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C O N F I D E N T I A L SECTION 01 OF 08 ISLAMABAD 003010

SIPDIS

E.O. 12958: DECL: 09/18/2018
TAGS: ECON EFIN EINV EAGR ENRG PGOV PREL PK
SUBJECT: CORRECTED COPY: THE 2008 U.S.-PAKISTAN ECONOMIC
DIALOGUE

REF: ISLAMABAD 2862 

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

¶1. (U) This is a corrected copy of reftel.

¶2. (C) Summary: The U.S.-Pakistan Economic Dialogue was held
in Islamabad on August 11, co-chaired by Assistant Secretary
of State for Economic, Energy, and Business Affairs Dan
Sullivan and Pakistani Minister of Finance Syed Naveed Qamar.
A topic of particular concern was the current state of the
economy, and the GOP's efforts to manage their budget deficit
and rapidly decreasing foreign exchange reserves. The GOP
asked for U.S. assistance in seeking external financing. The
Labor Secretary said that the GOP was making progress towards
resuming surprise labor inspections. Both sides agreed that
Bilateral Investment Treaty (BIT) experts should reconvene
very soon with a goal of completing negotiations by year end.
On terrorism financing, the GOP said it was committed to the
1267 process but felt that it had a few deficiencies. A
broad range of other topics was covered, including
macroeconomic policy, BIT, intellectual property rights
(IPR), energy, agriculture, terrorism financing,
Reconstruction Opport
unity Zones (ROZ), foreign assistance and Federally
Administered Tribal Areas (FATA) development, regional
cooperation and transit trade, and private sector
cooperation. The GOP also pitched a proposal for a new
scholarship program.

¶3. (C) U.S. participants included Ambassador Anne Patterson,
Acting Assistant U.S. Trade Representative for South Asia
Claudio Lilienfeld, Treasury Deputy Assistant Secretary Bob
Dohner, Linda Droker from the U.S. Department of Commerce,
USAID Senior Deputy Assistant Administrator for Asia Mark
Ward, and U.S. Embassy EconOffs. Ministry of Finance
Secretary Farrakh Qayyum and Advisor to the Prime Minister on
Finance and Economic Affairs xxxxxxxxxxxx led the Pakistani
delegation in multiple sessions in which Finance Minister
Qamar was not present. Government of Pakistan (GOP)
participation included Secretaries from the Ministries of
Finance, Commerce, Agriculture, Labor and Water & Power, as
well as representatives from the Ministry of Foreign Affairs,
Ministry of Interior, Higher Education Commission, State Bank
of Pakistan, Intellectual Property Organization, Board of
Investment and Federally Administered Tribal Areas
Secretariat. End summary.

Opening remarks
- - - - - - - -

¶4. (C) Pakistani Finance Minister Syed Naveed Qamar opened
the 2008 U.S.-Pakistan Economic Dialogue by thanking the
United States for its long history of support and assistance.
Recognizing that Pakistan is currently facing multiple
economic challenges, Qamar emphasized that additional U.S.
assistance programs would help Pakistan through its current
economic troubles. Assistant Secretary Sullivan reiterated
the USG's broad commitment to Pakistan and expressed the U.S.
desire to strengthen business-to-business and
people-to-people contacts between the two nations. The
Assistant Secretary described the 2008 Economic Dialogue as
the most recent step in a series of high-level meetings
between the two governments, including Prime Minister
Gilani's July visit to Washington.

Macroeconomic policy
- - - - - - - - - -

¶5. (SBU) During the macroeconomic section, Assistant
Secretary Sullivan and DAS Dohner noted U.S. concern over
increasing signs of weakness in the Pakistani economy and
stressed that additional assistance from international
financial institutions could be done only in conjunction with
GOP monetary and fiscal reforms, such as ceasing to finance
the fiscal deficit through the central bank, expanding the

Islamabad 00003010 002 of 008


tax base, and privatizing more rapidly. DAS Dohner stressed
the importance of the GOP meeting the 4.7 percent of GDP
fiscal deficit target, but noted that hitting this target
would take significant effort on the part of the GOP. When
asked about contingencies should the budget target not be met
and the status of foreign reserves, Finance Minister Qamar
replied that "all measures" including gas rationing "are in
the cards." Regarding reserves, he said they continue to
deplete "at a fairly rapid rate."

