BI-WEEKLY REPORT ON ECONOMIC ISSUES, 12 AUGUST 2009

UNCLAS SECTION 01 OF 06 ISLAMABAD 001905



SENSITIVE

SIPDIS



REF: ISLAMABAD 1817



E.O. 12958: N/A

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

SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, 12 AUGUST 2009



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TOP STORIES

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1. (SBU) The International Monetary Fund (IMF) approved an

additional USD 3.24 billion for Pakistan and increased the country's

Special Drawing Rights (SDR) from 500 percent to 700 percent,

pushing total assistance up to USD 11.33 billion from USD 7.6

billion. The IMF completed its second review of Pakistan's economic

performance and extended the Stand-By-Arrangement (SBA) through

2010. The Fund has agreed that Pakistan can use a portion of the

new funding to finance priority spending until the disbursements of

donor support pledged for 2009-2010 are received. Pakistan would

also benefit from the proposed allocation of Special Drawing Rights,

which, once approved, would supplement its reserves. (Comment: The

additional amount committed by the IMF will relieve pressure on

Pakistan's budget. The IMF funding will help cover the expected

shortfall in tax collection due to an economic slowdown, increased

costs for IDPs and "delays" in the Friends of Democratic Pakistan

pledged funds releases.)



2. (SBU) In its August review, the IMF lowered its GDP growth

estimate for the country for FY 2009-2010 from 3.3 percent to 3

percent noting that Pakistan's growth has been slow, especially in

the manufacturing sector. The agriculture sector, buoyed by a

bumper wheat crop, helped maintain positive GDP growth. Inflation,

particularly for food, has continued to decline, though it still

remains high with core inflation at just below 16 percent in June

2009. The exchange rate has been relatively stable in recent

months, and international reserves increased to USD 8.3 billion in

July, compared to USD 3.5 billion at end-October 2008. The GOP

continues to predict 3.3 percent GDP growth for this current fiscal

year. (Comment: Industrial growth will remain a drag on the GDP

growth rate in FY 2009-2010 as it will be a difficult task to

reverse the negative 8 percent growth rate from the last fiscal year

to the GOP project 1.8 percent for this current fiscal year.)



3. (SBU) Advisor to the Prime Minister on Finance Shaukat Tarin was

elected senator (unopposed) and sworn into office on August 7,

elevating him to the title of Federal Minister of Finance. Syed

Naveed Qamar replaced Dr. Asim Hussain as the new Minister of

Petroleum and Natural Resources also on August 7. Qamar will be

dual-hatted, retaining his current post of Minister of

Privatization.



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4. (SBU) According to Dawn, the federal government borrowed Rs 121.7

billion (USD 1.5 billion) for budgetary support during the first

three weeks of current fiscal year 2009-10 to cover rising

expenditures and a shortfall in revenue collection due to slow

economic activity in the country. FBR collected Rs. 74.077 billion

(USD 892 million) during July 2009 against the target of Rs. 78

billion (USD 940 million),reflecting a shortfall of Rs. 3.923

billion (USD 47 million). (Comment: The increased borrowing from

the banking system is likely to crowd out private sector credit,

which will negatively affect private sector growth, particularly in

manufacturing.)



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BANKING AND FINANCE

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5. (SBU) On August 1, The News reported that the State Bank of

Pakistan (SBP) signed a Memorandum of Understanding (MOU) with

Tameer Microfinance Bank (TMB) stating that the SBP will provide Rs.

82 million (USD 988,000) to TMB for one year. State Bank Governor

Syed Salim Raza commented that the facility would help TMB launch

branchless banking operations and build its institutional capacity.

The SBP has developed a National Microfinance Strategy which is

expected to provide microfinance outreach to 3 million clients by

2010 and 10 million by 2015. The strategy is intended to enhance

the microfinance sector's sustainability and help it raise its

capital base and human resource capacity. (Comment: A Tameer Bank

official confirmed the article and applauded the State Bank

Governor's efforts at enhancing microfinancing facilities.)



6. (SBU) On July 31, State Bank Governor Syed Salim Raza called for

commercial banks to increase lending to the private sector in order

to stimulate the economy, according to The News. Speaking at the

Private Sector Credit Advisory Council (PSCAC),Raza commented that

liquidity in the banking system has never been as high as it is

today and noted that growth in non-performing loans (NPLs) has

slowed in the last quarter of 2008-09. During fiscal 2007-08,

overall private sector credit grew 16.5 per cent compared to an

increase of only 0.7 per cent during 2008-09. This slowdown is

attributed mainly to a dearth in economic activity in Pakistan

coupled with the global recession. Loans for working capital

declined 7.6 percent during FY09 for the textile, manufacturing,

commerce and trade sectors; while fixed investment financing



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increased by 26.4 percent mainly for investment in manufacturing,

electricity, gas, water, transport, storage and communication

sectors.



7. (SBU) Import payments of furnace oil may put the Pakistani Rupee

under pressure. From August 1 onwards, according to a recent SBP

policy, all purchases of foreign exchange relating to the import of

diesel and other refined petroleum products will be made by banks

through the interbank market. This policy complies with the IMF

condition that the SBP transfer the burden of foreign exchange for

the import payment of diesel and other petroleum products to the

banks. Banks will have to arrange approximately USD 450-500 million

per month for the import payments which will put more pressure on

the already depreciating Pakistani rupee against the dollar and euro

due to high demand of the dollar in the interbank market. (Comment:

Import of furnace oil and diesel has been in the private sector for

some years now. A year ago the SBP took upon itself to arrange

foreign currency for private oil importers. The IMF has now

convinced the GOP to stop this practice and let private banks

arrange foreign currency for oil importers. This will put pressure

on the interbank foreign currency rates and the value of the

Pakistani Rupee.)



