TAKING THE KARACHI BUSINESS COMMUNITY'S PULSE

C O N F I D E N T I A L SECTION 01 OF 02 ISLAMABAD 000470 SIPDIS SIPDIS E.O. 12958: DECL: 01/28/2018 TAGS: ECON EINV EFIN PREL PK SUBJECT: TAKING THE KARACHI BUSINESS COMMUNITY'S PULSE REF: (A) Islamabad 228, (B) Islamabad 288, (C) Islamabad 4400 Classified By: DCM Peter Bodde, Reasons 1.4 (b),(d) ¶1. (C) SUMMARY: Econ Counselor and Econoff traveled to Karachi to meet with a broad section of Karachi's dynamic business community. The overall consensus was that 2007 had been a good year for business in spite of repeated political turmoil and violence. Concern over lack of law and order and the February 18 elections are on everyone's mind. The election results and the new government's economic policy will be crucial in determining whether Pakistan's economy will continue to grow. Infrastructure, energy needs, export diversification and development of human capital were seen as key areas needing to be addressed by the government. END SUMMARY. -------------- "Not Bad for a Bad Year" -------------- ¶2. (C) Econ Counselor and Econoff traveled to Karachi, January 22-25 and met with the Karachi Chamber of Commerce and Industry (KCCI),the American Business Council (ABC),the 21st Century Business and Economics Club, the Karachi Stock Exchange (Ref C),Standard Chartered Bank, and JPMorgan Chase. The Karachi business community took recent violence in their city in stride and is confident about its ability to bounce back. Almost all our interlocutors referred to the "resilience" of the Karachi business community. Most of these business owners and leaders have lived in Karachi either all their lives or for many years and are thoroughly acclimated to its volatile nature. Many said they had seen worse violence during the years of aggravated sectarian strife during the 1990s. Most had had a good year in terms of growth and revenue, and opined that the damage ensuing from the violent flash points of 2007 could be absorbed by the economy. The KCCI concluded that 2007 had been "not bad for a bad year." -------------- Top Concern: Law and Order -------------- ¶3. (C) Regarding the violence following the December 27 assassination of Benazir Bhutto, most of our interlocutors were very critical of the city, provincial and national governments for their lack of preparedness for violent demonstrations, vandalism and hooliganism. The government's response was much too slow, as law enforcement had little to no presence during the first 48 to 72 hours of violence. The ABC was particularly skeptical of the law enforcement response should violence break out after the February 18 elections. Badar Kazmi, President of Standard Chartered Bank, one of Pakistan's largest banks, told Econ Counselor and Econoff that he thought local businesses had gotten big enough to "weather the storm" and could bounce back from losses incurred during the rioting. The business community's main concern is that violence not be repeated. Diamant Textiles magnate Zubair Motiwala opined that the violence was coordinated and preplanned (septel). ¶4. (C) The ABC told Econ Counselor and Econoff that they had raised their law and order concerns during a set meeting with Caretaker Prime Minister Soomro, on January 17. The Prime Minister promised that a law enforcement liaison to the business community at the Provincial Deputy Inspector General of Police level would be appointed to deal with future violence targeting businesses. The ABC has a meeting scheduled with the governor of Sindh on January 31 where they will also raise their law and order concerns. The KCCI raised similar concerns with the GOP and was advocating for a law enforcement liaison and better policing for the industrial zones where much of the damage in December occurred. ¶5. (C) Majyd Aziz, a prominent Karachi business leader, told Karachi CG that over the next few weeks, over 250 of the biggest industrialists in Sindh would begin openly supporting the Muttahida Quami Movement (MQM) party which rules Karachi by holding parties and rallies and raising money for them. (COMMENT: Most of these industrialists were staunch supporters of Musharraf on the basis that the economy has flourished under his rule. MQM was a coalition partner with Musharraf's Pakistan Muslim League Party in the last government but appears to be keeping its options open as the February parliamentary elections approach.) -------------- Outlook -------------- ISLAMABAD 00000470 002 OF 002 ¶6. (C) Most Karachi businessmen agreed that it had been a good year "in spite of everything", but are concerned about the outcome of the February 18 elections. If the elections are not conducted smoothly and a new government is not formed quickly, Pakistan's economy will be headed for trouble. At a meeting with the 21st Century Business and Economics Club (a group of local business leaders),the members told Econ Counselor that in an election year the government would not be making any decisions. They were also concerned that the newly-elected government would find it difficult to make difficult economic decisions, particularly raising commodity prices. If the elections on February 18 go smoothly, then the economy could get by, but if the problems persist after the elections the market would see an increased loss of investments, both foreign and domestic. ¶7. (C) At several meetings, our interlocutors commented that the government had no economic road map, and that its position was a defensive one. ABC pointed to the problem of slow reimbursements for the oil marketing companies, including Chevron and AES. Standard Chartered Bank's Badar Kazmi said that Pakistan's politicians need to understand the importance of the economy. He thought that the government had done some positive reforms, and that the common people were aware of this in spite of the difficulties brought on by inflation, but he was concerned that a new government might not continue the reforms or pay enough attention to economic policy after the elections. He also felt that investment in infrastructure and human resources -- particularly education -- were lacking. Lack of export diversification and the continuing and worsening energy crunch were also major weaknesses noted by all. Several of the KCCI Executive Board bemoaned the worsening export market for Pakistani textiles but did not offer any constructive solutions. Rather, they criticized the U.S. and Europe for not extending their trade preference programs. ¶8. (C) The KCCI Secretary Anjum Nisar and Arif Habib, Chairman of Arif Habib Securities, both expressed concern that a U.S. recession would affect Pakistan's growth as well, given that the U.S. is Pakistan's biggest single country export market. However, Habib opined that the recent Federal Reserve rate cut would help out with Pakistan's domestic credit crunch caused by excessive government borrowing. The Fed rate cut will make it cheaper for Pakistani businesses to obtain funding internationally than domestically. ¶9. (C) The increasing fiscal and current account deficits combined with increased international commodity prices were concerns voiced by many of our interlocutors. While praising the independence and candor of the State Bank of Pakistan (SBP) Governor, they criticized the GOP for not anticipating this problem sooner. Others voiced concerns over the narrow tax base, and the fact that agriculture and services - which together comprise almost 75 percent of Pakistan's GDP - are virtually untaxed, while some sectors bear the majority of the tax burden. The combination of the increased deficits, higher commodity prices, and a narrow tax base will not leave the new government much room to be fiscally responsible and implement sweeping new programs. -------------- Comment -------------- ¶10. (C) Comment: The Karachi business community was in surprisingly good spirits in spite of the turmoil of 2007, especially post-December 27. They seem to take their own resilience for granted, despite increasing concerns about the government's ability to maintain law and order. Their optimism falters on the subject of a new government post-February 18 and what its political stability and economic policies will be. They have seen the economy progressing in the past several years and are apprehensive about whether it will continue. Few of our interlocutors speculated about how the elections would go or what a new government would look like and the effects on their businesses. End comment. PATTERSON