Identifier
Created
Classification
Origin
08ISLAMABAD3763
2008-12-03 13:52:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Islamabad
Cable title:  

STAKEHOLDER REACTIONS TO THE IMF PROGRAM

Tags:  ECON ETRD EAID EFIN EINV PK 
pdf how-to read a cable
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UNCLAS SECTION 01 OF 03 ISLAMABAD 003763 


SENSITIVE
SIPDIS

REF: A. ISLAMABAD 03699 B. ISLAMABAD 03560

E.O. 12958: N/A
TAGS: ECON ETRD EAID EFIN EINV PK
SUBJECT: STAKEHOLDER REACTIONS TO THE IMF PROGRAM

UNCLAS SECTION 01 OF 03 ISLAMABAD 003763


SENSITIVE
SIPDIS

REF: A. ISLAMABAD 03699 B. ISLAMABAD 03560

E.O. 12958: N/A
TAGS: ECON ETRD EAID EFIN EINV PK
SUBJECT: STAKEHOLDER REACTIONS TO THE IMF PROGRAM


1. (SBU) SUMMARY. All stakeholders surveyed agree that Pakistan's
Stand-by Agreement (SBA) with the International Monetary Fund (IMF)
was inevitable and will provide much needed economic stability in
the short-term. The SBA document is not yet fully public so
stakeholders are reacting to interest rate increases, the rupee
exchange rate, and the fiscal deficit. The IMF's Resident
Representative clarified on November 28 that the SBA does not have
specific requirements for how government revenues should be
increased beyond improving the effectiveness of income tax
collection, but stakeholders are worried about possible increases in
tax coverage of the agricultural income, real-estate profits, and
other capital gains.


2. (SBU) SUMMARY CONTINUED. The reactions in the financial markets
are broadly positive but have only halted Pakistan's economic
downward spiral rather than markedly improving indicators. The
business community has a generally favorable opinion of the IMF
program because they expect it will impose fiscal discipline on the
government, catalyze taxation reform and improve investor
confidence. They are concerned however, that higher interest rates
and import costs will reduce competitiveness. A spokesman of the
opposition party Pakistan Muslim League (PML-N) said that the SBA
will only be successful if it has a broad perspective and revives
the economy but otherwise he thinks that Pakistan will remain an IMF
program recidivist. END SUMMARY.


3. (SBU) Post has surveyed a variety of contacts from various fields
to assess the local reaction to Pakistan's acceptance of an SBA with
the IMF. While the full details of the program have yet to be
posted publicly on the State Bank website, information has been
steadily printed in local media and numerous talk show programs have
hosted question and answer programs related to the IMF program.
While opinions vary, most commentators accept that under the current
economic conditions, Pakistan's government had no other option than
to seek IMF assistance.

--------------
MARKETS
--------------


4. (SBU) The reactions in the financial markets are broadly positive

but have only halted Pakistan's economic downward spiral rather than
markedly improving sentiments. The Pakistan rupee exchange rate
appreciated from 80.8 rupees to the dollar at the beginning of
November to 78.6 rupees on November 24, when the GOP officially
requested the SBA. Ratings agencies continue to hold Pakistan's
debt ratings on review for further downgrades. Foreign reserves
stand at USD 5.98 billion as of December 2.


5. (SBU) The Karachi Stock Exchange, by far the largest stock
exchange in Pakistan, had a "floor" placed to halt rapidly declining
stock values on August 28 which remains in place. Local analysts
expect that about USD 1 billion of the USD 2.2 billion foreign
portfolio investors have in the stock market will exit once the
floor is removed. The IMF and GOP remain in consultation on how
best to remove the floor, with no date set. Trading off the market
remains at a 30 percent discount to the artificial values despite
the SBA. Foreign investors made net withdrawals of portfolio
investments in Pakistan of USD 26.4 million during November and USD
278.4 million since July. (reftel B)


6. (SBU) Sakib Sherani, Chief Economist for Pakistan at the Royal
Bank of Scotland and member of the Economic Advisory Committee for
the Government of Pakistan (GOP),said that the delay in approaching
the IMF and GOP policy inaction have damaged Pakistan's economy and
investor confidence. He believes the IMF program will improve
investor confidence and unblock assistance from the World Bank and
the Asian Development Bank (ADB).


