146991            3/24/2008 11:30          08ISLAMABAD1269 Embassy Islamabad      CONFIDENTIAL//NOFORN            07ISLAMABAD2873|07ISLAMABAD3694|07ISLAMABAD4817|07ISLAMABAD5328|08ISLAMABAD105|08ISLAMABAD191|08ISLAMABAD228|08ISLAMABAD288|08ISLAMABAD392|08ISLAMABAD924            "VZCZCXRO2730

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P 241130Z MAR 08

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TO RUEHC/SECSTATE WASHDC PRIORITY 6057

INFO RUEHBUL/AMEMBASSY KABUL PRIORITY 8333

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RUEHKP/AMCONSUL KARACHI PRIORITY 9347

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RUEHPW/AMCONSUL PESHAWAR PRIORITY 3841

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RUEKJCS/SECDEF WASHINGTON DC PRIORITY"         "C O N F I D E N T I A L SECTION 01 OF 02 ISLAMABAD 001269

SIPDIS

NOFORN

SIPDIS

E.O. 12958: DECL: 03/24/2028

TAGS: PREL, PGOV, MASS, MARR, PK

SUBJECT: CSF AND THE POTENTIAL FOR CIVIL-MILITARY TENSION

REF: A. ISLAMABAD 105

B. ISLAMABAD 191

C. ISLAMABAD 228

D. ISLAMABAD 288

E. ISLAMABAD 392

F. ISLAMABAD 924

G. 07 ISLAMABAD 2873

H. 07 ISLAMABAD 3694

I. 07 ISLAMABAD 4817

J. 07 ISLAMABAD 5328

1.   (C) Summary: Coaliton Support Fund (CSF) reimbursements are a major political and economic factor in our bilateral relations with Pakistan. On the military side, the recent publicity about CSF claims, largely resulting from congressional hearings, has prompted concern that reimbursements will be more closely reviewed and therefore decline.  Meanwhile, an increase in operational tempo and the military's belief that it should receive higher reimbursements for what one officer called ""the cost to Pakistan of doing business with the U.S."" is creating record-level claims that threaten to exceed authorization limits.  Indeed the monthly claim for January 2008 exceeds $200 million-a rate that if annualized would be more than double CSF's authorization for FY 2008.  On the political/economic side, a new civilian government we want to succeed is taking over.  It is facing both the need to deliver on campaign promises to increase social spending and a cash crunch. The temptation for the new coalition government to tap CSF for non-military purposes will be high; if we are going to consider ways to improve the implementing mechanisms of CSF, the time to act is now.  End Summary.

A STRUGGLING ECONOMY AND A NEW GOVERNMENT

2.    (C) Over time, Pakistan's government has become increasingly dependent on the nearly $1 billion per year in

CSF reimbursements. Greater scrutiny of CSF payments has coincided with a GOP cash crunch.  This is largely a result of the government's unwillingness to adequately raise fuel prices and cut energy subsidies while increasing infrastructure spending.  For the first quarter of Pakistan's current fiscal year (July-September), Pakistan's fiscal deficit was $2.53 billion, of which Pakistan funded $589 million through loans, grants and other financial sources outside Pakistan.  CSF claims as submitted are equivalent to 48 percent of the externally-financed portion of the budget shortfall and 11 percent of the total budget shortfall.

3.    (C) Because of greater scrutiny, the delay in reimbursing the March - June 2007 CSF claims, paid on February 25, 2008, combined with the projectization of the $200 million budget support payment has exacerbated Pakistan's fiscal straits.  As a result, the GOP is increasingly concerned about its ability to meet its budgetary obligations.  The GOP raised fuel and electricity prices on March 1 for the first time in over a year in an attempt to reduce the growing cost of energy subsidies. However, the GOP is increasing food subsidies and facing a $1 billion revenue shortfall.

4.    (C) Pakistan is undergoing a transition from a government controlled by the military - through President/General Musharaff and his hand-picked Prime Minister - to one where Musharraf is a civilian president, the PPP controls the prime ministry, and the military has promised to recede from politics.  The new coalition government will be seeking new sources of revenue to pay for social programs promised in the campaign; the large military budget and the CSF payments will be a tempting target to mine.

5.    (C) The Pakistan People's Party (PPP) finance expert, Syed Naveed Qamar, has been briefed on CSF reimbursements and asked Ambassador (Ref F) if the U.S. could ""give the government the money by June 30 so that the new civilian government would have the funds by the end of its current fiscal year and thus avoid additional borrowing to balance its books.""  Qamar expressed skepticism of the military's CSF claims and asked the U.S. to increase oversight and ensure that ""claims were not over-inflated or siphoned off into private coffers."" The presumptive Pakistan Muslim League-N (PML-N) Finance Minister also expressed his conviction that the military budget should be more transparent and subject to parliamentary scrutiny.

GROWING PRESSURE ON THE MILITARY

6.    (C) At the same time the Pakistani military has become increasingly anxious about the long-term viability of CSF. They are aware of the scrutiny CSF faces in the U.S. Congress and the possibility that civilian officials in the incoming Pakistani government may want to divert CSF funds for non-military purposes.

7.    (C) During recent high level exchanges senior Pakistani military officials expressed concern about the future of CSF, arguing that it would not be possible to sustain the current force levels and operational tempo in the FATA without it. Post received a record CSF claim for December of $155 million which projects to an annual rate of $1.8 billion, a level which would exceed the legislative authority.  The January 2008 claim exceeded $200 million.

8.    (C) The Pakistanis argue that the increase in tempo should be accompanied by corresponding increases in the value of reimbursements. The risk of ""hollowing out"" the Pakistani military by failing to ensure units conducting combat operations are recapitalized is a growing concern. Additionally, the Pakistanis have continued to argue that CS  should be used to pay a subsidy for basic soldier compensation as well as for benefits for deaths and injuries. They cite the recent assassination of the Army's Surgeon General as further evidence of the increased costs associated with partnering with the U.S. in the War on Terror. According to them, the loss of yet another senior officer has resulted in a new requirement to purchase armored cars to protect all of its general officers.

9.    (C) Comment: If CSF is going to be reformed it must be done soon. Delaying much longer threatens to create tension between a civilian government we are eager to support and a military that plays a vital role in the fight against extremism.  It is time to manage expectations on both sides and update implementing mechanisms for CSF.  Embassy has already written the major political parties offering briefings on our assistance programs, and will brief the new government in detail on CSF as soon as it comes into office. End Comment.

BODDE

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