ECONOMY CONTINUES DOWNWARD SPIRAL AND FUEL PRICE HIKES

UNCLAS ISLAMABAD 002470

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EAID EFIN ENGY PK
SUBJECT: ECONOMY CONTINUES DOWNWARD SPIRAL AND FUEL PRICE HIKES
SPARK PROTESTS


1. (U) Summary: Pakistan's major economic indicators continue to
trend downwards with the current account deficit reaching a record
high, foreign investment dropping significantly and speculative
stock exchange trading causing price volatility and investor losses.
On July 21, the GOP implemented a 14 percent price hike on fuel,
leading to a transporters strike which crippled Karachi. End
Summary.

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ECONOMY
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2. (U) Current Account Deficit Reaches a Record Level:
Pakistan's current account deficit has widened by 103.7 percent to
USD 14 billion and reached 9.4 percent of GDP in the FY 2008, mainly
due to a large increase in the trade deficit and slow foreign
inflows. The current account deficit exceeded the GOP target of 5
percent of GDP by a wide margin and is also higher than the State
Bank of Pakistan's (SBP) projection of 7.8 percent of GDP in FY2008.



3. (U) Foreign Investment Declines by 38 percent in 2008:
Net foreign investment decreased by 38.4 percent to USD 5.19 billion
in FY 2008 from USD 8.42 billion the previous year due to a massive
drop in portfolio investment. The portfolio investment dropped by
98.8 percent to USD 40.1 million in FY2008 from a high of USD 3.28
billion in FY2007.


4. (U) SBP Governor Says Karachi Stock Exchange (KSE) Trading
Largely Speculative: The KSE 100 index, which stood at 1,520
points, with total market capitalization of Rs. 394 billion (USD
5.54 billion) in FY 2000, reached the level of 15,676.34 points by
April 18, 2008, with total market capitalization of Rs. 4,790.98
billion (USD 67.4 billion). The KSE 100 Index has since dropped
significantly and currently stands at 10679.43 points. The Governor
of the State Bank of Pakistan, Dr Shamshad Akhtar, remarked that the
Pakistani equity market lacks depth and continues to be small and
narrow with high price volatility and speculative trading. Akhtar
further stated that listed commercial banks constitute around 26.5
percent of the KSE-100 index and are major drivers of growth in
market volumes.

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ENERGY
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5. (U) Petroleum Price Increase: On July 20 the Government of
Pakistan (GOP) announced an immediate 14 percent petroleum price
hike to Rs 86.66 per liter, a 17 percent price hike for diesel to Rs
64.64 per liter and a 16 percent price hike for kerosene oil to Rs
58.37. With four price increases since April, the coalition
government has increased local prices by 32 percent. The GOP noted
that the increases were necessary to move domestic prices to closer
parity with international fuel prices and to reduce the subsidies
burden on the government by Rs 4 - 5 billion (USD 57 - 71 million).

6. (U) Transporters Strike: Media reports that transporters in
Karachi went on strike on July 22 and kept over 20,000 buses and
vans from providing service to Karachi's 15 million residents.
Transporters in Islamabad and Rawalpindi plan to strike on July 24
if they are not allowed to raise fares. The majority of citizens in
Pakistan rely upon private transporters for commuting to work.
While the state owned domestic refineries and distribution
intermediaries are making windfall gains in the wake of rising oil
prices, Pakistani consumers and private transporters are struggling
to survive.

7. (SBU) Comment: With current expenditures of USD 552 million per
month on fuel subsidies, the GOP must continue to increase domestic
prices regardless of how unpopular these measures are with the
public. As the economy continues to spiral downward, the GOP lacks
a coherent strategy to halt the economic freefall and investors
continue to flee. End Comment.