U.S.-PAKISTAN STRATEGIC DIALOGUE ADDRESSES

C O N F I D E N T I A L STATE 108393 E.O. 12958: DECL: 10/09/2018 TAGS: PGOV PK PREL EFIN ENRG EAID ECON EINV SUBJECT: U.S.-PAKISTAN STRATEGIC DIALOGUE ADDRESSES ECONOMIC ISSUES Classified By: SCA A/S Richard A. Boucher for Reasons 1.4(b),(d) ¶1. (U) This cable summarizes the economic overview session of the U.S. Pakistan Strategic Dialogue plenary session as well as economic-related issues raised during Deputy Secretary Negroponte and Foreign Minister Qureshi,s small group meeting prior to the plenary session. Participants in the small group included: U.S. Deputy Secretary John D. Negroponte Under Secretary Reuben Jeffery Under Secretary of Defense Eric S. Edelman Assistant Secretary Richard Boucher Special Assistant to the President Mark Webber Special Assistant to the Deputy Ted Wittenstein SCA/PB Director Brent Hartley (notetaker) Pakistan Foreign Minister Makhdoom Shah Mahmood Qureshi Foreign Secretary Salman Bashir Ambassador Husain Haqqani Additional Secretary (Americas) Attiya Mahmood Deputy Chief of Mission Muhammad Aslam Khan (notetaker) ¶2. (C) During the small group meeting, Deputy Secretary John ¶D. Negroponte observed that Pakistan is facing a balance of payments crisis. He noted recent Pakistani engagement with the International Monetary Fund and the upcoming September 30 meeting of the Asian Development Bank to consider a $500 million loan to Pakistan. ¶3. (C) Under Secretary of State for Economic, Energy, and Agricultural Affairs Reuben Jeffery said the U.S. government is mindful of the serious and urgent economic challenges faced by Pakistan. The markets alone indicate that Pakistan is headed for a balance of payments crisis. It is in Pakistan,s and the international community,s interest that this not happen. The U.S. supports Pakistan,s work with the Asian Development Bank, the World Bank and the International Monetary Fund. Pakistan cannot assume, however, that all the efforts underway to address the balance of payments issue will come through or provide Pakistan with sufficient resources. Jeffery emphasized that it is imperative that Pakistan work closely with the International Monetary Fund. Acknowledging the considerable domestic political impact, Jeffery said that even if Pakistan does not want a formal program, it must agree to Fund monitoring of benchmarks. He emphasized that, as painful as this might be, it is better that measures take place under Pakistani Government control before the crisis becomes full-blown, than to accept a Fund program after a crisis hits. Under Secretary Jeffery added that privatization, austerity cuts and efforts to broaden taxation to satisfy the International Monetary Fund are good investments given the alternatives. ¶4. (C) Under Secretary of Defense for Policy Eric S. Edelman underscored that basic security policy has to start with a solid economy. The proposed U.S. assistance to Pakistan will be difficult to sustain without a sound economic foundation. Under Secretary Edelman cited as an example Congressional concerns regarding continued use of U.S. Foreign Military Funding to pay for Pakistan,s F-16 Mid-life Update program instead of Pakistani national funds, warning that this will not be sustainable in the face of opposition from the Hill. Strong economic polices are absolutely crucial. Edelman added that the USG wants to see a greater proportion of Coalition Support Funds flowing directly to the military in order to deal with the terrorist threat both the U.S. and Pakistan face. Edelman said that terrorism cannot be defeated by military means alone; to be sustainable, a successful counterterrorism approach needs economic, social and political aspects. ¶5. (C) Ambassador Husain Haqqani asked if Pakistani interaction with the Fund,s recent technical mission to Pakistan was insufficient despite the "shadow" monitoring provisions. The Fund is less negative now than it was several months ago, he said and noted recent Government measures to reduce subsidies on electricity and oil. ¶6. (C) Foreign Minister Qureshi said the Government can work closely with the Fund and is aware of the balance of payments crisis. He underscored that this "mess" is not the creation of the new Government and he dismissed any credit the Musharraf regime received for an economic turn-around. Having been democratically elected, the new Government is accountable and yet has moved to take hard decisions, including significant reductions in energy and fuel subsidies despite protests from the textile industry and others. The Government is moving to slash spending on the public sector development program, impose austerity, and putting a privatization plan (abandoned by the previous