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Cablegate: How Pakistan's Economic Troubles Affect Afghanistan

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PP RUEHIK RUEHPOD RUEHPW RUEHYG
DE RUEHBUL #2968/01 3140955
ZNR UUUUU ZZH
P 090955Z NOV 08
FM AMEMBASSY KABUL
TO RUEHC/SECSTATE WASHDC PRIORITY 6098
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC 0681
RUCNAFG/AFGHANISTAN COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEKJCS/OSD WASHINGTON DC
RUEKJCS/JOINT STAFF WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RUEABND/DEA HQS WASHINGTON DC
RHMFIUU/HQ USCENTCOM MACDILL AFB FL
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUEAIIA/CIA WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 KABUL 002968

DEPT FOR SCA/FO, SCA/RA, AND SCA/A
DEPT PASS AID/ANE
DEPT PASS USTR FOR GERBER AND KLEIN
DEPT PASS OPIC FOR ZAHNISER
DEPT PASS TDA FOR STEIN AND GREENIP
USOECD FOR ENERGY ATTACHE
CENTCOM FOR CSTC-A
NSC FOR JWOOD
TREASURY FOR LMCDONALD, ABAUKOL, BDAHL, AND MNUGENT
OSD FOR SHIVERS
COMMERCE FOR DEES, CHOPPIN, AND FONOVICH

SENSITIVE

SIPDIS

E.O. 12958 N/A
TAGS: ECON EFIN AF PK
SUBJECT: HOW PAKISTAN'S ECONOMIC TROUBLES AFFECT AFGHANISTAN

REF: J. WOOD-DELL EMAIL OF 10/8/08

1. (SBU) Summary. Afghan exporters are complaining about the impact
of depreciation of the Pakistani rupee on their bottom lines.
Meanwhile, Afghan importers are taking advantage of the same
situation, reportedly stocking up on imported goods to sell later
if/when domestic prices rise. Pakistan's economic difficulties are
thus already having a negative impact on Afghanistan's balance of
payments, though it is too soon to quantify this. The extent of the
macro impact on Afghanistan depends on how protracted and severe the
crisis next-door will be. Most contacts expect the situation in
Pakistan to stabilize before Afghanistan suffers major damage.
These and other bilateral economic issues will be discussed at the
Joint Economic Committee meeting tentatively set for November 25-26
in Kabul. End summary

2. (SBU) Afghan economic policymakers are beginning to consider, and
some are worrying about, the impacts on the Afghan economy of
current economic difficulties in Pakistan. Sorting out the
macroeconomic impacts is not easy, given both positive and negative
effects, the prevalence of informal economic ties, the uncertainty
of the course ahead for Pakistan, and weak statistical
capabilities.

3. (SBU) Afghan exporters are already dealing with and angry about
the depreciation of the Pakistani rupee against the afghani.
According to the head of the Export Promotion Agency of Afghanistan
(EPAA), Suleman Fatimie, Afghan exporters try to secure a certain
value for their sales in U.S. dollars, to which the afghani is
virtually pegged. (Note: the rupee has declined from about 60 to
the dollar one year ago to over 80 now.) He says that owing to
depreciation of the rupee, exporters are earning 30 percent less in
dollar/afghani terms for their goods than they did one year ago.
EPAA is especially concerned about the impact on exports to Pakistan
of carpets and fruits and vegetables, from which Afghanistan earns
an estimated $300 million per year, roughly 3 percent of its (licit)
GDP.

4. (SBU) Pakistan is obviously crucial to Afghanistan's
international economic fortunes, given the importance of transit
trade, though Fatimie points out that of total Afghan exports to
Pakistan, 70 percent are destined for end-use in the Pakistani
market and just 30 percent for transit to third markets. He fears
things could get even worse if Pakistan should face default. Should
recession in Pakistan reduce total demand for Afghan goods, the
effects could, indeed, go beyond the financial impact of rupee
depreciation. But Fatimie says the GIRoA does not yet have data
showing a drop in the volume of Afghan exports to Pakistan.

5. (SBU) The trade impacts are, of course, not solely, and maybe not
even mainly, negative. Rupee depreciation should help to moderate
inflation in Afghanistan, which has been running at almost 40
percent year on year. Afghanistan already has a large trade deficit
with Pakistan, suggesting that the positive currency effect on the
import side could outweigh the negative currency effect on the
export side. Even exporters, many of whom rely on imported inputs
from Pakistan, should enjoy this benefit. Afghan consumers could
enjoy a break from recently soaring food prices (assuming Pakistan
is able to maintain food exports).

6. (SBU) As elsewhere, consumers and importers are less well
organized than producers. In the face of exporter pressure, EPAA
organized an October 23 forum for them to present their concerns to
Minister of Commerce and Industry (MOCI) Farhang, who agreed to
relay their concerns to the full cabinet. According to Fatimie, the
GIRoA will also raise concerns about rupee depreciation in the
Afghanistan-Pakistan Joint Economic Committee, now scheduled to meet

KABUL 00002968 002 OF 002


in Kabul November 25-26. That would presumably require support from
the Finance Ministry, which co-chairs the GIRoA delegation with
MOCI, but a deputy minister we consulted at MOF seemed unconcerned
about the macro impacts of Pakistan's difficulties and said he had
not heard complaints from any exporters.

7. (SBU) According to the IMF resrep, Pakistan's troubles are
already causing both Afghanistan's bilateral trade deficit with
Pakistan and its global current account deficit to widen. Afghan
importers, he says, are taking advantage of rupee depreciation to
stock up on imported goods, including food, which they will sell
later in the winter when prices for these goods rise. The volume
effect outweighs the cheaper afghani price of imports, producing a
net increase in the value of imports. Remittances from Afghans
living in Pakistan, an important component of capital inflows here,
will decline, exacerbating the balance of payments impact.

8. (SBU) Our contacts here agree the extent of the impact on
Afghanistan depends on how protracted and severe the crisis is
next-door. According to EPAA's Fatimie, a full-blown debt crisis in
Pakistan "would take Afghanistan down with it." The IMF resrep
agrees that a real implosion would be "devastating" to Afghanistan,
but he does not/not believe that is the most likely scenario. He is
optimistic that the GOP and IMF will agree on a new Fund program
that will stabilize the Pakistani economy and thus limit, in time
and extent, the negative consequences for Afghanistan.

WOOD

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