BI-WEEKLY REPORT ON ECONOMIC ISSUES, 7 OCTOBER 2009

UNCLAS SECTION 01 OF 04 ISLAMABAD 002539



SENSITIVE

SIPDIS



REF: ISLAMABAD 2477



E.O. 12958: N/A

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

SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, 7 OCTOBER 2009



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TOP STORIES

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1. (SBU) The All Pakistan Textile Mills Association (APTMA) and the

business community expressed grave concern over the 6 percent

increase in electricity prices. In an October gathering organized

by APTMA and businessmen, speakers pointed out that industry is

already smarting from multiple problems, predominantly load

shedding, gas shortages, and higher interest rates. Mr. Zahid

Maqbool, President of Islamabad Chamber of Commerce and Industry,

urged the GOP to reverse the decision in view of a larger national

interest to facilitate business profitability and maintain

competitiveness in export markets worldwide. (Comment: The GOP

charges higher rates to commercial and industrial enterprises in

order to help subsidize lower costs for household consumers, so the

price hike hits industry harder than individuals. Though

industrialists continue publicly to criticize the tariff hike,

privately, many business leaders acknowledge the need to raise

tariffs to ensure the viability of the power sector.)



2. (SBU) Power outages increase throughout country. The News

reported on September 28, 2009 that the capacity shortfall for

Pakistan power now exceeds 3000 megawatt (MW). Major cities are

experiencing four to six hours of load shedding per day, and

significant commercial and residential areas are being impacted.

The situation is worse in the rural areas, where outages range

between 10 to 12 hours per day. It is expected that the crisis will

worsen due to decreased hydroelectric production, caused by this

year's low water levels. (Comment: Milder temperatures should lessen

power demand in the coming months, but the dry winter months also

mean lower water levels and thus less power from Pakistan's

hydroelectric system. Though new power plants totaling 2250 MW (see

next item) were scheduled to come on-line by December 31, many are

behind schedule. The load shedding has taken a toll on Pakistan's

economy and is credited by the Ministry of Water and Power for

causing an estimated $3 billion of lost GDP.)



3. (SBU) Rental Power Projects (RPPs) remain delayed. The Private

Power Infrastructure Board (PPIB) confirmed that all fourteen of the

RPPs approved by the GOP are unlikely to start operations by year

end. (Comment: The PPIB statement comes as no surprise: only one of

the RPPs has even begun construction. Sources at PPIB claim they

have released mobilization advances to five RPPs and the sixth will



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be paid in a few days, but the ongoing controversy over RPPs has

cast a pall over all rental power activity and the fate of the

remaining nine is uncertain. If completed, all 14 RPPs could

provide up to 2250 MW of additional generation.)

4. (SBU) GOP increases power tariff by 6 percent on October 1. The

GOP decision is in line with conditions agreed with the

International Monetary Fund (IMF) to phase out power sector

subsidies by July 2010. (Comment: The October 1 hike is an

important first step, and public opposition to the move was

reassuringly muted. Although the move will generate significant new

revenue, the 12 percent increase agreed with multilateral donors for

January 1 could prove more problematic.)

5. (SBU) GOP lowers prices for Petroleum Oil and Lubricant (POL).

Media reported that the GOP reduced its per liter prices for

gasoline by approximately half a cent per liter, for kerosene by

0.032 cents, and for light diesel by 0.023 cents in October.

(Comment: The GOP reductions reflect falling prices on the

international market.)



6. (SBU) Pakistan's public debt rises by $14 billion. The News

reported October 8 that the State Bank of Pakistan (SBP) estimates

that during the last Pakistani fiscal year, the government added

approximately $14 billion to the stock of the country's public debt.

Domestic debt rose by a worrisome $7.3 billion over the FY ending

July 2009, to $47.8 billion, and external debt and liabilities

increased from $46.2 billion over the same period to $52.8 billion,

or 62.8 percent of GDP. (Comment: According to the Fiscal

Responsibility and Debt Limitation Law, public debt should not be

more than 60 percent of GDP and should decline by 2 to 3 percent per

year.)



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BANKING AND FINANCE

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7. (SBU) On September 30, the SBP announced its policy rate would

remain unchanged at 13 percent. According to a press release from

the SBP, while inflation on a yearly basis and the balance of

payment position have improved, fiscal and real sector performance

is still tenuous and the risk of inflation remains. Lending to the

private sector remains subdued, but the emerging global economic

recovery augurs well for Pakistan's economy. However, limited

progress on electricity sector reform and the GOP's fiscal position

dilutes optimism for affordable credit.



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8. (SBU) Federal Board of Revenue (FBR) plans to introduce reward

system for tax collectors. The Chairman of FBR, Mr. Sohail Ahmed,

told The News that the Board will offer a certain percentage of

revenue collected as a cash reward to "successful" tax collectors.

The Board is targeting annual revenue of $16.38 billion for

Pakistani FY2010 (which runs from July 1, 2009-June 30, 2010). The

Chairman stated, however, that revenue collection will be well shy

of the first quarter target, although he predicted it will make up

ground in subsequent quarters with the collection of advance

withholdings for corporate and income taxes. (Comment: We predict

the rewards-based strategy will only lead to a marginal increase in

revenue collections at best, given the sluggish economy and

Pakistan's narrow tax base.)



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STOCK MARKET

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9. (SBU) The Karachi Stock Exchange (KSE)-100 Index ended the week

of October 2 at 9,455, roughly 2 percent below the previous week's

close. Overall market capitalization declined slightly to $33

billion, and net foreign portfolio investment inflow totaled $14

million. (Comment: Contacts from the exchange described the decline

as a technical correction. The U.S. commitment to support Pakistan,

higher remittances, and a current account surplus are expected to

remain the driving forces for market gains in the upcoming

sessions.)



10. (SBU) The Lahore Stock Exchange (LSE) remained bullish during

the week with improvement in volume trading. The LSE 25-share index

added 76.3 points to close at 2,988 points against its opening of

2,912 points. The volume is on track to well exceed turnover of

14.7 million shares on October 2.



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TRADE

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11. (SBU) On September 27, the News and other papers reported that

Pakistan seafood exports increased in August compared to the same

period last year. The exports increased to 5,327 tons, a 5.9

percent increase, and export value reached $9.7 million. Measures

that have been taken to improve the conditions of boats and harbor



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facilities are credited for the increase. (Comment: Marine

Fisheries Department (MFD) contacts confirmed the report and said

the MFD, along with the provincial fisheries authority, took several

steps to improve harbor facilities and modify boats, which helped to

increase the exports. He also said that he expects the EU ban to be

lifted soon, and that an EU inspection delegation is expected to

visit in late October. (The EU had de-listed all Pakistani seafood

exporters in April 2007). Absent the EU market, seafood producers

increased exports to China, the UAE, Thailand, South Korea, Saudi

Arabia and Indonesia. Despite these other significant increases,

officials emphasized the importance of the EU market, which offers

stable prices, a large network of countries, and consistent

standards.)



PATTERSON