PROCTOR AND GAMBLE GROUNDBREAKING CEREMONY;

UNCLAS SECTION 01 OF 04 KARACHI 000653

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON EINV SOCI PK
SUBJECT: PROCTOR AND GAMBLE GROUNDBREAKING CEREMONY;
AMBASSADOR MEETS KEY KARACHI OFFICIALS


1. (SBU) SUMMARY: Ambassador Patterson traveled to
PakistanQs largest city, Karachi, to attend the
groundbreaking of a new Proctor and Gamble (P&G) factory in
Port Qasim with Karachi Consul General on December 18. P&G
will hire 700 new employees to work in the plant and
estimates it may help to create up to 7,000 jobs.
Separately, the Ambassador met Adnan Afridi, Managing
Director of the Karachi Stock Exchange (KSE),who provided
a frank assessment of PakistanQs troubled stock markets.
The KSE dropped 13% in its first three days of trading
since the removal of the market floor imposed on August 28.
Afridi predicted a continued decline of an additional 30%-
40% in PakistanQs stock exchange but believes the market
will recover after a painful correction. Sindh Governor
Dr. Ishrat ul Ebad Khan received the Ambassador and CG at
the GovernorQs House and spoke to U.S. concerns about
recent ethnic violence in Karachi. The Ambassador also met
Chief Minister Syed Qaim Ali Shah and discussed PakistanQs
continuing economic problems. End Summary.

KarachiQs Beleaguered Stock Exchange
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2. (SBU) The Ambassador's meeting with KSE Director Afridi
took place at the Consul General's Residence because of
Afridi's concern about security. He was worried the
lifting of the floor on KSE stock prices earlier in the
week might result in violence by irate investors. Earlier
this year, there was a riot of money-losing investors in
Karachi's financial district following a stock market
plunge. Afridi also told the Ambassador that KarachiQs
financial district is on high alert because of NovemberQs
Mumbai attacks.


3. (SBU) Afridi described a variety of problems facing the
market including a lawsuit against the KSE, a loss of
public faith in the Government of Pakistan (GOP) due to its
wavering stance on helping the markets, and fading investor
confidence. Afridi, who studied economics and law at
Harvard, however, remains a strong believer in free
markets. The lawsuit was brought against the management of
KSE, the Security and Exchange Commission of Pakistan
(SECP),and the National Clearing Company by a group of
brokers seeking payment on margin accounts. Afridi
estimates that 70-80% of the stock market investment in
Pakistan comes from margin accounts. Unlike in the U.S.
where brokers fund margin accounts, in Pakistan the
borrowing is done through a third party. With the sharp
drop in Pakistan stock prices, many investors are unable to
cover their margin calls and the brokers are seeking
payments from the lenders to cover losses in margin
accounts. The courts have frozen the accounts named in the
law suits and the investors cannot liquidate their ccounts.
Afridi believes these lawsuits should be settled out of
court.


4. (SBU) When asked by the Ambassador how the proposed
government support fund might work in the stock market,
Afridi was not overly optimistic. He bemoaned the
government's credibility issue, recounting how when the
stock market began its decline in April, the Finance
Minister said funds would be made available to support the
market. Despite several government proposals involving
sums of PKR 20 to PKR 30 billion, no agreement was ever
reached. Then when Pakistan began discussions with the
International Monetary Fund (IMF) in October, the IMF
required that any support to the market would first require
consultation with the IMF. Late December 17, the IMF
agreed to allow Pakistan to provide PKR 20 billion (USD 250
million) to support the stock market through the purchase
of shares of seven state owned or managed enterprises. The
government plans to offer the shares to Pakistanis living
abroad. Afridi expressed concern that calling the program
a "stabilization fund" may raise investor expectations too
high. He is also concerned that local banks may not want
to get involved in the share purchase program. Afridi
stated "a lot of mistrust exists between the government and
the market." Afridi also thinks the government has become

KARACHI 00000653 002 OF 004


too involved in trying to fix all the economy's problems at
once. In sum, the governmentQs lack of credibility
combined with its perceived interference is scaring off
investors.

"Let the Market Forces Happen."
--------------


5. (SBU) Afridi believes the KSE has been hurt by Morgan
StanleyQs decision to remove Pakistan from its MSCI index.
On December 31, the removal will force many index funds to
sell Pakistani shares automatically, further depressing the
market since these funds simply invest in the index. He
told the Ambassador he had tried unsuccessfully to engage
Morgan Stanley on the issue. Afridi blames the media for
scaring investors away from the market, especially at the
present time when money needs to flow back into the market.
He is also concerned about investors who may lose their
homes and cars, pledged as collateral for loans to invest
in the stock market. He fears this could fuel social
unrest. Finally, when asked by the Ambassador if a
reasonable recovery was possible, Afridi was cautiously
optimistic: "We need to keep people alive for three to six
months and then a recovery may happen...We need to let the
market forces happen and then there will be a recovery."

Proctor and Gamble Betting on Pakistan's Future
-------------- --------------


6. (SBU) Karachi's Port Qasim Industrial Zone has been
under development for the past 15 years and includes 112
ongoing commercial and industrial projects.
Other than the DHS cargo scan facility, however, no
American firm has located in Port Qasim. Proctor and
Gamble's (P&G) decision to locate a plant in Port
Qasim is viewed as a vote of confidence in PakistanQs
future. P&G plans to begin bulk packaging of diapers at
the plant and production of laundry detergent when it is
completed in 2010. Initially the production will be
marketed in Pakistan but eventually, P&G hopes to use the
factory for exports. Laurent Phillipe, P&G's Director for
Europe, the Middle East, and Africa pointed out that P&G
will only use one-third of the 25 acre site initially.
P&G is optimistic about its future in Pakistan and believes
it will need the additional room to expand. He told the
Ambassador the plant will initially employ 700 people but
he hopes up to 7000 jobs could result in the area as a
result of the plant's presence.