7. (SBU) Sherani projected that even after the SBA, Pakistan still
has an external financing gap of around USD 2 billion. He assumes
the current account deficit will be USD 8.5 billion, portfolio
outflows from the stock market of USD 1.5 billion, debt servicing of
USD 2.5 billion putting the total financing need at USD 12.5

ISLAMABAD 00003763 002 OF 003


billion. He projected this total financing need will be partially
offset by foreign direct investment of USD 3 billion this year; loan
disbursements from the IMF of USD 4.5 billion; funds from the World
Bank and the ADB of USD 1 billion each; and assistance from the
Islamic Development Bank, the UK's Department for International
Development, and other bilateral sources of USD 1 billion.

--------------
INDUSTRIALISTS
--------------


8. (SBU) According to Majyed Aziz, a leading industrialist and
former president of the Karachi Chamber of Commerce and Industry
(KCCI),the business community has a generally favorable opinion of
the IMF program because they expect it will: (1) impose fiscal
discipline and narrow the budget deficit, (2) reassure the
multilateral institutions, releasing World Bank and ADB projects,
(3) promote documentation of the informal economy, (4) catalyze
taxation of the agricultural sector and real-estate, and (5) improve
investor confidence and FDI inflows (if the law and order situation
improves).


9. (SBU) Anis-ul-Haq, the Director of the All Pakistan Textile Mills
Association (APTMA),said that he was assured by de facto Finance
Minister Shaukat Tareen that the IMF conditionality is not harsh.
Haq expects that the IMF program will reduce inflation and stabilize
the exchange rate. Haq said that rupee stability helps the textile
industry by increasing predictability of domestic and imported
cotton prices.


10. (SBU) Anticipating that the SBA will address exchange rate
flexibility, Aziz and Haq emphasized that Pakistani production
heavily relies on imports. Aziz also pointed out that while global
prices have declined, some producer costs are still high because
contract commitments add a lag to price and policy changes, adding
additional pressure on producer costs. Aziz estimates that 30 to 35
percent of all inputs are imported, so a depreciating rupee has
mixed effects on the costs of production and competitiveness. Aziz
thinks that if the exchange rate remains around 78 rupees to the
dollar then producers will have the necessary "breathing space."
Haq said APTMA expects the rupee will appreciate to 75 per dollar.


11. (SBU) A prior condition of the IMF program was to increase the
policy rate from 13 percent to 15 percent. Aziz says lending rates
are high, around 20 percent for the average customer. Haq said that
the textile association is very concerned by interest rate increases
because members borrowed money from banks at 5 to 6 percent for
capital improvements but will have to repay at 17 percent to 18
percent. APTMA has taken up this issue with the government and is
demanding compensation from the government for interest rate hike.
COMMENT: Consumer price inflation in FY '08-'09 is 23 percent, so
while rates are higher they remain negative in real terms. END
COMMENT.


12. (SBU) Aziz believes that IMF funds will not have an immediate
affect on the rupee economy, but the program will likely decrease
inflationary pressure and remove subsidies on food and fuel. Aziz,
however, feared that a rise in gas and electricity prices will
negatively impact the poor. Aziz also fears that the current
government might not successfully implement the IMF program. He
said, "This government backtracks in hours and may not be able to
handle [IMF] conditionalities."

--------------
PARLIAMENT
--------------


13. (SBU) As a member of the most influential opposition party,
Ahsan Iqbal, Chief Coordinator & Information Secretary of the
Pakistan Muslim League (PML-N),criticized the SBA. He emphasized
that the IMF loan must be repaid with interest so it has to be
applied to productive uses. Iqbal said the policy rate hike will
result in stagflation by making it difficult for businessmen to
finance even their working capital needs. He said that an

ISLAMABAD 00003763 003 OF 003


agriculture tax is not a good idea because it will not yield
significant revenue but will have very adverse political
ramifications. Iqbal was also critical of devaluation, saying
"devaluation never helps" Pakistan because of its heavy reliance on
imports.


14. (SBU) Iqbal said that the IMF program will only be successful if
it has a broad perspective and its goal is to revive the economy.
Otherwise Pakistan will keep moving from one IMF program to another.
"The GOP should rationalize its own interests," rather than just
following the instructions of the IMF. He continued, "The IMF's
agenda is to get its money back. We need to understand our own
agenda."


15. (SBU) COMMENT. While many details have been openly discussed on
local media, stakeholders can only speculate on policy implications
until the SBA requirements are fully public. The first tranche of
USD 3.1 billion is already on deposit at the State Bank of Pakistan
and seems to be providing additional comfort that the GOP will meet
current payment obligations. Post will continue to closely monitor
implementation of the SBA and report accordingly. END COMMENT.

PATTERSON