BI-WEEKLY REPORT ON THE ECONOMIC ISSUES,04 NOVEMBER 2009

UNCLAS SECTION 01 OF 05 ISLAMABAD 002767



SENSITIVE

SIPDIS



REF: ISLAMABAD 2539



E.O. 12958: N/A

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

SUBJ: BI-WEEKLY REPORT ON THE ECONOMIC ISSUES,04 NOVEMBER 2009



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TOP STORIES

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1.(SBU) Government to evaluate efficiency of Rental Power Plant

Projects (RPP) before disbursing advance payments. On October 19,

The News reported that the government will now consider issues such

as the condition of equipment used at RPP facilities and the cost

effectiveness of their projects before issuing them mobilization

advances. This development comes at the insistence of the Asian

Development Bank, which is currently conducting an energy audit of

the efficiency and cost effectiveness of the RPPs. (Comment: In

theory the GOP's original rental policy framework requires companies

to demonstrate their level of efficiency as a prerequisite to

participating in the bidding process. In practice this has not been

the case, as the five rental power plants that were recently awarded

mobilization advances by the GOP were awarded contracts on a "first

come first served" basis. There are strong indications that the

RPPs still bidding for contracts may raise a complaint with the

International Court of Arbitration should the GOP seek to enforce

the policy proposed by the ADB.)





2. (SBU) The Government meets three International Monetary Fund

(IMF) targets. On October 21, Business Recorder reported that

during the first quarter of the 2009-2010 fiscal year, the GOP

successfully met three of the budgetary and monetary targets set by

the IMF. The GOP has reduced its borrowing stocks, capped its

budgetary borrowing from the central bank at $13.61 billion and the

State Bank of Pakistan achieved its two major targets of containing

net domestic assets and increasing net foreign assets. Net foreign

asset currently stand at $5.76 billion compared to the IMF target of

$4.8 billion and net domestic asset stand at $13.69 billion compared

to IMF target of $14.39 billion. (Comment: While this represents a

significant achievement for the GOP, it has yet to increase tax

collection, an IMF priority and a key to maintaining fiscal

discipline and macroeconomic stability.)



3. (SBU) Finance Ministry formally rejects Pakistan State Oil (PSO)

entreaties to collect power sector arrears on its behalf. Business

Recorder reported on Oct 27 that PSO has $843 million in outstanding

receivables from the power sector with $216 million in letter of

credit (LCs) coming due on November 13. According to the report,

PSO received a letter from the Ministry of Finance denying financial



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assistance and urging PSO to collect payment and "deliver fuel

supplies on a commercial basis," presumably to those who pay. PSO

representatives indicated they would meet with the Ministries of

Finance and Petroleum and Natural Resources to reverse the Ministry

of Finance decision and ensure the flow of fuel oil to the power

sector.





4. (SBU) Current account deficit drops to $462 million. The Daily

Times reported that the current account deficit declined by 89.14

percent during the first quarter of the 2009-2010 fiscal year. This

drop has stabilized the foreign exchange reserves and the exchange

rate. The report attributes this fall to a significant decrease in

Pakistan's trade deficit and a sharp increase in remittances. Over

the past year the trade deficit decreased from $4.51 billion to

$2.75 billion and remittances increased from $1.879 billion to $2.33

billion. (Comment: The steady decline in the value of exports are a

major risk to continued improvement in the current account deficit

and balance of payments. This issue also poses a risk to foreign

exchange reserves and has the potential to destabilize the exchange

rate.)





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BANKING AND FINANCE

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5. (SBU) The Karachi Stock Exchange (KSE) completed the development

and regulatory work on the Bond Automated Trading System (BATS).

The KSE has yet to set the go-live date for the trading of Debt

Market Securities (listed term finance certificates) through BATS.

The KSE asked members to apply now to get their BATS terminal

installed/activated by submitting a request to the exchange, along

with a refundable security deposit of approximately $1800.

(Comment: Our KSE contact confirmed the report and said that the

Bond Trading Platform is another KSE milestone in introducing

trading of debt securities to the exchange. KSE has been holding a

series of presentations to acclimatize the market, asset management

companies and banks with BAT, and is receiving requests from

institutions.)





