AMBASSADOR MEETS WITH FINANCE ADVISOR TAREEN

UNCLAS SECTION 01 OF 03 ISLAMABAD 003375 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD PREL PGOV PK SUBJECT: AMBASSADOR MEETS WITH FINANCE ADVISOR TAREEN ¶1. (SBU) Summary. Ambassador met with newly appointed de facto Finance Minister Shaukat Tareen on October 23 to discuss economic affairs. Tareen noted that he supports the IMF program and thinks the final plan will be concluded soon. He also noted that the Government of Pakistan (GOP) will be ready to discuss a menu of options for the Friends of Pakistan after the IMF deal is finalized. He confirmed that the Karachi Stock Exchange floor will be removed on October 27 and noted that he expects foreign investors to withdraw significant funds from the markets. The free flowing discussion covered Tareen's overall strategy for the governmental institutions which focus on Pakistan's economy. Other issues of bilateral importance such as Coalition Support Funds, Shared Objectives funds, development in the Federally Administered Tribal Areas (FATA) were also discussed. End Summary. -------------- OVERALL ECONOMIC STABILITY -------------- ¶2. (SBU) Ambassador met with Shaukat Tareen, Advisor to the Prime Minister on Finance and de facto Finance Minister, to discuss the current state of the economy. Tareen noted that he was working to develop a comprehensive plan with all segments of the society included and not just based on "elite thinking." Referencing his nine point plan which will emphasize macro economic stability, Tareen noted that he believes the most important aspect of this plan over the long term is to improve the competitiveness of manufacturing machinery and to develop human resources capabilities to allow Pakistan to remain competitive in the manufacturing sectors. Tareen noted, however, that at present the most important aspect for Pakistan is to stabilize the macro economic indicators "which are hindering all other issues." ¶3. (SBU) Noting that during his recent trip to the World Bank meetings, he had called President Zardari from Washington to discuss his talks with the International Monetary Fund (IMF) and "told Zardari that we must help ourselves first" and "if we are serious about our plan for the economy then we should not be scared of the IMF." Responding to the Ambassador's question about Zardari's comfort with moving forward on the IMF program, Tareen indicated that Zardari is still a bit apprehensive. ¶4. (SBU) Noting that the GOP team is in Dubai now for continuation of talks with the IMF, Tareen noted that he expected the IMF loan to be front loaded and to have incremental conditionality. Referring to his recent talks with Treasury's Deputy Secretary Kimmitt, Tareen noted that he expects to get USD 5.5 to 6 billion despite the IMF's initial offer of only USD 4 billion for the loan. Tareen noted "if we are meeting the conditionality on our own, why not explore" the option for getting more money "so that we can really turn around Pakistan's economy." ¶5. (SBU) Tareen noted that the GOP would be able to discuss "the menu" for the Friends of Pakistan (FOP) and "plan for the next meeting after the IMF plan is finalized." Noting that Pakistan needed to have a "market oriented menu available," he mentioned oil concessions, the securitization of remittances, investments such as in textile mills, bank shares as well as market access "in Reconstruction Opportunity Zones or whatever" as possible items for inclusion on the FOP menu. -------------- REFORMING THE GOVERNMENT -------------- ¶6. (SBU) Stating that "Pakistan needs an institution to take the country's vision forward," Tareen emphasized that he wants to make a difference in industrial planning and proclaimed that Pakistan currently lacks an institution to take the vision forward. Noting that he believes that the Planning Commission should become the fundamental planning organ for the government and serve as a think tank with linkages to the Ministries, Tareen further explained that he envisions the Planning Commission's role to be focused on implementation with regular follow up meetings to measure progress every two months. (Note: With the Prime Minister as the head of the Planning Commission, Salman Faruqui currently serves the Deputy Planning Commission at a Ministerial level. End Note.) ¶7. (SBU) Tareen noted that civil servants have no motivation to work ISLAMABAD 00003375 002 OF 003 given the low levels of their salary and no incentive mechanisms. He further explained that a Federal Secretary is currently paid 55,000 (USD 680) rupees per month as a base salary which is expanded to 300,000 rupees (USD 3,700) per month with expenses such as housing and car. Noting "if that is what you can expect after 30 years of service," Tareen questioned "why should civil servants work hard?" Ambassador agreed that civil servants are critical to the government's overall success and the future of the country. -------------- COALITION SUPPORT FUNDS -------------- ¶8. (SBU) Turning to the Coalition Support Funds (CSF),Ambassador noted that we need to mutually stabilize the CSF payment process. Explaining that the CSF program contributes USD 1.2 billion in cash to the Pakistan economy for expenses incurred in the war on terror, Ambassador further noted that there are currently issues between the army and the government on what is covered as a reimbursable expense. Ambassador further noted that the USG and the GOP need to look at the overall practice and work out problems in the billing process. Noting that he wants to cooperate and solve any outstanding issues, Tareen suggested that GOP and USG officials meet to discuss the issues and ensure that there is transparency in the process so that genuine expenses are paid. Further noting that he expects there will be an understandable lag in the payments while the US verifies the monies, Tareen emphasized that transparency in the system is critical. Ambassador noted that the "process has improved but that the Army still doesn't think it is getting adequately