Tarin requested that an additional $500 million of U.S. assistance flow through the GOP - in addition to the $174 million already committed - to bolster GOP credibility and allow the GOP to more adequately support its priorities.

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C O N F I D E N T I A L SECTION 01 OF 03 ISLAMABAD 002698

SIPDIS

E.O. 12958: DECL: 11/01/2019 TAGS: ECON, EFIN, EAID, MOPS, PGOV, PREL, PK

SUBJECT: FINANCE MINISTER TARIN ON BUDGETS, CSF DOLLAR FUND, AND PAKISTAN'S IMPROVING ECONOMIC OUTLOOK

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

1. (C) Summary: Minister of Finance Shaukat Tarin told the Ambassador that he is "cautiously optimistic" about the Pakistani economy and expressed GOP gratitude that the USG would begin to move gradually towards greater use of Pakistani platforms to channel U.S. assistance. Tarin requested that an additional $500 million of U.S. assistance flow through the GOP - in addition to the $174 million already committed to the Benazir Income Support Fund, the Higher Education Committee and the Pakistan Poverty Alleviation Fund - to bolster GOP credibility and allow the GOP to more adequately support its priorities. Tarin said he supported the World Bank Trust Fund and agreed with the Ambassador that an advisory group made up of Americans and expatriate Pakistanis could help direct U.S. assistance efforts, provided such a group was not too large. Tarin appealed to the Ambassador to keep him informed of U.S. assistance to the Pakistani military, and said he was willing to establish a U.S. dollar account on behalf of the PakMil if Army Chief of Staff Kayani would work with the Finance Ministry to streamline and rationalize PakMil budget planning. End Summary.

2. (SBU) In a late October meeting, Finance Minister Shaukat Tarin and Minister of State for Economic Affairs Hina Rabbani Khar discussed agreements signed with USAID totaling $174 million that would be channeled through three agreed funding platforms: Benazir Income Support (BISP), the Higher Education Committee (HEC) and the Pakistan Poverty Alleviation Fund. (Note: USAID signed these agreements with the GOP on September 30, for purposes as submitted in a Congressional Notification prior to that. End Note). Action was now with the GOP; Tarin and Khar assured the Ambassador that the Prime Minster would sign the agreements without sending them forward to the cabinet for approval. Khar said that another six projects totaling $478 million already had detailed agreements, which both the federal and provincial authorities had endorsed.

Bolstering GOP Credibility

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3. (SBU) Tarin told the Ambassador that he needs an additional $500 million of assistance to flow through the GOP. The U.S. could use existing platforms, such as BISP or HEC, to ensure that USG funds bolster the GOP's ability to meet budget targets. Tarin asked that the U.S. look into more work with microfinance with the State Bank of Pakistan (SBP), and also emphasized the World Bank Trust Fund as an option; money into this fund will help offset GOP requirements to support Malakand/NWFP and FATA reconstruction and to care for internally displaced persons (IDPs). Tarin said he was unaware of the status of a reported offer by Saudi Arabia to donate $100 million to the Trust Fund. The Ambassador said the U.S. is considering a $30 million donation, and that the EU and Japan are also considering donating funds.

4. (SBU) The Ambassador said that setting up a group of Pakistani and American advisors, such as were in place for the Defense Advisory Board, would help both to guide U.S. assistance. Tarin said that the U.S. and the GOP must work to close what he called a credibility gap: both sides must show they are implementing what they say they are. The Ambassador said that the advisory board could help with this. Tarin said the GOP has a clear plan to ensure that funds are used transparently and for maximum benefit, and cautioned against making the advisory group so large that it becomes unwieldy. Tarin reiterated the GOP's need for an additional $500 million to come through the budget to help the GOP meet the people's expectations.

"We Want a Win-Win"

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5. (SBU) Khar said that her office is working intensively with USAID to identify specific needs in various sectors. To address his concern that the United States does not get credit with the Pakistani people for its assistance to Pakistan, Tarin pointed out that BISP has a broader reach than a new turbine at Tarbela. The Pakistani intelligentsia would appreciate new scholarships through the HEC, Tarin said.

Coalition Support Fund and Foreign Currency Account

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6. (C) Tarin said the Finance Ministry had done a detailed analysis and concluded that, of the total of $6.6 billion the U.S. had provided to Pakistan under the Coalition Support Fund (CSF), only some $250 million had actually gone to the Pakistani army under (then) President Musharraf; the rest had gone into the regular budget, protestations by the then-government to the contrary notwithstanding. Tarin stressed that CSF funding counts as income in the budget, positively affecting the fiscal deficit.

7. (C) On improvements the GOP has made to address the accounting issues that have delayed CSF payments over the past 18 months, Tarin said the GOP needs to have backup staff for those individuals trained to prepare the paperwork required by the U.S. military. It is essential that billing and paperwork preparations be standardized to avoid delaying payments. Tarin appealed to the Ambassador to keep him informed of funds the U.S. directs to the Pakistani military. Promising that he would not reduce the military's budget based on U.S. assistance flows, Tarin said that the Finance Ministry needs to be kept aware for overall budgeting purposes. Army Chief of Staff General Kayani does not pass on this information.

8. (SBU) Tarin opined that the Pakistani military should decide rationally (in light of Pakistan's nuclear capability) how many divisions the army requires, and then conduct a gap analysis to identify specific needs to meet that requirement. It would likely take three to five years to fill the army's needs once identified, he said. Tarin said that Kayani was "open to help" and that he (Tarin) would like to co-locate Finance Ministry personnel with the army to assist in this exercise. Tarin said he is willing to open a hard currency account for the military if Kayani agrees to this approach; the account will be an incentive, Tarin said, as many of the military's purchases require dollars in any case. The Pakistan Counterinsurgency Capability Fund (PCCF) would remain separate, Tarin said. The Ambassador pointed out that the Pakistani military receives equipment rather than cash under the Foreign Military Finance (FMF) program.

Economic Outlook Getting Brighter?

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9. (SBU) Tarin told the Ambassador that Pakistan's economic fundamentals are improving and that large-scale manufacturing output had improved for the first time in 13 months. Pakistan is exceeding its foreign exchange targets in the first quarter FY 2009-2010 and would also more or less meet the IMF target of 10.5 percent for the budget deficit. Remittances were over $1 billion, and inflation is expected to drop below 10 percent "in the next three months." Tarin called revenue results "better than expected," and said that he had put out the word that people should pay their taxes by November 15 "or "I'll go after you." (Note: Pakistani income taxes are due annually on September 30; because the due date this year fell during Ramazan, the GOP authorized an extension until November 20. End Note). He said that rating agencies Moody's and Standard and Poor's expressed their confidence in Pakistan's economic outlook when they upgraded Pakistan's debt rating. Another positive indicator was the influx of some $300 million of foreign investment to the Karachi Stock exchange.

10. (C) While Tarin's assessment of the Pakistani economy is

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decidedly upbeat, Pakistan's review by the International Monetary Fund (IMF) is still expected to be difficult, due to lower-than-expected revenue collection and lagging fiscal and tax reforms (septel). The rating agencies based a large part of their upgrade on the completion of Pakistan's second IMF review and the simultaneous decision to increase Pakistan's quota in August. We will explore the possibility of using the State Bank of Pakistan as a vehicle for microfinance, but must be cautious in light of its role as a regulator. PATTERSON