FINANCE ADVISOR OUTLINES STRATEGY FOR DEPSEC LEW

C O N F I D E N T I A L SECTION 01 OF 03 ISLAMABAD 000718 SIPDIS E.O. 12958: DECL: 03/19/2019 TAGS: PREL PGOV PTER EAID ECON PK SUBJECT: FINANCE ADVISOR OUTLINES STRATEGY FOR DEPSEC LEW Classified By: Anne W. Patterson, for reasons 1.4 (b)(d) ¶1. (C) During an April 1 dinner for Deputy Secretary Lew, Finance Advisor Tareen outlined Pakistan's nine-point agenda for economic development. He recommend the USG focus on poverty alleviation, education and energy as sectors best organized to absorb assistance. Benazir Income Support Program (BISP) Chair Raja outlined plans to conduct a needs survey of Pakistan's poorest districts as the newly created BISP doubles its recipients. Higher Education Commissioner Wazir Ali emphasized the need to provide assistance beyond just the tribal border regions and urged a focus on job training for youth. Tareen explained the need for civil service reform to improve implementation of programs and described his daily visits to the Federal Board of Revenue to press them for private-sector tax collection. The good news is that the GOP is working to put meat on the bones of this ambitious economic development plan. We will continue to press the GOP to prioritize its goals as we tailor current and pending USG assistance to Pakistan's ability to absorb aid. Septel will provide an overview of how the Mission proposes to spend and monitor pending increases in economic and military assistance. End Summary. ¶2. (SBU) Ambassador hosted a dinner for Deputy Secretary Jacob Lew April 1 with Finance Advisor Shaukat Tareen, State Minister for Economic Affairs Hina Rabbani Khar, Chair of the Higher Education Commission Shahnaz Wazir Ali, and Chair of the Benazir Bhutto Income Support Fund Farzana Raja. Also attending were USAID Senior Deputy Administrator Jim Bever, DepSec Chief of Staff Piper Campbell, USAID Country Director, Polcouns and Econcouns. ¶3. (C) Deputy Secretary Lew noted that the Congress was in the midst of reviewing the Administration's new strategy for Pakistan and Afghanistan and pending legislation to expand both economic and military assistance. The Congress, he noted, would be more inclined to support this increased assistance if the GOP was able to articulate a concise economic development strategy. The U.S. also wanted to ensure there was adequate capacity in Pakistan to absorb this assistance. Tareen agreed and laid out a nine-point strategy: --economic stabilization (reducing the fiscal deficit, bringing down inflation, and building up foreign exchange reserves); --poverty alleviation (using the Benazir Income Support Fund); --strengthening the agricultural sector (productivity enhancement, water management and livestock and dairy improvement) ; --consolidating the fractured manufacturing sector and making it more competitive (reducing tax burdens); --developing an integrated energy plan (to include hydel, coal and alternative sources such as solar and wind, which Pakistan has in abundance); --infrastructure improvements (funded by public-private partnerships); --financial sector reform (focusing on the stock market and introduction of a debt market); --human resources development (job skills development); and --administrative reform (reducing and improving the civil service through salary reforms). Targeting Assistance ¶4. (C) Tareen suggested that U.S. assistance be targeted on poverty alleviation, education, and energy because the GOP's structure in these areas was best able to absorb support. Beyond this, he recommended a sequenced approach to assistance, based on absorptive capacity. Ambassador noted that we were considering assistance to the Benazir Income Support Fund (BISP) as part of our contribution to be announced at the Donors' Conference. She said we were consulting with the GOP about the Mission's plan to target USAID programs to specific geographic areas where poverty, unemployment and growing extremism were breeding terrorism. This included not just the tribal areas but also parts of the Northwest Frontier Province (NWFP),southern Punjab, northern Sindh and areas of Karachi, and parts of Balochistan. ISLAMABAD 00000718 002 OF 003 ¶5. (C) Farzana Raja reported that the BISP was launching a survey of the 16 poorest districts in Pakistan. The survey, which is funded by the World Bank, will collect information by the end of May to use in planning for health and education spending by the GOP. BISP will initially cover 3.5 million families, targeting female heads of household, but the plan is to expand to cover seven million families over the next two years. The coverage eventually will include health insurance and vocational education training. ¶6. (C) Shahnaz Wazir Ali agreed that vocational training was critical, especially given low literacy rates across Pakistan. However, she also noted the importance of involving the private sector to ensure there are jobs for the period after trainees graduate. She also lamented budget cuts for higher education and the low (three percent) level of Pakistanis who graduated from universities. Wazir Ali recommend that all of Pakistan be targeted, not just the tribal areas and NWFP and pressed