Identifier
Created
Classification
Origin
08ISLAMABAD3388
2008-10-27 12:46:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Islamabad
Cable title:  

TAREEN ANNOUNCES HIS ECONOMIC PLAN AND KSE RETAINS FLOOR

Tags:  ECON EFIN ETRD PREL PGOV PK 
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RUEHML/AMEMBASSY MANILA 3051
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RUEKJCS/SECDEF WASHINGTON DC
UNCLAS SECTION 01 OF 02 ISLAMABAD 003388 

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD PREL PGOV PK
SUBJECT: TAREEN ANNOUNCES HIS ECONOMIC PLAN AND KSE RETAINS FLOOR

UNCLAS SECTION 01 OF 02 ISLAMABAD 003388

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN ETRD PREL PGOV PK
SUBJECT: TAREEN ANNOUNCES HIS ECONOMIC PLAN AND KSE RETAINS FLOOR


1. (SBU) Summary. Pakistan's Advisor on Finance Shaukat Tareen
discussed his nine point economic plan with the business community
on October 25th, which according to him will bring the economy back
on track. He asserted that he will raise the tax-revenue to GDP
ratio to 15 percent from the current 10 percent by bringing untaxed
and under-taxed sectors like agriculture and real estate into the
tax net. Tareen said that the present government will focus on
production-led growth instead of consumption-led growth. Yet so far,
the economic indicators are defying the GOP efforts as the large
scale manufacturing sector production dropped close to 5 percent in
the first two months of the current fiscal year. The Karachi Stock
Exchange (KSE) floor continues to be in operation and the KSE Board
has not given any time line for lifting it. Despite previous
efforts the GOP has failed to tax the agricultural sector, which
according to some does not have huge revenue yielding potential
since 90 percent of farmers are either subsistence farmers or
landless tenants. The GOP also did not tax capital gains in the
2008-09 budget, which would have discouraged speculative trading in
the stock exchanges. End Summary.

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ECONOMIC ROADMAP
--------------


2. (SBU) In a nationally televised event, Advisor to the Prime
Minister on Finance, Shaukat Tareen, addressed the traders and
businessmen at the Federation of Pakistan Chambers of Commerce and
Industry on October 25 and said that the government has drawn up a
roadmap to revitalize the economy, which will have far-reaching
effects in putting the economy back on track. Tareen's roadmap has
nine elements, which include stabilizing macro economic indicators
(i.e. inflation, budget deficit and exchange rate),introducing
social safety nets such as Benazir Income Support Program, promoting
agricultural development, encouraging manufacturing sector
competitiveness, developing human resources, launching an integrated
energy development plan, promoting public private partnerships,
working on capital market and civil services reforms.


3. (SBU) The GOP says it needs USD 3 to USD 5 billion in the next 30

days to avert a possible default on its foreign debt obligations.
Tareen said if the GOP decides to borrow money from the IMF, it will
be based on its home grown economic package. He said that the
fiscal deficit will be reduced to 4.3 percent from 7.4 percent and
the tight monetary policy will be continued to check inflation.
According to Tareen, the thrust of economic policies will now be
shifted to production-led growth from a consumption-driven strategy
and agriculture will be given top priority. Tareen said the country
is faced with many challenges such as poverty and soaring inflation
and stated that the number of people earning one dollar per day has
increased from 25 percent to 44 percent of the total population.
(Comment: Dr. Ashfaque Hasan Khan, Economic Adviser at the Ministry
of Finance, said that there are no surveys or statistics to
substantiate poverty figures and termed it as a political statement.
End Comment.)

--------------
DECLINING PRODUCTION
--------------


4. (SBU) Tareen also announced that Pakistan's industrial output
declined by around 4.87 percent in the first two months of the
current fiscal year, indicating that the 6.1 percent growth target
set for 2008-09 is unlikely to be achieved. Many sub-sectors of the
large-scale manufacturing sector did not perform well during
July-August including electrical goods and textiles. The textile
sector is labor intensive and any drop in textile production or
exports can result in massive layoffs. The severe power shortage
and highest-ever increase in energy prices also fueled the decline.
The slump in industrial growth has affected the export of
commodities, particularly the textile and clothing exports which
declined by 0.77 percent in the first quarter of the current fiscal
year.