government) in place. Qureshi emphasized that if Pakistan does not get help quickly, it will not have time to carry out reforms. ECONOMIC OVERVIEW - PLENARY ¶7. (U) Reconstruction Opportunity Zones: U/S Jeffery said the Zones have bipartisan support, thanks in part to a recent joint editorial by Ambassador Haqqani and Afghan Ambassador Jawad. Although more members of Congress are starting to understand the importance of the Zones, there is a technical problem with labor issues, which may hold up legislation until after the elections. If there is a lame duck session of Congress, the zones may be put on the agenda. Jeffery encouraged the Pakistanis to continue speaking out in support of the Reconstruction Opportunity Zones. Assistant U.S. Trade Representative Delaney said they continue to be hopeful about the legislation. ¶8. (U) Macroeconomic Conditions: Pakistani Economic Counselor Wajid Rana outlined the Pakistani Government,s economic program, which had been shared with the International Monetary Fund. The Pakistani Government will: -reduce the fiscal and current account deficits, while decreasing subsidies and decreasing imports; -adjust monetary policy, including zero net borrowing from the State Bank of Pakistan and the financing of the Government of Pakistan (in part) through market-based instruments; -reduce budget outlays; -increase the discount rate and increase cash reserve requirements; -continue to allow free market (floating) exchange rates. ¶9. (U) The Pakistani Government has already increased the subsidized price of petroleum products five times, reduced electrical subsidies, reduced domestic funding of development projects, and privatized companies, according to Rana. ¶10. (U) Rana stated that an estimated $3 billion financing gap facing the Government of Pakistan would be met by the securitization of $ 1 billion in remittances, while proceeds from privatization would bring in an additional $2 billion. He admitted that these were longer term measures, however, and asked that the international financial institutions "front-load" their assistance. Rana asked the U.S. and G-7 to encourage the Asian Development Bank to release the $500 million tranche of budget support under consideration. (Note: The ADB approved the loan September 30) ¶11. (C) Deputy Assistant Secretary of Treasury Robert Dohner acknowledged that the current Pakistani government had inherited a "terrible" economic situation, and had taken some very difficult steps. However, many of the assumptions of its program were overly optimistic, including the assumption that foreign direct investment would not drop, as well as the expectation of a 60 percent increase in lending from international financial institutions. The Pakistani Government needed to cut expenditures drastically by 1-1.5 percent of GDP, while maintaining revenues as a percentage of gross domestic product. This would be difficult, said Dohner, as growth in all areas but the lightly taxed agricultural sector was slowing. The Government of Pakistan must clearly define the problem, while outlining the actions they were taking in a clear and comprehensive manner so that the markets and citizens would have confidence. It was important for the Pakistani Government to have contingency plans in case its optimistic assumptions were not borne out, or if, in spite of taking all announced measures, the markets did not respond. The coming quarter (October-December) would be critical, as the loan from the Asian Development Bank was the only external funding coming in. Dohner characterized the Pakistani economy as "very fragile" and noted that there was a fair amount of dissent on the Asian Development Bank Board about potentially lending into a situation that was fundamentally unsound. Dohner emphasized the need for the Pakistani Government to work closely with the International Monetary Fund. ¶12. (C) U/S Jeffery reinforced this message, emphasizing the need for contingency planning, while noting skepticism about the Pakistani government,s ability to meet announced targets. He noted that while no ONE wants to see Pakistan in an International Monetary Fund program, undergoing some sort of soft Fund monitoring has value. ¶13. (U) Ambassador Haqqani responded that the International Monetary Fund had been receptive to the Pakistani Government,s plan and that it had been difficult to take the "very painful" steps already taken. A two month interval was needed before raising energy prices again, for example. Haqqani noted the Pakistani Government is trying to raise money through privatization, but at this point it is difficult to attract investors. ¶14. (U) Energy: Given the country,s severe energy shortages, the Deputy Secretary encouraged