7. (SBU) Earlier this year, one P&G employee was killed
and three were wounded in Hub, Balochistan. P&G is now in
the process of shifting their operations from Hub to Port
Qasim. P&G had a large turnout of corporate and
government leaders including Qaisar Shareef, the Country
Manager for P&G and Shaukat Tarin, Advisor to the Prime
Minister on Finance, Revenue, and Economic Affairs. In her
remarks, Ambassador Patterson called the groundbreaking "a
good news day in U.S./Pakistan relations." She noted the
plant's potential to provide affordable local products to
replace expensive imports and as a place where youth can
begin a career in Pakistan. She also called upon the
Pakistani Government to lower duty rates on imported
materials to help create jobs in Pakistan. In closing she
reminded the audience that the U.S. is Pakistan's largest
trading partner and foreign investor.

Peace Committees Formed to Ease Tensions
-------------- --------------


8. (SBU) The Ambassador met with Sindh Governor Dr.
Israt-ul-Ebad Khan to learn his views on the recent ethnic
violence and current situation in Karachi. The Governor
acknowledged that local investors are hesitant due to
the security situation in the city and opined that Foreign
Direct Investment (FDI),such as the P&G investment at Port
Qasim lend stability to Pakistan and encourages local
investors to remain. Khan acknowledged that the harsh
economic situation coupled with ethnic tensions make the

KARACHI 00000653 003 OF 004


population susceptible to manipulation by those seeking to
foment unrest in the country. He said the demonstrations
in October provided a catalyst for the Governor to meet
with contacts throughout Karachi society. Peace Committees
were established to discuss difficult issues and defuse
tensions before they escalate into demonstrations and
violence. The Committees, comprised of a mix of sectarian
and political representatives, will meet on an on-going
basis. "We must have constant dialogue," he noted, "to
encourage and ensure reporting of suspicious activities in
the communities."


9. (SBU) Governor Khan said, "It is the duty of political
parties to influence their communities to tolerance," and
noted that the ANP appears to have very little actual
ground control of the Pashtun community. Khan believes the
Pashtuns do not want trouble with their neighbors, but seek
only to make an income and live peacefully. "It is not
necessarily a fight between ethnic groups," Khan said. The
people of Karachi had high hopes for the ANP to represent
their constituents as a secular party, but the leadership
has proven to be dishearteningly incompetent, Khan opined,
adding that the ANP must tackle the issue of ethnic
tensions head on.

Inflation is at the Heart of the Food Shortage
-------------- --------------


10. (U) When questioned about the food supply in rural
Sindh, the Governor responded that the actual food supply
is sufficient for the population. However, food costs have
escalated to two or three times the pre-election cost while
salaries have remained the same, creating an artificial
food shortage. The housing market has gone flat in
Pakistan and unemployment has risen, meaning the average
family can afford less of the basic necessities. The
Governor said he believed it is the combination of economic
pressures which make Karachi susceptible to ethnic
tensions.

Chief Minister Shah Offers Congratulations on Recent
Presidential Elections
-------------- --------------


11. (SBU) Chief Minister (CM) Syed Qaim Ali Shah offered a
congratulatory message to Ambassador Patterson on the
outcome of the November presidential election in the United
States in a December 18 meeting. CM Shah expressed thanks
for the USG's efforts to decrease tensions between Pakistan
and India following the Mumbai terrorist attacks. Shah said
Pakistan was shocked at the horrible attacks and had great
sympathy for India, noting that "Karachi has remained
peaceful since this government came into service."
Pakistan has followed the USGQs recommendation to restrict
Jamaat ul-Dawa (JuD) activities, he advised. Twenty-six
people have been detained thus far. CM Shah acknowledged
the Ambassador's comment that JuD had many charitable
elements and said he was confident the government had the
capacity to run the schools and hospitals supported by the
group, though there were not many such elements in
Sindh.


12. (SBU) Addressing the law and order situation in
Karachi, the CM said that the situation was not tense, but
in a city as large as Karachi there will always be
concerns. Shah said he believed that the continued
emigration into Karachi is evidence that the city is
stable. However, Pakistan does need a lot of help with
development. The Government of Pakistan (GOP) appreciated
U.S. assistance with direct and indirect investment, but
needed continued help to tackle unemployment, increase
education, and promote good health and hygiene in efforts
to eliminate poverty. Under the previous GOP, 1600 schools
were closed; those have reopened over the past year; the CM
said that the number of girls in school has increased due
to incentives offered to families for enrollment, such as
scholarships for books and clothing. In 2009, for the
first time, a meal will also be offered at school. The

KARACHI 00000653 004 OF 004


greatest assistance need for interior Sindh remained
disease prevention due to extreme poverty. CM Shah advised
that throughout Pakistan there was a dire need for police
training and outfitting; the equipment in use was outdated
and insufficient to meet the needs of a people under
terrorist threat.


13. (SBU) Comment: P&G's decision to enter the Pakistan
market at a moment when so many investors are withdrawing
is an important symbol of U.S. commitment to support
Pakistan's economic development. We will look for
opportunities to highlight their presence as we work to
reinforce our message that U.S. interests in the country
transcend the global war on terror.
FAKAN