US embassy cable - 05ISLAMABAD16051

UNCLAS SECTION 01 OF 05 ISLAMABAD 016051 
 
SIPDIS 
 
SENSITIVE 
 
DEPT - PLEASE PASS TO USAID 
KABUL - PLEASE PASS TO CFC-A 
MANILA - PLEASE PASS TO USADB AMB PAUL SPELTZ 
 
E.O. 12958: N/A 
TAGS: EAID, ECON, EFIN, PGOV, PREL, PREF, PK, Earthquake 
SUBJECT: PAKISTAN EARTHQUAKE:  MBS GEARING UP FOR 
RECONSTRUCTION ASSISTANCE IN ADVANCE OF OCTOBER 26 GENEVA 
MEETING AND NOVEMBER 18 ISLAMABAD DONOR CONFERENCE 
 
 
1.  (SBU) Summary:  Although the detailed needs assessment is 
just beginning, multilateral development banks (MDBs) are 
trying to come up with funds to support reconstruction needs 
following Pakistan's October 8 earthquake.  The World Bank 
board will vote October 25 on a $200 million package of 
earthquake-related enhancements to two existing Bank 
projects; the board will also take a first look at upcoming 
initiatives to provide an additional $270 million for 
earthquake reconstruction ($240 million in new funds for 
existing projects, $30 million in reprogrammed funds from 
savings identified in existing programs).  The Asian 
Development Bank (ADB) is trying to come up with $200 million 
($80 million in grant aid, $120 million in Asian Development 
Fund concessional lending), and is also trying to obtain GOP 
agreement to reprogram $100 million in savings from some 
long-standing existing projects to earthquake relief.  The 
International Monetary Fund (IMF) has, consistent with past 
practice in similar disasters, offered Pakistan a 
concessional emergency loan of $375 million (or roughly one 
quarter of Pakistan's IMF quota); having successfully argued 
to the IMF it would not agree to Post-Program Monitoring by 
the Fund, the Government of Pakistan (GOP) must now decide if 
it wishes to draw on the loan.  The Islamic Development Bank 
(IDB) has offered $252 million in earthquake support, but 
$200 million of that would be for import finance and lease 
finance at LIBOR or similar rates. 
 
2.  (SBU) The World Bank and ADB have just launched a jointly 
coordinated reconstruction needs assessment in the affected 
areas, with the participation of the GOP and major donors, 
and results will be presented to the GOP on November 5.  That 
document will be the basis for a major Pakistan 
reconstruction conference scheduled in Islamabad for November 
18, to which the GOP has reportedly already invited World 
Bank President Paul Wolfowitz and UNSYG Kofi Annan, who 
apparently has plans to be in the region at that time.   End 
Summary. 
 
3.  (SBU) Comment:  It appears that the MDBs appreciate the 
magnitude of the reconstruction job ahead, though their 
current plans may need to be scaled up if the needs 
assessment reveals greater financing needs than anticipated. 
Given the compelling humanitarian need and the GOP's record 
of strong economic management over the past few years, MDBs 
think that obtaining their boards' approval for these plans 
shouldn't be difficult.  We are pleased to see that even if 
it is just a negotiating tactic, the GOP for now is holding a 
firm line, saying it does not want MDBs shifting resources 
away from existing projects designed to meet urgent 
development needs in social sectors and infrastructure.  End 
comment. 
 
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WORLD BANK:  IDENTIFYING $470 MILLION 
-------------------------------------- 
4.  (SBU) John Wall, Country Director for Pakistan (protect), 
explained that the World Bank was looking at a near-term 
figure of roughly $470 million for reconstruction and 
rehabilitation.  This would be comprised of additional funds 
pumped into existing Bank projects in Pakistan, circumventing 
the need for the Bank's usually extensive review of new 
projects/designs, and facilitating the rapid disbursal of the 
new funds.  Two of these project expansions would be voted on 
SUBJECT: PAKISTAN EARTHQUAKE:  MDBS GEARING UP FOR 
at the Bank's October 25 board meeting: $50 million more for 
the Development Policy Credit for North West Frontier 
Province and $150 million more for the Poverty Reduction 
Support Credit (a nationwide program that, inter alia, funds 
provincial operations in Azad Jammu Kashmir since AJK is not 
officially counted as one of Pakistan's provinces).  The 
rationale for the infusion of new credit into these programs 
would be that since both programs were appraised and designed 
based on a three-year projection of provincial policies and 
expenditures, any significant change in those -- as the 
earthquake will certainly require for both AJK and NWFP -- 
will require adjustments of the projects' finances (so the 
provinces aren't forced to dislodge other necessary 
expenditures in order to meet their obligations under these 
two Bank projects).  The documentation for the expansion of 
these two projects was complete, and it was expected the Bank 
board would vote to support their expansion. 
 