6. (SBU) The National Clearing Company Limited (NCCPL) to set up a

debt market protection fund. On October 31, Business Day reported

that the NCCPL will establish a "debt market protection fund,"



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scheduled to go live in early November. According to the NCCPL, the

company will setup and maintain a debt market protection fund and

every market clearing member will contribute approximately $3000 to

the pool. Clearing members, acting as brokers, will be allowed to

participate in the debt market with minimum net capital balance of

approximately $300,000, and will only be allowed to participate for

listed term finance certificates (TFCs). The member's aggregate

debt exposure cannot exceed 10 times its net capital balance.

(Comment: The details on the NCCPL debt market protection fund is

on the web: http://www.nccpl.com.pk/news/details.php?para m=NjYTcVYc

.)





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STOCK MARKET

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7 (SBU) The Karachi Stock Exchange (KSE)-100 Index ended the week of

October 30 at 9159.18, flat over the previous week's close. Overall

market capitalization slightly increased to $31.74 billion, with a

net foreign portfolio investment inflow of $9.8 million. Despite

strong corporate results, security concerns continued to dampen

market performance. (Comment: Our KSE contact said the in spite of

serious security concerns, the benchmark index did not fall below

the 9,000-barrier as was widely speculated. This suggested that the

current downward drift may be done and the lows could attract new

purchases next week. Secretary of State Clinton public statements

on economic cooperation could be a driving force in a market surge.)







8. (SBU) Lahore Stock Exchange (LSE):Security concerns sent the

Lahore Stock Exchange (LSE) Index tumbling 6.9 percent October 19 to

21. After the flurry, the market stabilized and trading was average

the rest of the month.





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POWER AND WATER

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9. (SBU) Tarbela and Mangla reservoir levels drop after the start of

water releases for sowing wheat. The Business Recorder reported



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that the Indus River System Authority cautioned provincial

governments that the supply of water for winter crops could be 35

percent short of demand. (Comment: Low reservoir levels at this

point in the growing season could seriously impact the wheat crop.

Pakistan needs to build more water storage capacity.)





10. (SBU) Work on Indus Refinery stopped due to security concerns.

On October 20, the News reported that work on the Indus Refinery

Limited (IRL) was suspended after the project's sponsors backed out

as a result of the country's deteriorating security situation. The

IRL is now seeking new investors to complete the construction

project. IRL was expected to be operational by mid-2009, but

political turmoil and the downgrading of the country's credit

rating, left management unable to secure financing for the project.

(Comment: Indus Refinery Limited confirmed the report and said

that the management is still looking for new investors and

negotiating with the banks for financing. The company is open to

U.S. investment.)



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AGRICULTURE

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11. (SBU) Government procurement of rice set to begin the first week

of November. Contacts from the Pakistan Agricultural Storage and

Services Corporation (PASSCO),the federal purchaser of agricultural

commodities, have expressed concerns about their limited financing

and storage capacity after procuring record stocks of wheat last

summer. (Comment: Government intervention in rice markets is just

as counterproductive as it is in wheat and other commodity markets.

Newspapers are already running stories about unscrupulous middle men

and corrupt government agents denying farmers the benefit of the

government price support.)





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TEXTILE

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12. (SBU) Power loom operators strike over the supply and price of

cotton yarn. The protest is focused in Faisalabad District, the

heart of Punjab's textile belt. According to press reports

approximately 20 percent of the nations' power loom industries are



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currently involved in the strike, which started on October 27. Loom

owners and laborers are demanding government intervention, including

a prohibition on yarn exports, to ensure an ample supply of cheap

yarn. Industry interest groups remain divided over whether to

support the strike. Hosiery and readymade garment groups supported

the loom owners' demands. However, the All Pakistan Textile Mills

Association (APTMA),which represents the larger, more sophisticated

mills, opposed the strike, and cotton growers vowed to fight any

export ban. (Comment: Industry pressure could lead to more

government subsidies and supports rather than a much needed

restructuring of the lower end of the textile sector. Eighty seven

percent of Pakistan's 259,000 looms are in cottage or small

businesses. They have limited access to capital, frequently lack

professional management, and are ill-equipped to compete for

supplies with international cotton and yarn buyers.)





PATTERSON