BI-WEEKLY REPORT ON ECONOMIC ISSUES, 29 JULY 2009

UNCLAS SECTION 01 OF 05 ISLAMABAD 001817



SENSITIVE

SIPDIS



REF: ISLAMABAD 885



E.O. 12958: N/A

TAGS: ECON, ETRD, EFIN, EAGR, EINV, ENRG, PREL, PK

SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, 29 JULY 2009



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TOP STORIES

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1. (SBU) Protesters held demonstrations and rallies in various

cities and towns throughout Pakistan over the 12 to 18 hours of

electricity load shedding (rolling blackouts). Protesters set fire

to passenger trains in Jhang and badly damaged more in Faisalabad

where a number of vehicles were also pelted with stones. In

Peshawar, protesters blocked the Peshawar-Kohat Road and the Grand

Trunk Road, disrupting the flow of traffic for several hours while

they shouted slogans against the government and the Pakistan

Electric Supply Company (Pepco). People in Islamabad, Rawalpindi,

Chakwal and Attock suffered enormous problems as transporters kept

their vehicles off the road to protest high fuel prices and in

support of a strike called against load shedding. (Comment: While

not nearly as disruptive as events in Karachi, Punjab government

officials have expressed concern about the mounting unrest in the

province, and the potential for the provincial government to become

a target. Politicians with other agendas may have taken advantage of

load shedding to urge their followers into the streets to settle

political scores.)



2. (SBU) The State Bank of Pakistan (SBP) reported that foreign

investment into Pakistan declined by 51 percent during fiscal year

2008-09. According to the report, FDI stood at USD 3.7218 billion

in fiscal year 2009 against USD 5.4098 billion in fiscal year 2008,

a decline of 31.2 percent, while the portfolio investment dropped

precipitously by 2,725 percent. (Comment: In addition to the

global financial crisis, domestic shocks such as the worsening law

and order situation, negative economic indicators and power

shortages have hurt foreign investment in Pakistan.)



3. (SBU) The current account deficit of Pakistan has decreased by 36

percent in fiscal year 2008-09. The State Bank of Pakistan (SBP)

revealed that the country has posted a current account deficit of

USD 8.861 billion in fiscal year 2008-09, compared to USD 13.866

billion in fiscal year 2007-08. The current account deficit as a

percentage of GDP has dropped to 5.4 percent in fiscal year

2008-2009 from 8.7 percent of GDP in fiscal year 2007-2008.

(Comment: This massive decrease is attributed mostly to higher

remittances and a decline in imports. However, 5.4 percent is much

better than the IMF projection for the current account deficit as

percent of GDP which was -6.5 percent.)



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4. (SBU) The Ministry of Water and Power announced a 24 percent

increase in the power tariff which it plans to implement in three

phases. The first phase is scheduled to commence on October 1, 2009

with a tariff raise of 8-10 percent. This will be followed by a 5-6

percent increase on January 1, 2010, and then another 5-6 percent in

April, 2010. Ministry officials told ECON that the cost of power

per unit is Rs 8.25, while the government is selling it at Rs 5.45.

(Comment: The GOP has promised the ADB, the World Bank and the IMF

before that it would increase the power tariff but has backed down

each time for political reasons. The circular debt issue cannot be

addressed without an increase in the tariffs. Although the ADB and

the WB have shown willingness to work with the GOP on the proposed

tariff rise, the IMF is still considering the plan and has not yet

given the final nod.)



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TRADE

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5. (SBU) On July 27, the Government of Pakistan unveiled its new

trade policy for fiscal years 2009-2012 (July-June) which will cover

incentives for non-textile exports (47 percent share in total

exports). A separate policy for textiles reportedly will follow.

The policy aims to grow exports by 29 percent over the next three

years and sets the export growth rate target at 6 percent for

2009-10 and 10 percent and 13 percent for each of the successive

years. (Comment: Given Pakistan's constrained budgetary means,

questions over the execution of the policy are likely to remain

until there is clarity on how much cash the GOP is willing to put

into the various incentive plans; it is unclear how much of the

necessary funds are captured in the recently passed FY 2009-2010

budget.)



6. (SBU) The Business Recorder reported that Pakistan could receive

access to Tajikistan through Afghanistan under the Afghan-Pakistan

Transit Trade Agreement (APTTA). President Zardari announced on a

visit to Dushanbe July 29 that the two countries agreed to exploit

the benefits of increased trade once Pakistan concludes the APTTA

agreement later this year. On signing this Agreement, Pakistan

would have access to Tajikistan through the territory of

Afghanistan. The access points into Tajikistan from Afghanistan

discussed Polekhumri-Ali Khanem and Polekhumri-Shir Khan Bandar.