both sides to fix a date for the next energy dialogue, which had not met for over year. The Pakistani side requested help with attracting investment into the energy sector, as well as alternative, renewable energy and hydro-carbon replacement, as their supply of natural gas is dwindling. The Government of Pakistan is looking at both the Iran-Pakistan-India pipeline and the Turkmenistan-Afghanistan pipeline as additional solutions to its energy needs. Development of indigenous coal is also a priority, including coal bed methane and clean coal technologies. Acting Assistant Secretary of Energy Kathy Frederiksen said that the Department of Energy would like to institutionalize the dialogue. ¶15. (U) Agriculture: Additional Secretary for Food and Agriculture Shahid Hussain Raja and his delegation met Deputy Under Secretary for Farm and Foreign Agriculture Services Floyd Gaibler, followed by a meeting with a larger group of U.S. Department of Agriculture, U.S. Agency for International Development, and Department of State representatives. Gaibler opened the meeting by congratulating Additional Secretary Raja on resolution of the phytosanitary and quality issues for wheat. Not only will this allow the food assistance to go forward, but the U.S. would be able to compete in Pakistan's wheat tends, bringing more competition and hence better prices. Dr. Zafar Altaf from the Pakistani Ministry of Food and Agriculture laid out his vision for enhanced agricultural cooperation with the U.S., building on strong bilateral cooperation going back to ¶1951. He wished to focus on gender, such as female-managed farming cooperatives, and small farm productivity. The industrialization of agriculture has resulted in the need for bio-remediation of the soil, especially in the south. Altaf would like to focus on short term training as well as longer term doctoral programs where students would do field work in Pakistan under the guidance of U.S. institutions. The U.S. side raised the issue of wheat subsidies; Altaf said that currently farmers were being offered export parity prices, which should help next year,s wheat crop. Both sides agreed to continue meeting, perhaps forming working groups on specific issues. It was suggested that the next meeting be done by digital video conference. ¶16. (U) Participation: Both delegations featured senior-level representation from respective governments. Complete Dialogue participants are as follows: U.S.: John D. Negroponte, Deputy Secretary of State Henrietta Fore, Administrator, U.S. Foreign Assistance, Department of State Reuben Jeffery, Under Secretary of State for Economic, Energy, and Agricultural Affairs Eric S. Edelman, Under Secretary of Defense for Policy Jim Kunder, Acting Deputy Administrator, U.S. Agency for International Development Ross Kreamer, Acting Deputy Administrator, Foreign Agriculture Service, U.S. Department of Agriculture Richard Boucher, Assistant Secretary of State for South and Central Asian Affairs Mark Kimmitt, Assistant Secretary of State for Political-Military Affairs David F. Gordon, Director for Policy Planning, Department of State Dell Dailey, Coordinator for Counterterrorism, Department of State Richard Greene, Deputy Director, U.S. Foreign Assistance, Department of State Kathy Frederiksen, Principal Deputy Assistant Secretary for Energy, International Policy Mark Webber, Senior Director for South and Central Asian Affairs, National Security Council Mike Delaney, Assistant U.S. Trade Representative for South Asia Don Camp, Principal Deputy Assistant Secretary of State for South and Central Asian Affairs Mitch Shivers, Principal Deputy Assistant Secretary of Defense for Asian and Pacific Security Affairs Holly Vineyard, Principal Deputy Assistant Secretary for Commerce Bobby Wilkes, Deputy Assistant Secretary of Defense for Central Asia Bob Dohner, Deputy Assistant Secretary of Treasury for Asia Anish Goel, Director for South Asia, National Security Council Pakistan: Makhdoom Shah Mahmood Qureshi, Foreign Minister Mahmud Ali Durrani, National Security Advisor to the Prime Minister Salman Bashir, Foreign Secretary Ambassador Husain Haqqani, Embassy of Pakistan, Washington, D.C. Muhammad Aslam Khan, Deputy Chief of Mission, Embassy of Pakistan, Washington, D.C. Attiya Mahmood, Additional Secretary for Americas, Ministry of Foreign Affairs Sohail Mehmood, Director General for Americas, Ministry of Foreign Affairs Shahid Hussain Raja, Additional Secretary of Food and Agriculture Zafar Altaf, Ministry of Food and Agriculture Fayyaz Elahi, Managing Director, Private Power and Infrastructure Board Malik Zahoor Ahmed, Director General, National Animal and Plant HEALTH Inspection Services RICE NNNN End Cable Text