel subsidies would include the politically sensitive kerosene subsidy, which, he said, affected primarily lower income Pakistanis who use kerosene for home heating. Electricity rates, similarly, would be raised in two tranches of 31 percent and 30 percent between now and the end of the Pakistani fiscal year on June 30, 2009. ¶4. (C) On privatization, Masood confirmed the government would press ahead with plans to resume the effort. Several privatization schemes that had been in the works and were nearing completion would be pushed forward, he said, which would result in significant new funding for the Treasury. He admitted, however, that fresh funds would not be seen for some months to come. ¶5. (C) Completely rejecting the notion of Pakistan's imminent default as suggested in recent press reports, Masood argued that he was able to cover current obligations completely. In what seemed an unusual statement, he asserted he could always end imports, if needed. Nevertheless, he noted that Pakistan needs external assistance. He expressed cautious optimism the Saudis would come through with financial assistance, but he declined to say how much or when the aid was expected. He also did not push back when the DCM observed that, in our own discussions with the Saudis, they had indicated they had made no decision yet. ¶6. (C) As for the International Monetary Fund (IMF) and World Bank (Bank),Masood recalled there had been progress towards a Bank loan earlier in the year, but the international financial institutions backed away when the macroeconomic indicators began to slip. Masood expressed openness to consider greater Bank and IMF involvement in the economy. He said a team would come to Pakistan for ten days beginning on September 12 to work with the GOP on overcoming its economic problems. Masood noted the political difficulties of embracing a full-fledged IMF program, insisting the GOP could develop a credible program without the IMF. Nevertheless, he did not rule out the possibility of a shadow IMF program. He also noted the GOP might be willing to take on a Poverty Reduction Support Credit (PRSC) ISLAMABAD 00002935 002 OF 002 that would provide cash relief in exchange for government assurances on budget allocations. A PRSC agreement, he said, would require an annual IMF review of Pakistan's macroeconomic situation. ¶7. (C) Masood indicated the Embassy would be welcome to attend meetings with the IMF/World Bank team during their visit to Islamabad. ¶8. (C) Bio Note: Masood, who holds a PhD from Boston University, is serving his second stint as Finance Secretary. His first tenure, which began under Shaukat Aziz, ended earlier this year, when he was relieved of duties. He was not offered any other position in the government during this hiatus, instead following the time honored tradition of "spending more time with his family." Presumably politically rehabilitated, Masood was brought back to the Ministry in a surprise move earlier this week. He is generally well-regarded for his economic skills. ¶9. (C) Comment: Masood unsurprisingly toed the line of general optimism that Pakistan's problems are short-term and easily rectified. It is hard to see, however, how Pakistan can so easily regain its footing, especially in the face of an ongoing energy crisis that makes expanding the industrial base nearly impossible. End Comment. PATTERSON