¶6. (SBU) The Prime Minister's Special Assistant for Finance
and Economic Affairs xxxxxxxxxxxx and Finance Minister
Qamar noted there were indeed structural deficiencies in the
economy that precipitated the crisis, but that part of
Pakistan's problems were the result of exogenous factors,
such as rapid increases in world oil and fuel prices. They
stressed the GOP had begun to correct structural deficiencies
with "politically difficult" measures such as eliminating
petroleum subsidies by year-end, putting in place targeted
subsidies in place of broad economic subsidies, increasing
the tax base, mandating net zero borrowing from the central
bank on a quarterly basis, and increasing the pace of
privatization. Finance Minister Qamar (who also serves as
the Minister of Privatization) added that September will see
a "flurry of activity" when new privatization projects are
announced including a gas field. xxxxxxxxxxxx noted the GOP was
undertaking a program of stringent fiscal restraint,
including steps to elimin
ate fuel and electricity subsidies.

¶7. (SBU) xxxxxxxxxxxx described Pakistan's current economic
situation as a short- to medium-term challenge and said that
Pakistan had good long-term growth potential. Both xxxxxxxxxxxx
and Finance Minister Qamar asked for U.S. assistance in
seeking additional external financing from international
financial institutions.

Labor
- - -

¶8. (SBU) xxxxxxxxxxxx
opened the labor portion of the Economic Dialogue by
highlighting the steps the GOP has taken to guarantee core
labor rights and combat child and bonded labor. xxxxxxxxxxxx
emphasized that the GOP has ratified all eight core
International Labor Organization (ILO) conventions,
highlighted that Pakistan was the second country in South
Asia to do so. He also stated that Pakistan has instituted a
national bonded labor policy and is in the process of
combining Pakistan's 74 separate pieces of labor legislation
into five broad bills. xxxxxxxxxxxx claimed the GOP would
strengthen oversight of the informal sector and institute new
labor protection and labor inspections policies.

¶9. (SBU) Turning to nationwide labor inspections, heavily
regulated since 2003, xxxxxxxxxxxx reported that
government and industry leaders recently met in Sialkot,
Punjab to resolve outstanding issues and pave the way for the
resumption of surprise labor inspections. xxxxxxxxxxxx recognized
that labor inspections have been inadequate in the past but
claimed that both the federal and provincial governments
supported a timely resumption of inspections. Assistant
Secretary Sullivan highlighted the importance the U.S. places
on labor rights and conditions, particularly in trade
relationships. He stressed that the U.S. was looking for
labor inspections to be resumed quickly and continued to
press for labor rights to be guaranteed for all Pakistani
workers, including those in Export Processing Zones (EPZs)
and other industries covered under the Emergency Services
Maintenance Act (ESMA). Given the historic USG concerns
about labor rights in the EPZs, the need for attention to
labor rights in the context of the ROZs,
and the latest news from the GOP on new labor-related
developments (legal and enforcement-related), A/AUSTR
Lilienfeld proposed that a DVC be held between USG and GOP
experts to allow for a better common understanding of the

Islamabad 00003010 003 of 008


GOP's plans.

Break out session: bilateral investment treaty (bit)
- - - - - - - - - - - - - - - - - - - - - - - - - - - -

¶10. (C) The BIT break-out session, which lasted over two
hours, was productive and set a positive tone for possible
resumption of negotiations. The two sides outlined our
mutual understanding of where things left off in March 2006,
i.e., the five central, unresolved issues. The USG sent
strong signals that if negotiations were to resume, we should
focus on the five unresolved issues alone and not address
matters raised subsequent to our last negotiating round in
¶2006. The Pakistanis signaled they would be amenable to
picking up with these five issues but also may want to
address the "shared understanding" as well as what they
characterized as "loose ends" or "cross-cutting issues."