reimbursed." Tareen suggested that we find a point person and stated "I was a Citibanker- I get that you need to have transparency." -------------- SHARED OBJECTIVES and FATA -------------- ¶9. (SBU) Ambassador noted that last fall the USG transferred the Shared Objectives money from direct budgetary support to specific projects. Explaining that this shift in US policy occurred due to Pakistan's State of Emergency declaration, Ambassador noted that "we need to look at these projects to ensure that we are on the same page" since there have been several shifts in the Ministry. Tareen agreed to cooperate in any efforts. ¶10. (SBU) Turning to the FATA, Ambassador also noted that we are having some difficult issues with the implementation of our projects in the FATA and emphasized that we need to appoint a single point of contact who can bridge the divide between the federal and provincial authorities and navigate the bureaucratic maze. Citing the recent work with the internally displaced persons, Ambassador noted that we experienced difficulties with internal competing authorities in the Pakistani system which has slowed the relief work considerably. Ambassador further noted that if the World Bank Trust Fund evolves then a leader such as General Nadeem who was instrumental in the success of the earthquake reconstruction will be essential for making success on projects in the FATA. Tareen stated that he wants to be helpful and noted that he believes economic issues are fueling terrorism in Pakistan so he would do his part to assist in whatever was needed. -------------- KARACHI STOCK EXCHANGE (KSE) -------------- ¶11. (SBU) Ambassador asked Tareen about what he expects to happen when the floor is removed from the KSE. Tareen noted that the KSE floor will be removed on Monday, the 27th and stated that the GOP has stop intervening in the market in the future. He noted that the GOP announced a new measure which will be available only to foreign investors. This measure will give foreign investors who were invested in the KSE on August 27 when the floor was imposed a put option for up to 30 billion rupees. Tareen noted that he still anticipates that foreign investors will leave with significant levels of funding but that the GOP can only do so much to assist in these economic situations. [Note: After a late night meeting on October 26, the KSE Managing Director Adnan Afridi announced that the floor will not/ not be removed "until a later date" but failed to gave any indication of the exact timeframe. End Note.] ISLAMABAD 00003375 003 OF 003 -------------- INTERNATIONAL MONETARY FUND -------------- ¶12. (SBU) Responding to the Ambassador's question about whether he plans to travel to Dubai for the IMF discussions, Tareen noted that there was no point in his travel since Finance Secretary Waqar Masood Khan and State Bank Governor Aktar were there. He noted that the IMF negotiations were almost finalized while he was in DC but that the IMF now wanted "backup numbers." He stated that he hopes to "stabilize the current macro situation with IMF help by December so that by January the real work on the economy can begin." -------------- PRIVITIZATION and the BIT -------------- ¶13. (SBU) Tareen responded to the Ambassador's question about plans for privatization by noting that his personal opinion is that "the government has no business running business" and that privatization plans need to move forward. He noted that he has discussed privatization issues with Zardari and that he envisions plans "where the government can maintain a percentage but allow complete management control and a controlling stake to the private sector." Ambassador also noted that concluding the bilateral investment treaty (BIT) would send a strong signal to foreign investors that Pakistan is open for business. Econ Counselor noted that the USG has not received a response from the GOP on proposed dates for the BIT negotiations to be held in November in Washington. Tareen noted that he "would follow up immediately and intended to get the BIT done quickly." -------------- COMMENT -------------- (SBU) Comment: During the Ambassador's meeting, Tareen mentioned with passing reference "his new nine point plan." Post consistently scours the local press for any economic developments and was unaware of any such announcement by the newly appointed de facto Finance Minister. Contacts at the Finance Ministry subsequently confirmed that Tareen has announced a new economic plan with the following "action items." The nine point plan is as follows: Stabilize macro economic indicators such as inflation, budget deficit and exchange rate; Introduce social safety nets such as Benazir Income Support Program; Promote agricultural development; Encourage manufacturing sector competitiveness; Develop human resources; Launch an integrated energy development plan; Promote private public partnerships; Work on capital market reforms and Consolidate and upgrade administrative machinery through civil services reforms. None of these points have any implementation measures associated with them nor have them been explained in any detail publicly. (SBU) Comment continued. Tareen is the third Finance Minister to be appointed since the ruling government came to power in the February 18 elections. He is clearly engaged on macro economic issues and appears to be in more regular and closer consultation with Zardari than former Finance Minister Qamar. Tareen stated that he is working for the GOP for only one rupee per year as a salary. He noted that he also asked for housing and a car but felt that "he needed to take this job for the national good and to put the country back on track." Publicly, Tareen continues to make statements to soften the population towards the inevitable IMF program by claiming that no GOP decisions will be necessary until mid-November; however, Tareen privately acknowledges that Pakistan needs the IMF and is working behind the scenes to secure the necessary support among the GOP leadership. End Comment. PATTERSON