(Comment: It is not clear at this stage on what terms Pakistan and



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Tajikistan will trade once APTTA is signed and press reports

indicate the two sides may be considering signing a separate,

parallel agreement. In 2008 Tajikistan exports totaled USD 1.4

billion and imports were USD 3.2 billion. Tajikistan's major

importing partners are Russia (32.1 percent),Kazakhstan (13.1

percent),China (10.8 percent) and Uzbekistan (8.4 percent). If

Pakistan gains trade access to Tajikistan, Pakistani exports will

have to compete with Russia and China for the USD 3.2 billion

market.)



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ENERGY, POWER AND WATER

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7. (SBU) Pakistan Electric Power Company (PEPCO) Managing Director

(MD) Tahir Basharat Cheema announced that PEPCO has launched 20 new

projects to ensure the availability of an additional 3,500MW of

electricity by the end of the calendar year. Cheema told press that

the introduction of a pilot automatic meter-reading system at Bhaati

Gate and Shadman in Lahore has reduced losses by 40 percent.



8. (SBU) According to Water and Power Development Authority (WAPDA)

data, heavy rains and snow melt have helped raise water levels in

the Tarbela reservoir by 96 feet since July 1. This improvement in

reservoir levels is welcome news. Tarbela is now just 47 feet below

maximum holding capacity and could top off by mid August. Mangla

reservoir has risen 21 feet since July 1, leaving it only 23 feet

below capacity. (Comment: This dramatic improvement in reservoir

levels since June bodes well, but substantial future river flows may

be lost because of the lack of additional reservoir capacity. Demand

for maximum power generation could result in rapid draining of the

reservoirs after the monsoon season, which could complicate efforts

to use hydroelectric power as means to address load shedding through

the end of the year.)



9. (SBU) In a meeting on July 24, the Executive Committee of the

Lahore Chamber of Commerce and Industry (LCCI) pressed a French

trade delegation for access to nuclear power plant technology, in

addition to other economic assistance. The delegation, headed by

French Minister for Foreign Trade Anne Marie Idrac, stressed that

France could only cooperate with Pakistan on nuclear safety and

security within the bounds of international law. Idrac did,

however, promise support on other energy and economic fronts.

(Comment: The increased load shedding has made nuclear energy a hot



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issue again, with Consulate Lahore personnel encountering pleas for

a nuclear deal in at least four gatherings during the week of July

20.)



10. (SBU) The GOP is planning to ration natural gas in the winter.

Sui Northern Gas Pipelines Ltd (SNGPL) Managing Director Rasheed

Lone told the press that SNGPL will upgrade existing gas meters to

limit natural gas consumption. When a consumer increases the usage

of gas appliances, the gas pressure will drop, preventing the use of

additional home appliances. Lone stressed that low-end consumers

would not be affected; the rationing would apply only to those users

paying over Rs. 10,000 per month for their natural gas bill.

(Comment: We understand that limiting consumers' access to natural

gas is part of the GOP strategy to ensure additional gas supplies

will be available for power generation - a means of reducing the

substantially higher cost of producing power from fuel oil and

narrowing the disparity between generation costs and the price the

GOP is willing to charge consumers for electric power. While the

GOP plan may be advantageous to the power generation industry and

the GOP balance sheet, consumers will likely hold a far more

negative view.)



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STOCK MARKET

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11. (SBU) The Karachi Stock Exchange KSE-100 Index closed at

7674.77, after losing 36.29 points on Tuesday, July 28, 2009.

Investors still remain concerned over the declining currency value

and further delay on the announcement of a new monetary policy. The

index is up 33 percent since the start of 2009 but down 51 percent

from its lifetime high of 15,676.34 on April 18, 2008.



12. (SBU) The Lahore Stock Exchange (LSE) was volatile throughout

July, but the LSE 25 Index still climbed 7.9 percent on the strength

of oil and banking stocks. Market capitalization was up 5.6

percent, and volume has been average all month.



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BUSINESS

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13. (SBU) Citibank is closing five branches in Pakistan (Multan,

Gujranwala, Sialkot, Jhelum, and Hyderabad) on September 1, reducing



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the number of branches from 23 to 18. According to a press release,

Citibank needs to direct its "human and financial capital and our

distribution channels ... towards a more streamlined and sustainable

business model. We are consolidating our business into a more

efficient network of branches, phone banking and state-of-the-art

online banking services in line with our 'clicks not bricks'

strategy."



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AGRICULTURE

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14. (SBU) Local media reported that the GOP imported USD 1 billion

worth of wheat in fiscal year 2008-2009, representing a 23 percent

increase from the previous year. GOP officials attribute the huge

import bill to high international wheat prices combined with

problems with hoarding and smuggling. (Comment: Despite having a

bumper crop of wheat in 2009, Pakistan was forced to import a large

amount of wheat over the winter months. High international prices

and hoarding/smuggling were reportedly the sources of the problem;

however, the main cause of the huge wheat import was GOP

mismanagement of the commodity.)



FEIERSTEIN