PAKISTAN ECONOMIC REPORT, MAY 7 - MAY 20

UNCLAS SECTION 01 OF 03 ISLAMABAD 001274



SENSITIVE

SIPDIS



E.O. 12958: N/A

TAGS: ECON, ENRG, EFIN, PK

SUBJ: PAKISTAN ECONOMIC REPORT, MAY 7 - MAY 20



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1. (SBU) Pakistan featured the following economic news over the last

two weeks:



* Federal Board of Revenue gets new Chairman.

* Supreme Court directs government to reduce oil prices

* Reduced imports shrink Pakistan's trade deficit

* Karachi Stock Market unchanged

* Lahore Stock Exchange up

* Traders' strike closes Islamabad shops on May 11

* Water outflow from Tarbela Dam exceeds its inflow

* Load shedding wreaks havoc on manufacturing in Lahore

* Robust wheat harvest increase government's purchase targets



TOP ECONOMIC STORIES

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2. (SBU) Federal Board of Revenue gets new Chairman. Retiring

Chairman of the Federal Board of Revenue, Ahmad Waqar, was replaced

May 18 by Sohail Ahmed, who was previously an Additional Secretary

at the Ministry of Finance for a short time, and held various

positions in the Punjab provincial government prior to that.

Comment: Normally the Chairman of the FBR also serves as Secretary,

Revenue Division, but Ahmed, who is fairly junior, will not hold the

latter position, according to an FBR official. Finance Ministry

sources speculate that Ahmad might have a PPP connection because he

was posted in the Finance Ministry for only a week before his

appointment as Chairman FBR. Finance Advisor Shaukat Tarin has

referred to Ahmed's appointment as a sign of his seriousness about

improving revenue collection, which has not met the GOP's

expectations this fiscal year.



3. (SBU) Supreme Court directs government to reduce oil prices. On

May 13, the Supreme Court directed the government to pass on lower

international petroleum prices to domestic users, warning that

failure to comply would compel the courts to intervene further. The

Business Recorder reported that Chief Justice Chaudhry directed the

Attorney General to seek instructions from the government regarding

reduction in prices of petroleum products for the people of the

country. Comment: In view of Pakistan's small tax base, the GOP

has depended on its Petroleum Development Levy as a significant

source of revenue. Collections this fiscal year are expected to top

Rs. 100 billion. It is expected that the GOP will lower prices by

about 10 percent in response to the high court's directive, but it

is unclear whether the Finance Ministry will comply before the end

of the fiscal year June 30.



4. (SBU) Reduced imports shrink Pakistan's trade deficit.

Pakistan's trade deficit fell from $16.8 billion to $14.1 billion

from April 2008 to April 2009 primarily due to a significant drop in

imports. Exports fell slightly as well. The Business Recorder

opined that this situation should be a wake-up call to senior

government officials, who had predicted earlier that exports would

increase by 10 percent in spite of the present economic situation.

Comment: The trade deficit has decreased by 15.9 percent due to a

9.7 percent decline in imports, not because of an increase in

exports. On the contrary, exports dropped by over 3 percent between

July 2008 and April 2009. The fall in exports reflects the effects

of energy shortages, high cost of borrowing and the global financial

crisis, which has impacted demand.



BANKING AND FINANCE

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5. (SBU) Karachi Stock Market unchanged. The Karachi Stock Exchange

(KSE) - 100 Index ended the week of May 15 at 7,177.64, up just

48.13 points over the previous week. Market capitalization

increased slightly from $26.41 billion to $26.46 billion. Net

foreign portfolio investment continued its decline with an outflow

of $11.0 million. The banking, energy, fertilizer and cement

sectors continue to be among the top performers. Comment: Post

contacts at the Karachi Stock Exchange said the continued portfolio

outflows highlight continuing institutional investor concerns

regarding the law and order situation.



6. (SBU) The Lahore Stock Exchange (LSE) 25 index was up, climbing

3.4 percent over the last two weeks, buoyed by successful military

action against the Taliban and relative calm in Balochistan and



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Karachi. Transaction counts were average, and there were an equal

number of winners and losers.



