In a September 3 meeting with the Ambassador, Finance Minister Shaukat Tarin said the GOP had included $2 billion in Tokyo Pledges in its budget but was grappling with a shortfall in actual donor assistance.

223755 9/4/2009 11:11:00 AM 09ISLAMABAD2139 Embassy Islamabad CONFIDENTIAL 09ISLAMABAD2115 VZCZCXRO8783OO RUEHLH RUEHPWDE RUEHIL #2139/01 2471111ZNY CCCCC ZZHO 041111Z SEP 09FM AMEMBASSY ISLAMABADTO RUEHC/SECSTATE WASHDC IMMEDIATE 4728INFO RUEHBUL/AMEMBASSY KABUL PRIORITY 0821RUEHLO/AMEMBASSY LONDON PRIORITY 1237RUEHNE/AMEMBASSY NEW DELHI PRIORITY 5425RUEHKP/AMCONSUL KARACHI PRIORITY 2193RUEHLH/AMCONSUL LAHORE PRIORITY 7797RUEHPW/AMCONSUL PESHAWAR PRIORITY 6806RUEAIIA/CIA WASHINGTON DC PRIORITYRUEHRC/DEPT OF AGRICULTURE WASHINGTON DC PRIORITYRUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITYRUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITYRHEBAAA/DEPT OF ENERGY WASHINGTON DC PRIORITYRHMFISS/HQ USCENTCOM MACDILL AFB FL PRIORITYRUEKJCS/JOINT STAFF WASHINGTON DC PRIORITYRHEHNSC/NSC WASHINGTON DC PRIORITYRUEKJCS/SECDEF WASHINGTON DC PRIORITYRUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 ISLAMABAD 002139

SIPDIS

E.O. 12958: DECL: 09/03/2019 TAGS: PGOV, EFIN, ECON, EAID, ENRG, PK

SUBJECT: FINANCE MINISTER ON PAKISTAN'S BUDGET WOES, TOKYO PLEDGES, AND U.S. ASSISTANCE

REF: ISLAMABAD 2115

Classified By: Ambassador Anne W. Patterson for reasons 1.4 (b, d).

1. (SBU) Summary: In a September 3 meeting with the Ambassador, Finance Minister Shaukat Tarin said the GOP had included $2 billion in Tokyo Pledges in its budget but was grappling with a shortfall in actual donor assistance. He asked that the USG provide $650 million in cash through the GOP to cover the budget gap. The Ambassador said that $174 million in budget support would be forthcoming in September, if approved by the Congress, and that the USG would look at how to funnel additional cash into projects that supported GOP social safety net programs.

2. (C) In addition, Tarin said the GOP was waiting on a $500 million CSF transfer. The Ambassador explained that the funds could not be disbursed until the Pakistani military had properly accounted for its expenditures. Tarin said falling profits in the energy and banking sector brought revenue collection down and welcomed U.S. technical support for the FBR and the development of a VAT. He said that the GOP had agreed with the World Bank on the structure of a Border Trust Fund that included accountability mechanisms. The World Bank was now sending the proposal to its board for final approval. He welcomed the October 21-22 U.S.-Pakistan energy dialogue and suggested that the Energy Expert Group head preparations for the summit on the Pakistani side. End Summary.

GOP budget shortfall and cash transfers from Tokyo Pledges

--------------------------------------------- -------------

3. (SBU) Of the $5.3 billion in Tokyo Pledges, Tarin said he had budgeted $4 billion over the next two fiscal years (Note: Pakistan's fiscal year is July 1-June 30. End Note.). For FY10 he believed donors other than the USG would provide as much as $1.35 billion in cash transfers for budget support and GOP social safety net programs. He asked for the USG to fill the $650 million balance. He said the GOP had already secured $702 million in Tokyo Pledges for budget support and was working with donors to reallocate other pledges to budget support and social programs. He said the United Arab Emirates had promised to reprogram $110 million; Saudi Arabia $200 to $250 million; Japan $200 million for social programs and $135 million for IDPs; and Turkey and Germany some additional funds as well.