¶11. (C) The USG noted that we provided the 2006 "shared
understanding" to Pakistan before President Bush's trip, in
hopes of persuading Pakistan to sign the BIT during the
President's visit. We said we hoped that our discussion of
the five remaining issues during any future negotiations
would be sufficient to satisfy GOP concerns and that if the
GOP was still going to insist on a shared understanding, we
would have to consult with our interagency before providing a
response.

¶12. (C) Notwithstanding that we had not yet established a
solid starting point, the GOP expressed the desire to
reconvene negotiations, preferably in Islamabad so as to
allow their stakeholder agencies to take a more active role.
They promised to pass the 2006 negotiated text to these
agencies, most of whom were not present at the meeting. GOP
Finance Secretary Farrukh Qayyum joined for a few minutes
during the session, emphasizing that he hoped that talks
would not again be suspended and appealed for "renewed
sensitivity" from each side.

¶13. (C) The tone of the breakout session was positive and
equally good sidebars continued throughout the day. In our
Joint Communique, we noted that the United States and
Pakistan have a strong interest in resuming BIT negotiations
and that our investment experts should meet as soon as
possible to do so. The favorable initial working
relationship and rapport that was forged during this breakout
session should facilitate progress going forward.

Intellectual property rights
- - - - - - - - - - - - - -

¶14. (SBU) Finance Secretary Farrakh Qayyum opined that
Pakistan's IPR laws were fragmented prior to 2005. Since that
time, the GOP has taken multiple steps to bring Pakistan in
line with international IPR norms. Recognizing that
challenges still remain, Secretary Qayyum reported that the
GOP's midterm goal is to strengthen enforcement capacity.
Acting Assistant USTR for South Asia Claudio Lilienfeld
pointed out that the U.S. still has concerns over IPR
legislation, highlighting U.S. displeasure over the lack of
data protection legislation, despite previous GOP pledges to
quickly enact relevant legislation. Director xxxxxxxxxxxx
of the Intellectual Property Organization (IPO) reported
that legislation was currently with the Ministry of Health
but stalled due to disagreements on data protection versus
data exclusivity. U.S. participants singled out data
protection and the protection of book publishing copyrights
for future discussion. In response to the proposal raised by
A/AUSTR Lilienfeld, both s
ides agreed on the need to hold a DVC as soon as possible
among USG and GOP stakeholders to discuss the draft data
protection legislation.

Energy
- - -


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¶15. (C) The session opened with an overview by the GOP of the
energy situation in Pakistan. Noting that only ten percent of
the sector is privatized, xxxxxxxxxxxx remarked that privatization is expected to
be increased to 60 percent over the next ten years and that a
40 percent increase in prices has recently been passed to the
public. xxxxxxxxxxxx also vaguely highlighted other steps which
the GOP is pursuing such as a new strategy to exploit
indigenous resources in which the private sector will have a
key role, passage of measures to allow electricity prices to
fluctuate with market demands, as well as the development of
a price strategy for the FATA to recover the full cost of
electricity versus the current 98 percent loss. Stating that
the GOP wants to add 16,000 megawatts by 2015 with USD 30
billion of investment, xxxxxxxxxxxx noted this was approximately
USD 3 billion per year, with 2 billion from the private
sector and 1 billion from the public sector. He said Pakistan
is planning road shows in the U.S. and Southeast Asia to
secure these investments, with emphasis on coal and
hydro-power development. xxxxxxxxxxxx noted that the GOP is in
need of experts on legal issues and capacity building
involved in Thar coal development and that all parties are
very interested in re-energizing the bilateral energy
dialogue with the U.S.