for a specific focus on youth. Security ¶7. (C) Ambassador noted that the Mission recently had completed a survey of police needs, especially in the NWFP. We were introducing a program of expanded unit-based police training, would continue efforts to provide non-lethal equipment, and had offered to help harden police stations in vulnerable districts like Swat. Our survey indicated the police were most focused on the lack of insurance and salary increases that would help their families with expenses like weddings, and death benefits for sole family income providers. Wazir Ali said that social safety net programs, including health insurance, were a priority everywhere, given the weakness of state-provided programs. Tareen admitted that he did not have money to adequately pay the police. He suggested the need for a survey of areas like southern Punjab, where extremism is growing, so that flexible local solutions could be developed to best fit district-level conditions. Others at the dinner concurred with his focus on the Punjab and areas east of the NW Frontier. Tareen repeatedly emphasized the government's lack of a sufficiently strong analytical ability and said he was proposing a think tank to study terrorist sources, motivations and strategies to counter extremism. Civil Service Reform ¶8. (C) Noting that the ability of the GOP to absorb assistance depended on the ability to implement programs, Tareen expressed concern about the bloated and often ineffective civil service. He said that civil service salary scales were completely skewed, particularly at the higher levels. Chief of Army Staff General Kayani's base monthly salary is less than $700, for example, although if perks are included it might approach $12,000. In contrast, when Tareen was at Citibank his monthly salary was $15,000 in cash. In order to afford higher salaries at higher levels, the size of the bureaucracy must be reduced, however. Tareen noted the success of some reform efforts, citing how the motorway/traffic police were providing efficient services and did not spare VIPs when they handed out tickets. The force was able to pay more, attract recruits with higher education levels and work as a meritocracy. A similar reform effort was needed in other parts of the government. He recalled that when he was head of Habib Bank he successfully laid off a large portion of the work force by providing generous severance packages ("golden handshakes") and believed he could do the same with government ministries. He admitted that there were political challenges to reducing the size of the bureaucracy that supported over 50 ministries. Planning Capabilities ¶9. (C) Tareen expressed concern about the lack of GOP planning capability and said several times that he wanted to improve the capacity of the Planning Commission, which in the 1960's was good enough to have given South Korea assistance. He also was revitalizing the Economic Advisory ISLAMABAD 00000718 003 OF 003 Council, which he chairs, made up of 16 prominent economists. One member, Farouk Ramatullah formerly of Shell, had drafted an integrated energy plan. (Note: members include: Sardar Asif Ahmad Ali, Deputy Chairman, Planning Commission; Hina Rabbani Khar, Shahnaz Wazir Ali; Mian Tariq Saigal, former DG of the Civil Aviation Authority; Saleem Raza, Governor of the State Bank of Pakistan; Jahangir Tareen, former Minister of Industries; and Hafeez Pasha, former Minister of Planning and Development. End Note) Energy ¶10. (C) Bever followed up by asking about plans to improve the energy sector. Tareen said he repeatedly complained that it would be more efficient to develop Pakistan's own resources -- he emphasized the potential of the Sui gas and Thar coal deposits -- than to continue being at the mercy of foreign supplies. He welcomed U.S. assistance in focusing on development of the Thar reserves. Tax Collection ¶11. (C) Tareen was also focused on improving the GOP's tax collection capabilities. He said he visited the Federal Bureau of Revenue (FBR) every morning to drink tea with the tax collectors and discuss the day's agenda. He is trying to change their mindset from one of targeting government entities and large corporations to widening the tax net. "I want to call it 'FBR, Inc.' and allow them to keep a certain percentage of the taxes they collect." Although two million tax returns are filed, only 560,000 actually pay taxes. He repeated his public pledge to begin taxing the agricultural sector. Unless Tareen can increase the percentage of tax revenue to GDP beyond 9 percent, "I won't ever be able to adequately pay the police." ¶12. (C) Comment: The good news is that the GOP does have an economic development plan and is working, albeit slowly, to map out how to implement it. Given Pakistan's vast needs and limited resources, we will continue to press them to prioritize their goals. We are extremely mindful of the need to tailor proposed assistance programs so they do not overwhelm the absorptive capacity of the government or of USG ability to monitor that assistance. Septel, we will provide an overview of how we propose to spend and monitor pending increases in economic and military assistance. PATTERSON