--------------
INCREASING GOVERNMENT REVENUE
--------------


5. (SBU) Tareen said that the GOP will bring untaxed and under-taxed

ISLAMABAD 00003388 002 OF 002


sectors into the tax system while the tax-to-GDP ratio will be
increased from present 10.5 percent to 15 percent. Noting that
there will be no sacred cows, Tareen claimed that real estate and
agriculture will be taxed. Pakistan has a history of taxing
agriculture through the land revenue system. Yet its collection has
always remained negligible and far below its potential. The Federal
Board of Revenue (FBR) struggled in early 2007 to convince the
previous government to either permit federal taxation of farm income
or let the Board collect it on behalf of the provinces.


6. (SBU) The FBR thought the agricultural income tax had the
potential to generate estimated revenue of over Rs.60 billion (USD
737 million) a year. That amount could be gradually increased as
the agriculture sector is about 21 percent of the nation's GDP. But
the strong agriculture lobby, which has always formed a big part of
almost all governments, was blamed for thwarting the FBR plans to
effectively tax their income.


7. (SBU) A progressive farmer from Bahawalpur and a former head of
the Small and Medium Enterprise Development Authority (SMEDA),Iqbal
Mustafa, said that more than 90 percent of farmers are either
landless tenants or small land owners. Mustafa stated "When we talk
of agriculture income tax we're actually talking of taxing the
bigger land holders whose number shouldn't be more than 4,000 to
5,000 in the country, which means that the agricultural tax will not
raise revenue collection significantly." Implementation of the new
taxes may also slow growth in the sector.

--------------
KARACHI STOCK EXCHANGE RETAINS FLOOR
--------------


8. (SBU) After a meeting with Shaukat Tareen and Chairman of
Securities and Exchange Commission of Pakistan Razi-ur-Rehman on
October 26th, the Board of Directors of Karachi Stock Exchange (KSE)
decided that the floor set on share price will remain in place until
the government funds for assistance and put option mechanics are
finalized. The Board did not give any date for removal of the
floor. In the meeting, the market stabilization measures were
reviewed and it was noted that many measures, including increasing
liquidity in the financial system and additional risk management
measures, are in place. However, the mechanics of the put option
fund and the National Investment Trust-State Enterprise Fund still
required additional time for implementation. Noting that the
government has a right to protect its companies, Managing Director
of the KSE, Adnan Afridi, defended the government decision to invest
its funds in state owned companies since the fund is being provided
by the government institutions. The Fund will invest in the
following nine stocks: Oil and Gas Development Company Ltd, Kot Addu
Power Company, Pakistan Petroleum Ltd, Sui Southern Gas Company, Sui
Northern Gas Pipeline, Pakistan State Oil, National Bank, Pakistan
Telecommunication Company Ltd and Habib Bank. President of the
Federation of Pakistan Chamber of Commerce and Industry, Tanveer
Ahmed Sheikh termed it a risky strategy to use liquidity provided by
a change in the Cash Reserve Requirement and Statutory Liquidity
requirement to maintain the stock market indicators.

--------------
COMMENT
--------------


9. (SBU) Comment. The GOP is seeking the IMF's endorsement for its
economic stabilization policies -- and possibly securing hard cash
from the fund itself -- which is crucial to both bilateral and
multilateral lenders support. Neither the IMF endorsement of
Islamabad's economic policies or its funding are likely to come
unless the government, among other things, outlines a credible plan
to improve the tax-to-GDP ratio, by increasing the number of sectors
taxed and eliminating tax exemptions. On October 26, the GOP
reversed a previous decision to increase electricity tariffs and
eliminate the current subsidy by 31 percent due to widespread public
protests. End Comment.

PATTERSON