Identifier
Created
Classification
Origin
10LAHORE20
2010-02-08 06:20:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Lahore
Cable title:  

PUNJAB'S DEFICIT SPENDING POSES CHALLENGES FOR NEXT IMF

Tags:  ECON EAID EFIN EINV PGOV PREL PK 
pdf how-to read a cable
VZCZCXRO8564
OO RUEHLH RUEHPW
DE RUEHLH #0020/01 0390620
ZNR UUUUU ZZH
O 080620Z FEB 10
FM AMCONSUL LAHORE
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4305
INFO RUEHIL/AMEMBASSY ISLAMABAD IMMEDIATE 5003
RUEHBUL/AMEMBASSY KABUL IMMEDIATE 0544
RUEHLO/AMEMBASSY LONDON PRIORITY 0242
RUEHNE/AMEMBASSY NEW DELHI PRIORITY 0924
RUEHKP/AMCONSUL KARACHI PRIORITY 2207
RUEHPW/AMCONSUL PESHAWAR PRIORITY 1885
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEAIIA/CIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NSC WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RUEHLH/AMCONSUL LAHORE 5473
UNCLAS SECTION 01 OF 03 LAHORE 000020 

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EAID EFIN EINV PGOV PREL PK
SUBJECT: PUNJAB'S DEFICIT SPENDING POSES CHALLENGES FOR NEXT IMF
REVIEW

REF: 09 LAHORE 143

UNCLAS SECTION 01 OF 03 LAHORE 000020

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EAID EFIN EINV PGOV PREL PK
SUBJECT: PUNJAB'S DEFICIT SPENDING POSES CHALLENGES FOR NEXT IMF
REVIEW

REF: 09 LAHORE 143


1. (SBU) SUMMARY: An August 2009 deal to finance Punjab
province's deficit received sudden attention from the media in
January, despite the absence of new issues arising from that
deal - yet. The size of Punjab's growing deficit, however,
raises concerns about the next review of Pakistan's finances
under the IMF Stand-by Arrangement (SBA). Punjab's fiscal year
(FY) 2008-2009 shortfall of $600 million seriously jeopardized
Pakistan's compliance with the IMF SBA at the time. The
provincial deficit this year could top $800 million. The
province's FY 2009-2010 budget calls for robust spending
increases, while assuming a correspondingly significant rise in
revenue; however, revenues are falling well short of budget
plans, particularly income from taxes. Punjab is cutting some
expenditures, but actually increasing others. If provincial and
federal authorities maintain overly optimistic revenue
projections, Punjab could post another substantial, unfunded
deficit at the end of FY 2009-2010. END SUMMARY.

- - -
MEDIA SEES NEW CONTROVERSY IN OLD FINANCIAL DEAL
- - -


2. (SBU) For three consecutive days starting from January 7,
the media reported an alleged conflict in President Zardari's
cabinet over a Government of Pakistan (GOP) letter to the IMF
announcing a debt financing scheme between the Government of
Punjab and the State Bank of Pakistan (SBP). The nationalist
English daily "The Nation" carried an article claiming that
Finance Minister Shaukat Tarin approved the deal without
informing Prime Minister Gilani or President Zardari, and that
Zardari was "astonished" and unhappy about being caught unaware.
The same article noted that the Prime Minister's secretariat
vigorously denied any such conflict between Tarin, Gilani, and
Zardari. Although the GOP notice to the IMF was new, it was
describing an agreement negotiated between the provincial
government and SBP back in August 2009 after the close of FY
2008-2009, according to contacts in both the provincial and
federal government.

- - -

PUNJAB'S FISCAL YEAR 2008-2009 YEAR END DEBT
- - -


3. (SBU) At the end of the last Pakistani fiscal year, June 30,
2009, Punjab had a substantial "overdraft" or short term line of
credit (LoC) with the SBP. The LoC is a routine cash-flow
management facility, typically paid off upon receipt of revenues
from the central government. Revenue from the central
government accounts for approximately 85 percent of provincial
government income. After fiscal year-end revenue
reconciliation, Punjab still had an outstanding balance of over
$600 million. The debt stood as unfinanced deficit spending.
Apprehensive about fiscal space for Punjab to start FY
2009-2010, the SBP agreed to convert the balance into a
four-year, low interest loan. (Note: The size of Punjab's
deficit raised serious concerns during a subsequent IMF review
of Pakistan's finances. End note.)


4. (SBU) Punjab Finance Secretary Tariq Mahmood Pasha claimed to
EconOff on January 21 that Punjab's FY 08-09 year-end deficit
came as a surprise. He asserted that right up to June 2009,
federal officials were projecting robust revenues for Punjab.
In the end, federal receipts were $393 million short of
expectations. Pasha said that Punjab was also missing $48
million in delayed hydroelectric power profits and over $155
million from the aborted effort to privatize the Bank of Punjab.
Bank of Punjab shares lost over 90 percent of their value in a
matter of weeks as the bank and its former chief became engulfed
in a massive fraud scandal, scuttling privatization plans.
Pasha was puzzled by the recent media frenzy. He chalked it up
to "politics," but also worried about the "misperception" that
the province was "bankrupt" in the middle of the current fiscal
year.