4. (SBU) The Ambassador said the United States recognized the importance of building the capacity of the GOP to deliver social services. Pending Congressional approval, the USG planned to provide a $174 million cash transfer to the GOP in September through support for the Benazir Income Support Program (BISP), Higher Education Commission (HEC), and IDP Income Support. The Ambassador agreed to investigate how additional funds could be directed through the GOP in U.S. FY10. Tarin suggested the USG target poverty reduction and an electricity subsidy for the poor through the Benazir Income Support Program, an accountable and transparent fund with a $500 million shortfall. He also welcomed additional support to the Higher Education Commission, Border Trust Fund, National Rural Support Network, and the Pakistan Poverty Alleviation Fund.

5. (SBU) Tarin expressed concern that funds to Malakand reconstruction and a large energy infrastructure project could divert funds from the Benazir Income Support Program and other programs. But at least in the case of the energy project, much of the capital investment would come in later years, freeing money to support GOP programs in FY10 and FY11.

6. (SBU) Tarin also recommended the USG contribute to the State Bank of Pakistan's (SBP) microfinance window, a credit facility to 23 microfinance concerns that effectively bring banking services to the poor and rural areas. He said future ISLAMABAD 00002139 002 OF 003 donor pledges should be made in a forum separate from the Friends of Democratic Pakistan.

Status of military assistance funds

-----------------------------------

7. (C) Tarin said that the GOP was still waiting for $500 million in Coalition Support Funds (CSF). He said ODRP had sent a technical team to work with the Pakistani military to ensure proper accounting for CSF monies. The Ambassador explained that the Pakistani military still fell short of properly accounting for its CSF expenditures, one aspect of which was its continuing inability to provide receipts. (Note: Tarin's staff has not kept him sufficiently updated on CSF. Post will provide Tarin a briefing on the status of CSF and procedures for proper accounting. End Note.)

8. (C) The Ambassador said the USG had purchased $370 million in equipment for the military through FY09 Pakistan Counterinsurgency Capability Fund (PCCF) supplemental funds. Tarin said he was unaware of this and would work to see that the purchases of these items were removed from the army's capital budget.

Tax Reform, Border Trust Fund and Energy Sector Reform

--------------------------------------------- ----------

9. (SBU) Tarin said that lower than forecasted banking and energy sector profits in the latter half of FY09 had led to an unexpected decrease in tax collection. He welcomed the proposal from NSC Senior International Economist Lipton for the U.S. Treasury Department to provide two technical experts to assist Pakistan's Federal Board of Revenue (FBR) to implement tax policy reform and introduce a value-added tax (VAT). (Note: Post will coordinate with Treasury on implementing this technical assistance project. End note.)

10. (SBU) The Ambassador said the USG wanted to have the Border Trust Fund instituted and some donor pledges to it in place before the September 24 summit meeting of POTUS, British Prime Minister Brown and President Zardari. Tarin said that the GOP and World Bank had agreed on a structure for the Border Trust Fund with mechanisms to ensure accountability and transparency. He said the World Bank had forwarded the proposal to its board for approval.

11. (SBU) Tarin said the same group that prepared Pakistan's integrated energy plan in March 2009 should take the lead in preparing for the October 21-22 U.S.-Pakistan strategic energy dialogue. He suggested that the Chairman of the Energy Expert Group Farooq Rahmattulah head the talks.

12. (SBU) Comment: The Congressional Notification for the $174 million cash transfer is on hold until Congress resumes September 8. The funds would come from the FY09 Supplemental Appropriations Spending Plan, which includes $85 million for the Benazir Income Support Plan, $45 million for the Higher Education Commission, and $44 million for IDP Income Support. USAID lawyers and legislative affairs staff will arrange the required consultations with congressional appropriations staff to explain the cash transfer process, especially terrorist financing controls. USAID has contracted two accounting firms to document the cash flow process and is prepared to send USAID as well as GOP representatives to Washington to provide additional information on the program. If we can get this budget support obligated in FY09, and it proves we can effectively program funds to specific line items, track our funds, and have a social and economic impact, then the groundwork will be laid for future cash transfers. End comment.

13. (U) Participants:

Ambassador Patterson USAID Director Bob Wilson

ISLAMABAD 00002139 003 OF 003

ECON Robbie Marks (note taker)

Finance Minister Shaukat Tarin Minister of State for Economic Affairs Hina Rabbani Khar Senator Shanaz Wazir Ali Advisor to the Finance Minister Sakib Sherani Joint Secretary Finance Abdur Rauf Khan Joint Secretary Finance Asif Bajwa

PATTERSON