CORRECTED COPY: GSM 102 AND GOP WHEAT SUBSIDIES

UNCLAS SECTION 01 OF 02 ISLAMABAD 003300

SENSITIVE
SIPDIS

REF: Various USDA-USAID- State emails on Food for Progress and GSM
102

E.O. 12958: N/A
TAGS: ECON EFIN EAID ETRD EAGR PREL PK
SUBJECT: CORRECTED COPY: GSM 102 AND GOP WHEAT SUBSIDIES


1. (SBU) Summary: Post, USDA, and the Government of Pakistan (GOP)
continue to hammer out the details for the Food for Progress
monetization of wheat. Under the program, the GOP wants to sell US
donated wheat at USD 195 per ton while USDA regulations prevent the
sale of donated commodities below local market rate (which is
currently around USD 300). The GOP has also requested an additional
USD 400 million under the GSM 102 facility, currently approved for
USD 100 million to enhance wheat procurement. The GOP continues to
subsidize both the domestic production of wheat as well as the
import of wheat from abroad. Such subsidies, particularly on
international wheat imports, will only continue to exacerbate the
GOP's balance of payment problems. Action request see paragraph 11.
End Summary.


2. (U) This cable is an action request. See paragraph 11.

FOOD FOR PROGRESS MONETIZATION OF WHEAT
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3. (SBU) Post appreciates assistance from the Department of
Agriculture (USDA) to facilitate agreement on the proposed wheat
monetization, Food for Progress program, for Pakistan. The USG
commitment to provide this wheat stems from President Bush's
commitment to Prime Minister Gilani during the July 2008 state
visit. The GOP has indicated that they will sell the 50,000 metric
tons of wheat at USD 195 per ton to provincial utility stores in the
poorest areas of Pakistan and will use the proceeds of such sales,
anticipated at approximately USD 7.95 million, for poverty
alleviation and food security programs. Post understands that USDA
is concerned that the GOP proposed monetized price of USD 195 per
metric ton is too low compared to market rates. USDA has notified
Post that the GOP has set a floor for locally produced wheat at
roughly USD 300 per metric ton and that USDA regulations do not
permit the sale of commodities donated for monetization to be sold
below local market prices. USDA wants to ensure that USG programs do
not disrupt local procurement or commercial markets.


4. (SBU) After discussion with Post, USAID and the Desk, USDA has
proposed four options to the current impasse:

(i) The GOP could sell the donated wheat at the USD 300 per metric
tons level which would allow the GOP to continue to assist needy
groups within Pakistan;

(ii) The GOP could monetize the wheat at USD 300 and use a portion
of the proceeds to provide "food stamps" or vouchers within its
safety net system;

(iii) The GOP could sell the wheat at USD 300 but could offer
assistance or refunds to the stores that will distribute the food to
the targeted groups;

(iv) The GOP could distribute all of the donated wheat rather than
monetize it to ensure the targeting to the most vulnerable; however,
directly distributing the wheat will not give the GOP money to
implement developmental activities.


5. (SBU) On October 9, Econ Counselor discussed these USDA proposed
options with Mr. Junaid Iqbal, A Secretary of EAD, and Mr. Shahid
Hussain Raja, A Sec MINFAL. Both Secretaries indicated that the new
proposed price of USD 300 is too high and will not be feasible for
the GOP plan to distribute the wheat in the Federally Administered
Tribal Areas and in Balochistan. Both Mr. Junaid Iqbal and Mr.
Shahid Hussain Raja noted that they will confer with other GOP
officials and will respond to Post shortly; however, both
Secretaries indicated that of these options, they personally only
perceived the donation without monetization as a viable option. Post
will report septel on further GOP discussions or decisions.

REQUEST FOR GSM 102 EXPANSION
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6. (SBU) Ambassador received a letter from Ministry of Food,
Agriculture and Livestock (MINFAL) Secretary Muhammad Zia-ur-Rehman

ISLAMABAD 00003300 002 OF 002


requesting an expansion to the existing GSM 102 facility of USD 100
million for the procurement of wheat. The letter did not provide
details as to what sort of expansion was requested, however, MINFAL
Joint Secretary Faiz Mohammed Faizi clarified and proposed adding
another USD 400 million to the facility for more wheat over the
existing two year time period.

GOP SUBSIDIES ON WHEAT
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7. (U) In response to requests on the amount of current subsidies
provide by the GOP on wheat, Foreign Agricultural Specialists have
reported the following:


8. (SBU) Domestic Subsidies: In FY 08, the GOP procured 3.9 million
metric tons of wheat from its farmers through provincial food
departments and PASSCO (Pakistan Agricultural Services & Storage
Corporation),a federal agency, at a price of PKR 15625 (USD 200)
per metric ton (MT). This was then sold to flour mills and
government utility stores for PKR 20625 (USD 264) per MT, which
includes incidental costs such as transportation and storage (both
at PKR 2500 or USD 32 each). Average prices reported from markets
are higher, however, highlighting the gap between government and
market prices. A survey of current market prices for wheat (per MT)
across Pakistan is as follows: Lahore at PKR 21310 (USD 273) shows a
subsidy of PKR 685 (USD 9); Rawalpindi at PKR 21250 (USD 272)
reveals a subsidy of PKR 625 (USD 8); Quetta at PKR 26000 (USD 333)
shows a subsidy of PKR 5375 (USD 69); Peshawar at PKR 30000 (USD
384) reveals a subsidy of PKR 9375 (USD 120); Karachi at PKR 27500
(USD 352) shows a subsidy of PKR 6875 (USD 88). The open market
price varies from city to city due to the different transportation
costs.


9. (SBU) The federal government recently announced a plan to
increase the domestic wheat procurement price in April 2009 from PKR
15625 (USD 200) to 23750 (USD 304) per MT as part of a GOP plan to
entice wheat farmers to increase wheat production for the next
season. Post will provide more details on this program as they
become available.


10. (SBU) International Import Subsidies: The GOP imports wheat from
the international market through the Trading Corporation of Pakistan
based on market rates. The most recent shipments of wheat amounted
to 210,000 MT and were imported from Ukraine, Russia, and Argentina
at PKR 28217 (USD 362) per MT. Provinces in need of wheat can
purchase it from the federal government based on the federal
procurement rate (PKR 15625 per MT or USD 200). The federal
government then absorbs the difference in price. In this case that
would amount to a subsidy of PKR 12592 (USD 161) per MT.


11. (SBU) Action Request: Embassy requests assistance from the Desk
to contact the Department of Agriculture on the feasibility of
whether an expansion of the GSM 102 sovereign guarantee for Pakistan
is possible and if so, for what amount. Post also requests Desk
assistance in identifying additional resources, approximately USD 8
million, which the GOP anticipates raising through the Food for
Progress monetization program and may now forego, that can be
utilized for food security and poverty alleviation programs in
Pakistan. End Action Request.


FEIERSTEIN