5.  (SBU) Bank staff would also on October 25 be bringing 
before the board - not for approval, since the necessary 
paperwork hasn't been completed, but to give the board a 
heads up that these projects will be ready for approval 
within a few weeks -  the expansion of several other existing 
Bank projects to include earthquake reconstruction:  $100 
million more for the National Highways Project (although the 
highway project is designed to upgrade the main 
Karachi-Lahore artery, it would be expanded to cover three 
damaged roads connecting the quake-affected areas with 
central Pakistan where the main highway runs); $100 million 
more for the Pakistan Poverty Alleviation Fund (to expand the 
operations of the 61 partner NGOs currently working on 
microcredit, community infrastructure and capacity building, 
and mobilize them to rebuild communities); and $30-40 million 
more for the NWFP and AJK Community Infrastructure Project 
(to build out infrastructure including water, roads and 
schools).  In addition, Bank staff would preview for the 
Board roughly $30 million in undisbursed funds from existing 
projects that they hope to reprogram to support cash grants 
for livelihood support and housing reconstruction. 
 
6.  (SBU) Subsequent to this initial package, after the World 
Bank/ADB joint needs assessment is completed in November, the 
Bank will consider whether it is necessary to fund an 
Emergency Recovery Credit (ERC) for Pakistan.  ERCs were 
announced for India after the Gujarat earthquake and for Sri 
Lanka after the tsunami, worth several hundred million 
dollars, but those were funded out of undisbursed balances on 
Bank projects in those countries.  Since undisbursed balances 
on Bank projects in Pakistan totals only $30 million (see 
para 4), any funding for an ERC for Pakistan would have to 
come from new funds. 
 
7.  (SBU) Wall said it wasn't clear to him if the Bank's 
plans would be announced at the Geneva conference on October 
26, noting that strictly speaking the conference was about 
raising money for the United Nations' flash appeal for relief 
rather than for longer term reconstruction (this theme 
reappeared in discussions with most MDBs).  It wasn't even 
clear who from the Bank would be attending the Geneva 
conference, but not the Bank's President.  That said, Wall 
noted the timing of the October 25 Board meeting would allow 
the Bank to announce it had identified $470 million in 
reconstruction financing for Pakistan's reconstruction, and 
SUBJECT: PAKISTAN EARTHQUAKE:  MDBS GEARING UP FOR 
that the Bank's Board had already approved $200 million in 
expanded projected finance. 
 
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ADB:  LIKELY TO OFFER $200-300 MILLION 
----------------------------------------- 
8.  (SBU) ADB's Ed Haugh (protect) said ADB was trying to 
identify earthquake reconstruction funds, since its 
three-year allocation for Pakistan was already settled and 
the GOP had made clear it didn't want any cannibalization of 
projects already in that three-year plan.  In view of that, 
the ADB was planning to come up with $200 million in new 
money -- $80 million in grant aid, and $120 million from the 
Asian Development Fund concessional resource (on 
IDA-equivalent terms).  Beyond that, the ABD was hoping to 
persuade the GOP to agree to identify savings of $100 million 
in some long-standing, lingering projects dating back to the 
early 1990's, and reprogram the money from those projects to 
earthquake assistance (but not cancel those projects). 
Longer term, the ADB was thinking of ways it could rejigger 
existing projects to meet reconstruction needs -- for 
example, the existing NWFP social sector project could shift 
its focus from programs to school reconstruction. 
 
9.  (SBU) Asked how this compared to the kind of assistance 
ADB provided in response to the tsunami, Haugh explained that 
after the tsunami, the ADB took the unprecedented step of 
dipping into its own resources to fund a $600 million Tsunami 
Relief Fund.  The largest recipient, Indonesia, ended up 
receiving roughly $290 million from that Fund, so if the ADB 
were to announce $200-300 million for Pakistan earthquake 
relief, the amount would be roughly comparable.  Haugh 
mentioned the Tsunami Fund currently contained $30-40 million 
in unspent funds, which might be added to the Pakistan 
earthquake relief (aternatively, the fund might be 
re-designated the Asian Emergency Fund). 
 
10.  (SBU) Haugh noted that while the size of contributions 
was important, both for reconstruction and for sending a 
political message of support, what was equally important was 
the effectiveness of the aid--specifically, that it 
materialize quickly, and be spent within a year or two. 
Gujarat earthquake aid had been effective in this regard, 
particularly because there was good local institutional 
capacity to build on for rapid disbursement; tsunami 
assistance had been less effective.  Cash grants -- for 
rubble clearance and for housing -- would be critical.  Haugh 
noted that NWFP, whose capital Peshawar was not seriously 
damaged by the earthquake, would be in a much better position 
to administer assistance than AJK, whose capital Muzaffarabad 
was one of the worst hit cities. 
 
