MORE DONOR ASSISTANCE NEEDED

UNCLAS SECTION 01 OF 02 ISLAMABAD 000343 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: EAID EFIN ECON IBRD PGOV PREL PK SUBJECT: MORE DONOR ASSISTANCE NEEDED REF: ISLAMABAD 305 ISLAMABAD 00000343 001.2 OF 002 ¶1. (SBU) This is an action cable. See paragraph 8. ¶2. (SBU) Summary: GOP officials have told us and high-level visitors that they have received little support from the international donor community in recent months. A World Bank senior economist confirmed that very little foreign assistance had reached Pakistan lately, partly because donors were waiting for the GOP to finalize its agreement with the International Monetary Fund, and also because donors were waiting for the fiscal situation to stabilize. Top GOP officials have remarked that Pakistan was treated unfairly by the IMF when it received only five times its quota under its $7.6 billion Standby Arrangement, and Finance Advisor Shaukat Tarin has publicly announced his intention to ask the IMF for an additional $4.5 billion. We request that Washington urge the World Bank and the Asian Development Bank to disburse more quickly, and that a Donors' Conference be finalized as quickly as possible to stimulate a faltering economy, that can not spend its way out of the problem. End Summary ¶3. (SBU) Dr. Hanid Mukhtar, Senior Economist at the World Bank, confirmed that outside financial assistance has been slow over the past year, due both to weak fundamentals and partly to the International Financial Institutions standing aside while the GOP finalized its agreement with the IMF. In the past, over half of World Bank assistance had been in the form of budgetary support, but this had changed since FY06-07. The World Bank had planned to disburse $600 million in FY 2007-08, but due to worsening macroeconomic fundamentals, this money did not materialize. The GOP then asked them for a stabilization loan, but at the last minute the Bank was advised not to do so because the IMF program was being negotiated. ¶4. (SBU) The Bank is planning to disburse $500 million in new money for budgetary support in March, however, once the IMF review is complete. Mukhtar said that the World Bank has a $2 billion pipeline which, in theory, could be disbursed by end-June; it includes $300 million for the Benazir Income Support Program, $90-$100 million for power sector development, and $500 million (over several years) for the National Trade Corridor. He predicted that a realistic estimate of the amount that the GOP would receive by the end of the fiscal year would be $700 million - the $500 million in budgetary support plus $100 million each for education projects in the Sindh and Punjab, which are contingent on policy framework changes by these states. ¶5. (SBU) He noted that the bulk of Pakistan's foreign assistance comes from multilateral sources, and acknowledged that the Asian Development Bank had been slow in disbursing its funds as well. In bilateral terms, Saudia Arabia has not provided deferred oil payments (which it had done in the past) for over one year, the UAE has not come through with oil assistance, and China's $500 million was a deposit in the central bank, on which interest must be paid. Many donors have expressed reluctance to give straight budgetary support, preferring to spend money on projects over which they have more control. Zardari has told us, however, that the United Arab Emirates has promised him significant financial assistance, although this has yet to materialize. ¶6. (SBU) As the IMF conditions have begun to pinch the economy, GOP officials have become more vocal about their need for additional funds. State Bank Governor Raza told DCM February 2 (reftel) that the Fund's Standby Arrangement was unfair, as Pakistan received only five times its quota, while a country such as Hungary had received twelve times its quota from the Fund, and that Pakistan intended to ask the Fund for more money once a successful review was concluded. Finance Advisor Shaukat Tarin told the press that he intended to request an additional $4.5 billion from the Fund. ¶7. (SBU) Comment: Given that Pakistan's foreign exchange reserves have stabilized, the GOP has to make the case that the volume of drawings from the IMF is insufficient. However, the GOP and the IMF ISLAMABAD 00000343 002.2 OF 002 agree that expanded development assistance is needed in the short term to mitigate the impacts of balance of payments adjustment. The IMF resident representative (protect) said as donors' conference sooner rather than later was important, and, while all assistance was welcome, budgetary support was particularly crucial. End Comment ¶8. (SBU) Action Request: Especially now that it appears that the GOP will meet many of the Fund's targets for release of the second tranche of the Standby Arrangement (reduction of the fiscal deficit, higher interest rates, increased tax collections),we request that SCA approach Treasury to encourage the quick disbursal of World Bank and Asian Development Bank commitments. We also ask that the Department approach the United Arab Emirates to encourage them to release their promised assistance as quickly as possible. Early action on appropriations for the USG contribution to the donors' conference is also needed. PATTERSON