RECENT TRENDS IN JAPAN'S TRADE WITH AND AID TO

UNCLAS SECTION 01 OF 02 TOKYO 000740 SENSITIVE SIPDIS STATE FOR S/SRAP, SCA/PB, EAP/J AID FOR A/AID - FULGHAM TREASURY FOR DOHNER E.O. 12958: N/A TAGS: EAID ETRD PREL PK JA SUBJECT: RECENT TRENDS IN JAPAN'S TRADE WITH AND AID TO PAKISTAN REF: A. TOKYO 620 ¶B. TOKYO 640 TOKYO 00000740 001.2 OF 002 ¶1. (SBU) SUMMARY: Japan's aid to Pakistan focuses on human security and creating a favorable trade and investment climate. The GOJ has been looking to amplify Official Development Assistance (ODA) to priority areas, such as health and human development, economic infrastructure, trade faciltation, and poverty reduction. However, perceptions among Japan's business people that the trade and investment climate in Pakistan is deteriorating can undercut the effect of Japanese aid programs even while business figures argue for increased aid as a means to further development. END SUMMARY. -------------- GOJ ASSISTANCE STRATEGY FOR PAKISTAN -------------- ¶2. (U) Japan has a long history of assistance to Pakistan and consistently ranks among the country's top five donors. The basic thrust is to support Pakistan's development as a "moderate Islamic state" in the face of social, economic and political instability in the region, according to Japan International Cooperation Agency (JICA) officials. To this end, Japan has provided approximately $1.3 billion in assistance since developing a coordinated Country Assistance Program in February 2005. The JICA program for Pakistan centers on three areas: (1) Human Security and Human Development, including basic, higher and technical education, medical and health programs, and clean water and sanitation; (2) Sound Development of the Market Economy, with a focus on industrial diversification, trade-facilitating infrastructure, and poverty reduction; and (3) Balanced Regional Socio-economic Development, including leveraging public funds to induce private investment and promoting development of Western Pakistan from the Indus River Valley to the Afghan border. Much of Japan's recent assistance has focused on Punjab, Balochistan, and the Federally Administered Tribal Areas (FATA). -------------- RECENT ASSISTANCE: GRANT AID -------------- ¶3. (U) Japan's ODA commitment to Pakistan since April 2008 has amounted to approximately $565 million, including $75 million in grant aid and $489 million in yen loans. Japanese Ambassador to Pakistan Chihiro Atsumi and GOP Secretary for 
Economic Affairs and Statistics Farrakh Qayyum signed an agreement February 23 to make JPY2.5 billion ($25.5 million) in non-project grant aid available for economic stabilization, debt relief and balance of payments support. The Japanese and Pakistani governments continue to negotiate the details for disbursing funds. In addition, MOFA committed up to JPY422 million ($4.3 million) January 29 through UNICEF for polio eradication in the FATA; Japan has assisted UNICEF in this endeavor since 1996. Japan also announced a grant of up to JPY4.4 billion ($45 million) to improve the water supply-related infrastructure in Punjab province and Faisalabad. -------------- YEN LOANS -------------- ¶4. (U) On the loan side, Japan announced a JPY47.9 billion loan package ($489 million) for Pakistan in May 2008 centering on four infrastructure projects. The largest, a JPY15.5 billion ($158 million) tied-aid loan for the East-West Road Improvement plan, will connect Quetta and Lahore to improve market access for the mining and agriculture sectors. Japan also pledged up to JPY11.94 billion ($122 million) to construct electricity transformer stations and improve the transmission grid in Punjab, where 70% of Pakistan's electricity is reportedly consumed. Japan TOKYO 00000740 002.2 OF 002 and Pakistan signed a loan agreement of up to JPY11.4 billion ($116 million) to improve the water supply system in Punjab, which produces 80% of Pakistan's wheat and cotton. Finally, Japan pledged up to JPY9.1 billion ($93 million) for farm-to-market road construction in the Sindh region. -------------- DISASTER ASSISTANCE -------------- ¶5. (U) Japan regularly responds to emergency appeals for humanitarian assistance in the wake of natural disasters. Most recently, the GOJ provided in-kind assistance worth around JPY11 million ($112 thousand) following the magnitude 6.5 earthquake in Balochistan. -------------- TRADE PROMOTION -------------- ¶6. (U) Japan's $2 billion annual trade with Pakistan centers on autos and machinery in exchange for textiles, with Japan enjoying a roughly $1.1 billion trade surplus. More than thirty Japanese firms have a presence in country, and the Japan External Trade Organization (JETRO) office in Karachi includes two direct-hire Japanese staff engaged in trade promotion. At the urging of trade groups such as the Pakistan Japan Business Forum, the GOJ has pushed the GOP to undertake reforms to improve the investment climate. For instance, the countries enacted an amended tax treaty in November 2008 to prevent double taxation and discourage tax evasion. The Ministry of Economy, Trade and Industry (METI) also supports training programs in Japan for Pakistani employees of Japanese auto manufacturers with operations in Pakistan. The METI financed training supports Pakistan's trade-related human capital development efforts. -------------- DECLINING BUSINESS SENTIMENT -------------- ¶7. (SBU) A JETRO survey released March 30, 2009, however, revealed a steep decline in Japanese firms' appraisal of Pakistan's trade and investment climate. Of the 29 firms surveyed, more than half reported revenues dropped in 2008 compared to the previous year. Nearly 70% of the manufacturing firms surveyed reported a decline in Pakistan-related revenue. Moreover, 72% of Japanese firms predicted the business outlook would either stay the same ("difficult") or deteriorate further. Over 90% of respondents cited political uncertainty as the number one threat to the investment climate. More than two-thirds of firms also cited inflation due to the depreciation of the rupee and infrastructure problems such as a lack of a reliable electric supply as challenges to doing business in Pakistan. JETRO officials are not optimistic that private sector trade and investment in Pakistan will expand given the declining business sentiment and hurdles restricting business activity. Therefore, JETRO officials place greater importance on official development assistance to fund projects that will improve the business climate to pave the way for further private sector investment. ZUMWALT