- - -
IMPOSING FISCAL DISCIPLINE: A NEW CAP ON PROVINCIAL BORROWING
- - -


LAHORE 00000020 002 OF 003



5. (SBU) Converting Punjab's overdraft (and guaranteeing
Balochistan province's LoC balance) was tied to an agreement
between the GOP and the IMF to implement a new cap on all
provincial LoCs, according to Pasha. The cap is to equal six
week's worth of salary and pension obligations; as much as $321
million is available to Punjab. The cap was intended to impose
a measure of fiscal discipline and help Pakistan meet IMF's
deficit target of 4.9 percent of GDP, currently estimated at
$8.7 billion. Pasha said the province was routinely running an
outstanding balance of roughly $202 million for one month's
total of salaries and pensions, before central government
revenue was received to pay it off. The LoC mechanism works
exactly as planned, and Pasha is satisfied that there is no cash
flow problem. Punjab has also been making its regular monthly
payments on the 2009 loan deal, over $12 million per month.

- - -
BUT PUNJAB IS STILL RUNNING A UP A LARGE DEFICIT
- - -


6. (SBU) Pasha's confidence about cash-flow notwithstanding,
public records from the SPB and Punjab Finance Department
indicate that Punjab has a substantial deficit, with no apparent
financing in place to cover it. The SPB first quarterly report
shows the province with a $377 million shortfall. The report
states, "Punjab experienced enormous deterioration in the
overall balance, turning from surplus into deficit." It was the
only province with a deficit. Punjab is not using the SBP
overdraft to pay its bills, so it must rely on commercial loans,
budgetary support from the international donor community, or
possibly borrowing from other government accounts. A 2005 World
Bank report observed that Punjab has history of borrowing out of
the retirement system (called the General Provident Fund) to
help cover current account expenses.


7. (SBU) Punjab's FY 2009-2010 budget was unrealistic from the
beginning (ref A). It called for substantial increases in
spending, supported by a significant rise in revenues, plus an
$825 million deficit that the federal government could never
afford to support under the IMF Stand-by Arrangement. The new
overdraft account limit of $321 million appears to signal the
federal government's tolerance level for the provincial deficit.


- - -
ROBBING DEVELOPMENT TO PAY EXPENSES, AND STILL FALLING SHORT
- - -


8. (U) The Punjab budget called for a 14 percent increase ($457
million) in current account expenditure, and spending has been
right on plan through the first five months of the year
according to Finance Department data. Development expenditure
has been reduced to 55 percent of budgeted outlays through
November, shaving $416 million off of the spending plan over
five months. The provincial and federal governments frequently
cut development funding to help cover current expense deficits,
and if the revenue budget was accurate, Punjab would be in good
condition.


9. (U) Unfortunately, both federal transfers and
provincially-generated revenues have been significantly below
Punjab's ambitious expectations. Punjab Finance Department
reports show provincial receipts through the first five months
of the current fiscal year are $163 million below plan. At that
pace, annualized provincial revenue would be $392 million below
budget. Federal transfers, which account for 85 percent of
provincial income, look similarly weak. SPB reports show first
quarter transfers to Punjab were 11 percent below the provincial
forecast, at $879 million. Federal transfers to Punjab could be
as much as $438 million below the province's plan by the end of
the fiscal year. Combined with the province's own revenue gap,
Punjab's annual income could well be $830 million below budget.

- - -
PUNJAB HOPES TO IMPROVE TAXES AND COLLECTION, SUPPORTS VAT
- - -


10. (SBU) Pasha said Punjab was looking for possible new sources
of income, but when pressed for details on timing and amounts,

LAHORE 00000020 003 OF 003


neither he nor his staff could offer specifics. He said the
provincial government is considering floating bonds, launching a
Real Estate Investment Trust (REIT),and even securing
commercially available financing. (Note: These same options
have been under consideration at least as far back as a 2003
World Bank examination of Punjab's debt burden. Progress has
been slow because of the province's high existing debt burden,
narrow sources of revenue, and limited financial management
talent, combined with Pakistan's political instability in
general. End Note.)


11. (SBU) Provincial Additional Finance Secretary Zarak Mirza
said that an overhaul of property taxation was almost complete,
but he was not sure when it could be approved by the Chief
Minister. Mirza also noted that the Punjab Resource Management
Program (PRMP) was putting the final touches on a finance
department capacity-building roadmap that would help improve tax
collection in the future. He went on to ask for USG assistance
with implementing the PRMP plan. Finance department leaders
were also supportive of moving to a federal Value Added Tax
(VAT),as they expected it to enhance provincial income.


12. (SBU) COMMENT: Recent media attention on Punjab's deficit
financing may be just highlighting old news, but it does suggest
a potentially serious problem for future IMF SBA reviews.
Punjab officials could or should have recognized revenue
problems in fiscal year 2008-2009, well before the June 2009
"surprise." With increased expenses, flat revenue, and a
challenging economic climate, the province appears to be facing
a similar fiscal problem for FY 2009-2010. It is highly
unlikely that their proposals for increasing income, with less
than five months left in the current fiscal year, will be enough
to meet the shortfall. The federal government seems prepared to
finance a deficit up to $321 million, but Punjab exceeded that
after just three months. Unless provincial spending is sharply
reduced, Punjab's deficit could be as much as $800 million at
the end of June 2010, with serious repercussions for future IMF
SBA reviews. END COMMENT.
CONROY