¶16. (C) Assistant Secretary Sullivan said that everyone is
facing energy challenges. He said that the BIT would boost
investor confidence to bring in funding from the private
sector for large scale projects. On the Iran pipeline,
Sullivan noted that the U.S. does not support investment with
Iran and also questioned whether the GOP could ensure that
Iran is a reliable supplier. Sullivan also pointed out that
the Siemens Westinghouse dispute, which has been in the
judicial process for 10 years, does not build confidence with
foreign investors who may be looking at potential
opportunities in Pakistan. He emphasized the importance of
arbitration moving quickly and that it was important to clear
up the issue and put a transparent regime in place to avoid
similar drawn-out disputes in the future. He also added the
need to resolve late payments to Chevron, whose country
manager the day before briefed the delegation that the
company may leave Pakistan unless the issue is resolved.
Noting that the U.S. is willin
g to fund a comprehensive geological mapping survey which
could be very beneficial for the domestic energy sector,
Sullivan asked the GOP to move forward with approval of the
U.S. Geological Survey offer. A/S Sullivan also pointed out
that he is the U.S. co-chair on the International Energy
Association board and was willing to reach out to them for
expertise if the GOP is interested.

Agricultural cooperation
- - - - - - - - - - - - -

¶17. (SBU) Finance Minister Qamar described increasing
agricultural production as low hanging fruit, pledging that
agricultural development will be the "main thrust of economic
growth in the short term" as the income stays in the rural
areas, which serves to alleviate poverty. He advocated
strengthening the U.S.-Pakistan agricultural relationship.
Qamar reported that water utilization remains a constraint
for increased agricultural capacity; 60 percent of Pakistan's
irrigation water never reaches crops due to inadequate
irrigation systems and technology. Due to water constraints
that prevent more planting, xxxxxxxxxxxx opined that the integration of
genetically modified seeds is critical to increasing
agricultural productivity. He requested enhanced
U.S.-Pakistan collaboration on biotechnology research,
cooperative biosecurity training and assistance in improving
Pakistan agricultural value chains, particularly the use of
cold storage and cool chain techno
logies and methods. Finance Secretary Qayyum also discussed
more access to U.S. markets, noting their twelve year effort
to ship mangoes to the U.S. The Agricultural Counselor
replied that once the Cobalt 60 arrives and the irradiation

Islamabad 00003010 005 of 008


facility is operating, USDA will restart the mango
pre-shipment protocol. Also discussed were the ongoing
negotiations to resolve differences over wheat import permit
conditions so that U.S. commercial and food assistance wheat
shipments to Pakistan could resume.

Break out session: eliminating terrorism finance networks
- - - - - - - - - - - - - - - - - - - - - - - - - - - - -

¶18. (C) Treasury Deputy Assistant Secretary Bob Dohner
represented the U.S. in a break out session on eliminating
terrorism finance networks. While Pakistan's anti-money
laundering legislation and bulk cash interdiction programs
were discussed, the majority of the breakout session focused
on the UN 1267 committee and Pakistan's use of the People's
Republic of China to block listings that reference Pakistan.
Ministry of Foreign Affairs (MFA) representatives including
xxxxxxxxxxxx reported that while Pakistan remains
"fully committed" to the 1267 process, the GOP believes that
the process has "several deficiencies." xxxxxxxxxxxx claimed
that Pakistan's opposition to 1267 listings that mention
Pakistan or Pakistani nationals was a domestic issue,
claiming that evidence submitted to justify 1267 listings
would not hold up in a court of law. xxxxxxxxxxxx reported that
the GOP was reluctant to support such listings for fear that
once the GOP froze assets of
1267 listed entities, the government would be brought to
court over the action. MFA and FIA representatives requested
the U.S. share more intelligence on the individuals and
entities in question. When asked whether Pakistan would
prosecute if evidence were provided, xxxxxxxxxxxx
replied that "higher levels" would have to decide.

¶19. (C)xxxxxxxxxxxx conceded that Pakistan's image was a
motivation in blocking the listings, also reporting that
supporting such listings "creates difficulties" for Pakistan.
DAS Dohner responded that 1267 designations are not
arbitrary and urged the GOP to ask the PRC to remove its
holds on the listings in question. The breakout session
concluded with both sides failing to come to an agreement on
the issue.