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IMF:  HAS OFFERED $375 MILLION EMERGENCY LOAN 
--------------------------------------------- 
11.  (SBU) The IMF's ResRep Henri Lorie (protect) confirmed 
press reports that IMF Managing Director Rato had, on a brief 
October 17 visit to Pakistan, extended a $375 million 
emergency assistance loan, with a 3-5 year repayment term and 
0.5 interest rate.  This amount would be roughly equivalent 
to 25 percent of Pakistan's IMF quota; extension of a Fund 
loan of this magnitude is fairly customary following major 
natural disasters (both Sri Lanka and the Maldives borrowed 
SUBJECT: PAKISTAN EARTHQUAKE:  MDBS GEARING UP FOR 
on these terms from the Fund after the tsunami, and Turkey 
did after its earthquake).  Lorie noted the GOP had been 
adamant with Rato it would not draw on such a loan if it 
would involve Post-Program Monitoring (PPM) (which had also 
been a sticking point when the GOP concluded its special IMF 
program in December 2004 -- and the Fund had relented). 
Rato had said given the generally sound state of Pakistan's 
macroeconomy, the Fund would not insist on PPM (Lorie noted 
this was a judgment call.  Since Pakistan is already 
borrowing close to 100 percent of its IMF quota, borrowing an 
additional 25 percent would push Pakistan's borrowing to the 
level where the Fund could insist on PPM, but given IMF 
confidence in the GOP's economic policy team, Rato did not 
think it necessary).   This exchange has already been 
reported in the Pakistani press, with Pakistan's refusal to 
accept PPM being characterized as a point of national honor 
(as was the "breaking of the begging bowl" associated with 
ending of the IMF program in 2005).  The GOP even asked the 
IMF for written confirmation of Rato's statement that the 
Fund would not insist on PPM--an odd request to make of the 
Fund Managing Director, Lorie noted, but one that would 
likely be addressed in Rato's letters to his GOP 
interlocutors thanking them for a productive visit.  This 
"victory" could give the GOP the cover it needs to draw on 
the IMF emergency loan. 
 
12.  (SBU) Mechanically, Lorie said no further IMF action was 
necessary to offer the loan; all that remained was for the 
GOP to send in a letter formally requesting it.  (Note:  we 
understand such a loan would require IMF board approval.  End 
note.)  Therefore, Lorie noted, it was possible that the Fund 
might choose the occasion of the Geneva conference to 
officially confirm it has extended such a loan to Pakistan. 
But Lorie noted the U.N. conference on relief was not really 
a Fund function, and he was not even aware if an IMF 
representative would attend. 
 
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IDB:  HAS ANNOUNCED AID PACKAGE TOTALLING $252 MILLION 
--------------------------------------------- --------- 
13.  During an October 23 meeting with Prime Minister Shaukat 
Aziz, IDB President Ahmad Mohammed Ali (accompanied by OIC 
SecGen Ekmeluddin Ihsanoglu) announced that IDB would provide 
$251.6 million to Pakistan as emergency assistance.  $1.6 
million of that amount would be grant funding; $50 million as 
a Sharia interest-free loan (but up to a 1.25% service charge 
on actual expenses); $100 million would be lease finance (for 
such things as equipment purchases) with a rate of 3.825 
percent, five-year grace period, and 25 year repayment term; 
and $100 million would be trade finance for the import of 
petroleum products, with a concessional rate of one year 
LIBOR (currently approx 4.4%) and 18 month repayment.  IDB 
Resident Rep Shahid Miah reported that IDB President Ali 
initially maxed out his individual authority by offering $11 
million in emergency assistance and then approached the IDB 
Board.  The IDB Board, "in the spirit of Ramadan," expanded 
the package to $251.6 million.  When asked about the 
relatively high interest rates, Miah explained that while not 
competitive with other MDBs, they were lower than what IDB 
normally charges (approximately 5% for petroleum products and 
5.1% for lease financing).  Miah also noted that OIC 
financing includes a preference for purchasing products from 
OIC countries, including in cases where lowest bids may be 
SUBJECT: PAKISTAN EARTHQUAKE:  MDBS GEARING UP FOR 
from non-OIC countries. 
 
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NEXT STEPS:  PREPARING FOR NOVEMBER 18 DONORS CONFERENCE ON 
RECONSTRUCTION 
--------------------------------------------- --------------- 
14.  (SBU) The MDBs and major donors have agreed on a needs 
assessment that will begin imminently.  Of the 15 functional 
areas the needs assessment will survey, the World Bank will 
take the lead on nine and the ADB will take the lead on six; 
GOP technical experts will participate in all the teams, and 
the project coordinators will meet on a weekly basis with de 
facto Finance Minister Salman Shah and Chairman of the new 
Earthquake Reconstruction and Rehabilitation Authority LTG 
Zubair.  The assessment team will present its report to the 
GOP on November 5.  That will be followed by a November 18 
Donors conference in Islamabad on reconstruction.   Prime 
Minister Aziz has already asked World Bank President Paul 
Wolfowitz to represent the Bank at that event, and has also 
invited Kofi Annan, who reportedly has plans to be in the 
region at that time. 
CROCKER