ENGAGING THE GOVERNMENT OF PAKISTAN ON ITS ECONOMIC

C O N F I D E N T I A L STATE 093287

SIPDIS

E.O. 12958: DECL: 08/27/2018
TAGS: EAID ECON EFIN EINV PREL PK
SUBJECT: ENGAGING THE GOVERNMENT OF PAKISTAN ON ITS ECONOMIC
SITUATION

Ref: Islamabad 2812 and previous

Classified By: SCA Acting Assistant Secretary Donald Camp for
reasons 1.4 (b) and (d).


1. (SBU) This is an action request; see para 4.


2. (C) Despite the difficult political context, the precarious
economic situation in Pakistan necessitates that we continue to
press senior GOP leadership on the urgent need for additional
steps to restore confidence and avert an economic crisis. Prim(
Minister Gilani has told Ambassador Patterson that significant
action along the lines proposed by Deputy Treasury Secretary
Kimmitt to Finance Minister Qamar will be difficult, if not
impossible, to implement in the short term. Initial policy
actions, including reductions in fuel subsidies and increases ir
interest rates, have already placed a strain on the government.
The decision-makers within the government, however, may not be
fully aware of the imminence of the crisis, or, if they are, ar
choosing to hedge their bets in hope that the situation improve,
or that they will be bailed out by the international community.


3. (C) Accordingly, we need to reiterate to Pakistan's senior
leadership, particularly the PPP leadership and Presidential
candidate Zardari: 1) the likelihood, scope and implications o
the looming economic crisis; 2) the need to take decisive
actions now to avert an otherwise imminent economic crisis; and
3) that emergency external assistance (U.S., Saudi, World Bank)
is uncertain, if not unlikely, unless also accompanied by
significant fiscal and monetary reforms.


4. (C) Washington agencies understand that GOP action prior to
the election of a new President is highly unlikely. Once
elected, however, a new President as one of his first public
pronouncements could make a statement on the need for bold
actions now to avoid greater hardship in the future. Below are
suggested talking points for Ambassador to use in discussions
with Mr. Zardari and his senior advisors, as deemed appropriate,


5. (C - releasable to GOP)

-- A newly-elected President could take the opportunity to
announce dramatic actions that are required to avoid even worse
hardship for the Pakistani people. This is a chance for the ne
President to demonstrate strong leadership aimed at resolving
the problems the Pakistani Government inherited.

-- The Government's efforts to date - reducing some fuel
subsidies, raising interest rates - are welcome but have failed
to restore confidence and stop the reserve losses. Reserves
were only $6.26 billion as of August 15, a loss of $600 million
in two weeks. We anticipate that the GOP will soon be unable t
pay its bills, by October or sooner, if foreign exchange
reserves continue to decrease at this rate.

-- External financial assistance alone will not solve the
problem, and budget support would only briefly delay the onset
of a crisis. Absent swift and credible policy actions by your
government, external assistance will dissipate quickly, Pakista
will still face a crisis and donors will be very hesitant to
provide additional financial support.

-- Pakistan's leaders need to demonstrate their capacity to
confront the economic crisis directly. We urge the newly-
elected President to make a clear public statement of GOP
economic policy soon after election, outlining an adjustment
plan and accompanied by immediate actions aimed at restoring
confidence of domestic and foreign investors. The GOP needs to

1) cut fuel subsidies again in the short-term and eliminate
them by the end of the 2008 calendar year;

2) cease borrowing from the central bank, and resume market
borrowing to fund the budget deficit; and

3) resume and accelerate privatization.

-- Negotiating an IMF program would be an effective step in
restoring investor confidence. Working with the IMF on a
Pakistani-designed program that has meaningful conditionality
would be a particularly welcome sign to investors and financial
markets. If the GOP chooses not to seek an IMF program, then
policy actions must be even bolder in order to establish
credibility and restore investor confidence, and we encourage
continued active engagement with the IMF in any event.

-- Immediate actions are critical to avoid a crisis. We are
willing to use USG influence to support these efforts by workin
with bilateral and multilateral donors, but only if the GOP
undertakes a credible adjustment program (i.e., actually has
undertaken these steps and has established measures of
accountability).

-- We recognize that it will be difficult to announce and
implement some of these steps in the current political context,
but these steps must be taken, and quickly. In conclusion we
urge the GOP to forge ahead with its program of fiscal and
monetary reforms as quickly as possible, noting that with each
passing day the risk of a deeply painful and politically
destabilizing balance of payments crisis grows.
RICE