¶20. (C) State Bank of Pakistan Executive Director Jameel
Ahmed reported that the Anti-Money Laundering Ordinance was
still valid, the GOP planned to amend the legislation, taking
into consideration recommendations put forth by Financial
Action Task Force (FATF) members. The Ministry of Finance
currently has the draft legislation and is reviewing the
legality of the changes but plans to submit the bill to the
Federal Cabinet for approval. No timeline was provided. The
Financial Monitoring Unit (FMU) is reportedly functioning and
submitting information of suspicious transactions to the FIA,
Anti Narcotics Force (ANF) and National Accountability Bureau
(NAB). Ahmed claimed that legislation aimed at interdicting
cash smugglers was currently under review and being "hotly
debated" by various GOP agencies.

Gop scholarship proposal
- - - - - - - - - - - -

¶21. (SBU) The GOP also presented a scholarship proposal for
U.S. consideration. Noting that the Higher Education
Commission (HEC) has seen the number of degrees conferred
triple as well as a significant increase of money (USD 2
billion) into the sector, the GOP requested U.S. support to
expand the "domestic brain pool for the future benefit of
Pakistan." Stating that they would like to see fields of
expertise tailored to the needs of the country, the GOP noted
that 100 million Pakistanis are under the age of 25, so the
need is great for higher education but currently only one in
six high school graduates goes on to higher education. To
provide more opportunities, the HEC proposed awarding 10,000
scholarships over five years. Last year, 1,000 individuals
were sent abroad, primarily in Europe. The details of the
program and specific areas of concentration remain to be

Islamabad 00003010 006 of 008


worked out. Last year there were 100 Fulbright scholars and
they would like to see this expanded to 1,000. A/S Sullivan
noted that this co
ncept could enhance long-term economic growth with graduates
bringing back knowledge economy skills. He asked the
Pakistani delegation to revise the proposal to include joint
funding possibilities at which point he would share with the
U.S. interagency.

Reconstruction opportunity zones
- - - - - - - - - - - - - - - -

¶22. (C) Commerce Minister Shah said that his ministry would
take the lead on Reconstruction Opportunity Zones (ROZ) for
the GOP. He said that Pakistan would still like to see all
textile products included in the list of products since this
sector is the largest employment generator. He was concerned
that currently only 50 percent of textile production is
currently included. He said that the issue has been
discussed with the Sarhad Development Authority and the
Northwest Frontier Province (NWFP) Industrial Development
Authority. The Finance Secretary pointed out that they have
seen a lack of interest in ROZ's in the press and urged the
U.S. to provide reassurance and more visibility on the
subject.

¶23. (C) A/S Sullivan noted that work is proceeding to promote
the bill and September is the targeted timeframe for passage
of the bill. He also said that we have worked to develop as
broad as possible geographic territory for eligibility and
expansive product lists, but full coverage for textiles was
not possible given U.S. domestic concerns. A/S Sullivan
said that the next steps on ROZ's were to internationalize
the concept by approaching Japan, Canada and others to offer
ROZ-like trade benefits, informing traditional and Pakistani
investors on how to do business in the ROZs, addressing labor
issues and prioritizing ROZ locations. For geographic areas
not included in ROZs, A/S Sullivan recommended outreach to
ensure businesses in those areas were taking full advantage
of General System of Preferences (GSP) benefits.

¶24. (C) The Secretary of Commerce responded that labor issues
would not be a problem, he expected that there would be
collective bargaining for Export Processing Zones (EPZs).
A/AUSTR Lilienfeld said that national labor laws should apply
in all locations including EPZs. A/USTR Lilienfeld said that
a senior Commerce Ministry visit in September for the TIFA
Council meeting would provide a timely opportunity for the
GOP to engage with stakeholders in D.C. while ROZ legislation
was under consideration on Capitol Hill.