7. (SBU) Traders' strike closes Islamabad shops on May 11. The

Traders' Action Committee Islamabad called for a "shutter down" on

May 11 to protest the arrest of 43 of its members for their

involvement in disturbance in the city court, sparked by a

controversial eviction notice. The Nation reported that in

Islamabad "not a single shop" was open, greatly inconveniencing

residents. Comment: While most shops in Islamabad were closed

early in the day, many out of fear of retaliation by the Committee,

by evening the majority had reopened. The Secretary General of the

Traders Action Committee told Post that the absence of rent laws had

hurt business. Although disturbing court proceedings can be

punished by up to two years in prison, the judge held the protestors

for only 48 hours, so the action fizzled quickly.



ENERGY, POWER AND WATER

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8. (SBU) Water and Power Development Authority (WAPDA) data show

that outflows from Tarbela Dam have exceeded inflows since April 25.

The reservoir has dropped more than 20 feet in three weeks to 1,392

feet on May 14, just 23 feet above Tarbela's dead level. On May 10,

Lahore Electric Supply Company (LESCO) officials said they expected

load shedding (rolling blackouts) to ease next month as reservoirs

filled. Their hopes will be dashed if Tarbela's water level

continues to drop.



9. (SBU) Varying estimates of power supplies and demand resulted in

unscheduled load shedding in Lahore, wreaking havoc on

manufacturing, according to press reports. Several business leaders

told Lahore Econoff that unscheduled load shedding is crippling

small and medium sized enterprises, especially in the textile

industry. They added that even regularly scheduled load shedding

has dramatically increased the cost of production for larger

industrial units that run their own generators, making their

products less competitive.



AGRICULTURE

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10. (SBU) The Punjab Food Department and the Pakistan Agricultural

Storage and Services Corporation (PASSCO) expanded their response to

the robust wheat harvest by increasing their purchase targets to a

total of 8 million metric tons (MMT). South Asia

Partnership-Pakistan, a development and human rights NGO, claimed

that a survey covering 168 villages indicated that Punjab growers

may have as much as 10 MMT of wheat available for sale. Punjab

Chief Minister Shahbaz Sharif told Lahore Principal Officer May 2

that the province had adequate facilities for wheat storage (see

Lahore 087),but three days later the press reported that the Food

Department was renting private warehouses to supplement government

holding capacity for the duration of the buying season.



TAXATION

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11. (SBU) Lahore-based officials of the Federal Board of Revenue

(FBR) made headlines with dramatic tax enforcement actions. The

Business Recorder said FBR Lahore would recover some Rs 60 million

from three businesses as a result of their on-going crackdown on tax

evasion. Additional investigations are under way. Members of the

American Business Council told Principal Officer on May 13 that they

while they insist that their members pay all taxes, they felt that

many non-U.S. brands routinely dodged taxes. The leadership of the

Pakistan Industrial and Traders Association Front told Lahore

Econoff May 5 that its members were willing to pay taxes, but the

government should also broaden its tax base to include services and

agriculture.



DEVELOPMENT

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12. (SBU) Punjab Chief Minister Shahbaz Sharif said May 4 that the

"teeming millions" who believe that Pakistani elites are fleecing

the country at the expense of the lower classes are perhaps "not



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very far from the truth." The statement was part of his remarks to

the second meeting of the National Policy Platform for

Competitiveness and Economic Growth (NPPCEG),a project co-sponsored

by USAID and the Ministry of Finance. He called textiles Pakistan's

"most important link to industrialization" and argued that Punjab

agriculture was full of "missed opportunities." He added that his

vision for Pakistan includes small and medium sized enterprises

integrated in the global subcontracting and supply chain.



13. (SBU) Investment in Port Qasim. The Daily Times reported that a

second container terminal at Port Qasim Authority will be completed

in 2010 with the help of Dubai Port World, at an estimated cost of

$250 million. According to the Ministry of Ports and Shipping, the

government's port modernization plan includes coal clinker/cement

terminal, a liquids terminal, and liquified natural gas terminal.

The projects total over $1 billion, and will increase the port's

capacity by 20 million tons. Comment: A description of the

projects can be found at http://www.portqasim.org.pk.









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