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STOCK MARKET

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8. (SBU) The Karachi Stock Exchange KSE-100 Index closed at 8,044.5,

after losing 37.56 points on Tuesday, August 11, 2009. Overall

market capitalization slightly increased to USD 28.21 billion. Net

foreign portfolio investment inflow was USD 18.6 million, the

highest since April 2008. The outgoing week saw Lucky Cement

posting better than expected results, which triggered positive

movement in cement sector. Some blue chip results, such as MCB

(Muslim Commercial Bank),PSO (Pakistan State Oil),Hubco (Hub Power

company) and OGDC (Oil and Gas Development Corporation) will be

released the week of August 17. The major stock players and bankers

believe these results, coupled with the positive decision of the IMF

to release and augment funds under Pakistan's Standby Arrangment,

would set the tone for the market next week. The index is up 40

percent since the start of the calendar year but down 49 percent

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

Our KSE contact said the persistent inflow of foreign investment,

prominent since the inclusion of Pakistan into the MSCI Frontier



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Index in May 2009, and the positive IMF decision to release further

funds were the major driving forces that kept the optimism and

provoked investors to stay at market with higher holdings.)



9. (SBU) The Lahore Stock Exchange (LSE) fluctuated day to day, but

closed the two weeks ending August 8 where it began. Market

capitalization was up 1.8 percent, and volume was average all month.





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TRADE

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10. (SBU) In the Federally Administered Tribal Areas (FATA) budget

Rs. 5 million (USD 60,241) was allocated for Reconstruction

Opportunity Zones (ROZs) in the FATA Annual Development Program

(FADP) 2009-10. The FATA government also allocated Rs1.150 billion

(USD 13 million) under the 2009-10 FADP for 44 projects focusing on

small dam construction, mineral exploration, skill development,

research and development, industries, housing, tourism and SME

financing. (Comment: The allocation of Rs.5 million for ROZs shows

the GOP's resolve towards ROZ legislation. However, government

officials and businessmen both still maintain that the success of

ROZs in the FATA crucially depends on the security situation.)



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ENERGY, POWER AND WATER

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

data and media reports, the Punjab government dramatically reduced

water releases from Mangla dam on July 23 in order to fill the

reservoir for the province's irrigation needs. This move slowed

Mangla hydroelectric production, which had already dropped the

previous month due to mechanical failures. As rolling blackouts

continue, the province denied an appeal from the federal government

to release more water for power generation. The Mangla reservoir

could take the rest of the month to fill. WAPDA figures show

Tarbela reservoir climbed almost 3 feet per day over the last two

weeks, despite substantial water releases for power and irrigation.

It stands just 15 feet below capacity. (Comment: The Punjab

government's decision to reduce Mangla dam water releases came one

week after the Indus River System Authority (IRSA) rejected the

province's request for more irrigation water through the



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Chashma-Jhelum link canal. IRSA advised the Punjab government to

look to Mangla for additional irrigation supply so closing the

Mangla tap for any other use appears to be the Punjab government's

reply. Conflicts over hydroelectricity and irrigation are likely to

intensify when summer snowmelt and monsoons end.)



12. (SBU) Extensive rolling blackouts continue to plague the

country, but related civil strife has dissipated since the protests

of late July. In a meeting with Consulate Lahore officials on

August 6, Lahore Electric Supply Company (LESCO) officials blamed

unscheduled load shedding on poor decisions by the national grid

control center in Islamabad. The media covered dueling positions on

the use of rental power plants to boost electricity supplies short

term, while Prime Minister Gilani of the Pakistan People's Party

(PPP) and Punjab Chief Minister (CM) Shahbaz Sharif of the

opposition Pakistan Muslim League-Nawaz (PML-N) discussed the power

crisis during a July 26 summit in Lahore. (Comment: The PPP led

federal government has fared reasonably well in the public debate

over rental power stations thanks to the PML-N's relative silence.

In a July 28 meeting with A/PO, a PML-N official acknowledged the

necessity of the federal government's short-term plan to utilize

rental power.)



13. (SBU) On August 10, Dawn reported that China plans to put on

hold the Coastal Oil Refinery Project at Gwadar in Balochistan.

According to the media, China has formally informed the Government

of Pakistan that there has been no progress on the Coastal Oil

Refinery project; therefore, the project has been removed from the

FY 2009-10 Financial Development Program between Pakistan and China.

The proposed Coastal Oil Refinery, which was designed to reach a

daily output of 60,000 barrels crude oil, was part of China's plan

to invest USD 12 billion in multiple projects in Pakistan.











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BUSINESS

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14. (SBU) According to SBP data, foreign investors in Pakistan

remitted USD 763 million abroad in FY 2008-09 despite low economic

activity in Pakistan and the global economic recession. The



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repatriated amount during for FY 2008-09 was 17 percent lower than

in FY 2007-08. Foreign investors repatriated USD 593.8 million from

return on FDI in FY 2008-09 versus USD 673.3 million in FY 2008-09,

a drop of 12 percent. The power sector registered the largest

amount repatriated where foreign investors repatriated USD 184.4

million FY 2008-09 against USD 169.6 million in FY 2007-08, an

increase of 9 percent. The financial services sector was second

largest sector with USD 79 million remitted. Repatriation from

trade, however, increased by 122 percent to USD 73.1 million from

USD 32.8 million, while petroleum refining repatriation stood at USD

77.3 million with an increase of 40 percent. (Comment: The rise in

profits and dividend outflows in the last fiscal year despite a

significant drop in FDI is the result of large FDI inflows in the

past and is likely to continue despite the current decrease and

slowdown in FDI inflows.)



PATTERSON