UNCLAS SECTION 01 OF 02 ISLAMABAD 003801


SENSITIVE
SIPDIS


E.O. 12958: N/A
TAGS: ECON ETRD EAID EFIN ENGY EINV PGOV PK
SUBJECT: IMF LOOKS FOR USG SUPPORT WITH PROGRAM IMPLEMENTATION

REF: ISLAMABAD 03776



1. (SBU) SUMMARY. EconCounselor met with the IMF's Resident
Representative to discuss Pakistan's implementation of economic
stabilization policies. They agreed that the SBA adjustment
measures are necessary for a stable economy and this message should
be continually reinforced with officials of the Government of
Pakistan (GOP). The USG and GOP have discussed holding a donors'
conference on January 8 in Beijing, a date that could strike the
balance between promptly endorsing progress while still achieving a
successful conference. The GOP still faces the difficulty of
removing the costly electricity subsidies and the trading
restrictions on the stock exchange. In February the IMF evaluation
team will visit Pakistan for the first assessment of Pakistan's
benchmarks. END SUMMARY.


2. (SBU) On December 8, EconCounselor and EconOff met with Paul
Ross, the International Monetary Fund's (IMF) Resident
Representative in Pakistan to discuss Pakistan's implementation of
the Stand-By Agreement (SBA) the IMF board approved November 24.
Ross commented that in the past, Pakistan has not always followed
through on IMF program commitments, leading to curtailed programs
and indicated that the IMF would appreciate additional U.S.
reinforcement on the importance of meeting the benchmarks when
meeting with GOP officials. While Ross and EconCounselor agreed
that it is important to reinforce the message when communicating
with the GOP that the SBA adjustment measures are necessary for a
stable economy, both also agree that the current quarter will be
especially critical for the program as donors will be looking at
benchmark commitments as well. Ross noted that Mohsin Khan,
Director for Middle East and Central Asia will be visiting Pakistan
next week for meetings and the IMF evaluation team will visit
Pakistan in February to determine if the program requirements are
being met, but the exact date for the team visit has yet to be
determined.

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DONOR FUNDING IS EXPECTED BUT HAS NOT MATERIALIZED

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4. (SBU) EconCounselor said the USG and GOP have discussed holding a
donors' conference on January 8 in Beijing but the dates have yet to
be finalized. EconCounselor explained that while donors are
interested in a prompt response to endorse the GOP's adjustment plan
and the SBA -- and the USG in particular wants to avoid losing the
momentum and hold the conference soon to reinforce the program -
donors are also interested in seeing that SBA benchmarks are met and
that sufficient resources are marshaled to have a successful
conference.


5. (SBU) EconCounselor noted that given the global financial crisis,
several potential donors are very interested in the results of the
GOP's prioritization of development projects as it may be easier to
garner support for projects versus direct budgetary support. For
example, the USG is acutely aware of the imminent shortage of wheat
in Pakistan during this winter and is working to help finance
imports from the United States. (reftel)


6. (SBU) Ross noted that the GOP expects China to deposit USD 500
million in Chinese U.S. dollar reserves into the State Bank of
Pakistan. The GOP will be permitted to use the reserves for any
purpose, including budgetary expenditures, but will then return the
reserves to China. China's original offer was at the London
interbank lending rate (LIBOR) (2.795 percent as of December 8) plus
one percent for a term of one year, but the GOP requested a longer
term. This request is being considered but the reserve deposit is
expected to be disbursed in December.


7. (SBU) The SBA includes a forecast USD 3.8 billion in financing
from the World Bank and Asian Development Bank in fiscal year
2008/2009. However, both banks have had difficulty disbursing and
Ross sought USG assistance in trying to press for quick
disbursement. Ross noted that, without these funds, meeting
quarterly targets will be "very tricky."

ISLAMABAD 00003801 002 OF 002



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POLICY INTEREST RATE INCREASE
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8. (SBU) Ross said that the proposed January increase in the policy
rate from 15 percent to 16.5 percent is still under discussion. The
decision will be a function of rupee exchange rates, foreign
exchange reserve levels, T-bill auction results, and inflation
rates. Ross noted that the core inflation rate continued to
accelerate for the October figures, so he was interested to see the
November rates. He also noted that the policy rate decision will be
made factoring in economic indicator data from multiple months.

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STOCK EXCHANGE FLOOR
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9. (SBU) Noting the August 27 floor is still in place on the Karachi
Stock Exchange, Ross said that the longer the stock exchange floor
remained in place, the harder it becomes to remove it. Removing the
floor will certainly result in flight of foreign capital while
foreign reserve stocks are low, but Ross said "there will be no
right time" and it is necessary. The GOP continues to revise stock
market support schemes but the IMF's view has been that the use of
public funds is inappropriate. Ross noted that discussions on the
floor removal have gone as far as possible at the staff level and
the issue has now been elevated to the IMF's management for
consideration of the GOP proposals. He noted that discussions on
the issue would continue immediately after the EID holiday and could
not confirm local press reports that the floor may be removed as
early as December 15.

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ELECTRICITY SUBSIDIES
--------------


10. (SBU) Concerning the removal of electricity subsidies, Ross said
that the World Bank was working with the GOP on phasing them out.
The proposal is that, beginning in January, consumers' bills will
slowly increase month-by month (2 to 4 percent) until the full
subsidy is removed. However, the cabinet has not reached consensus
yet on this approach. EconCounselor noted that this could present a
great challenge to the GOP as public resentment continues to
increase as the electric bills rise while blackouts also increase.
Ross agreed that the increasing electricity outages complicate the
price increase commitments but hoped the USG would continue to
encourage the GOP to adhere to its targets.

PATTERSON