Foreign assistance and fata development
- - - - - - - - - - - - - - - - - - - -

¶25. (C) xxxxxxxxxxxx stated that they wanted more input into USAID
projects in the FATA. Mark Ward, Senior Deputy Assistant
Administrator for Asia, noted that USAID continues to work
closely with the FATA Secretariat and other local
stakeholders to ensure decisions were made locally. USAID
agreed to support the FATA Secretariat in improving
communication with stakeholders in the capital but stressed
the need for quick project implementation and visible
progress, noting that delays can also be visible. A/S
Sullivan noted the importance of country led efforts,
accountability and USG efforts at improved coordination of G8
donor activities. He also noted existing projects in the
FATA that may be linked to implementation of Reconstruction
Opportunity Zones. xxxxxxxxxxxx agreed with the need for greater
coordination to avoid isolated, unlinked activities. xxxxxxxxxxxx
also requested budget support in lieu of project based
assistance. USAID noted the capacity building needs f
or GoP to adequately track and control funds.

Regional cooperation and transit trade
- - - - - - - - - - - - - - - - - - - -

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¶26. (C) On the issue of transit trade with Afghanistan,
Commerce Secretary Shah noted that Pakistan saw a decline in
overall exports to Afghanistan in 2006-2007 and were
currently seeing Afghan restrictions on Pakistani exports of
edible oil and carbonated soft drinks. Shah noted that
Pakistan had received a draft transit trade agreement from
the Government of Afghanistan and that the GOP had also
delivered their own version to Afghan officials. He noted
that the transit trade agreement would be discussed at the
next session of the bilateral Joint Economic Council which is
not yet scheduled. Shah noted that the GOP is concerned about
the delays with Afghan reimbursement to Pakistanis who
transit Afghanistan and explained that the GOA is charging
ten percent of the value of Pakistani goods which transit
Afghanistan en route to the Central Asian nations. Shah
further commented that the GOP is currently not charging
Afghanistan-bound goods the full port charges and are not
inspecting the trucks en route to th
e border.

¶27. (C) To promote regional cooperation, Shah noted that
Pakistan had been fully supportive of facilitating
Afghanistan's entry into the South Asian Free Trade
Association (SAFTA) and paid compensation as a developed
country for the least developed countries in the SAFTA pact.
Shah noted that trade among the SAFTA countries is up and
that the next step in SAFTA was to complete the services
agreements. Sullivan noted that increasing regional trade is
the faster way to expand the local economy and linked the
importance of expanding Pak-Afghan transit trade to greater
trade within the region.

Private sector cooperation
- - - - - - - - - - - - - -

¶28. (C) Qamar noted that Pakistan needs USD 110 billion in
infrastructure development in the energy, mass transport and
municipal services sectors. Feasibility studies and a
sovereign guarantee fund are needed as well as funding from
Overseas Private Investment Corporation (OPIC) and the Export
Import Bank in the form of grants. Qamar was hopeful that
more public-private partnerships could be established which
would be mutually beneficial to the U.S. and Pakistan and
hoped to see greater private sector ties established before
the next economic dialogue. A/S Sullivan noted the Senior
Commercial Officer soon to be posted in Islamabad can assist
those efforts and also highlighted the telemedicine project
as a good example of cooperation. Droker emphasized the need
for Pakistan to provide a transparent and predictable
business climate to attract foreign investment.

Closing remarks
- - - - - - - -

¶29. (C) In his closing remarks, Assistant Secretary Sullivan
thanked Finance Minister Qamar for his leadership. He
appreciated the candid discussion and underscored the
importance of our economic relationship. He reemphasized the
need to incorporate the FATA into the ROZ efforts and the
need to restart the BIT negotiations. Finance Minister Qamar
closed by saying that he felt great progress had been made
during the day. He said that a matrix of actionable items
would be good for follow through. He appreciated the open
and frank discussions with a "good friend" on interwoven
issues which he hoped lead to progress in those sectors and
reemphasized that student scholarship recipients are the best
ambassadors for the U.S. in Pakistan. Qamar noted that that
there had been progress in moving forward on the BIT and
suggested working out the differences "in coming days."
Sullivan reiterated that the U.S. hoped to continue forums on
Pakistan and have a broad based relationship with the new
democratic government
.

¶30. (U) This message has been cleared with A/S Sullivan.

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Patterson