Identifier
Created
Classification
Origin
09ISLAMABAD2767
2009-11-17 13:49:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Islamabad
Cable title:  

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

Tags:  EAGR ECON ETRD EFIN EINT EINV ENRG PREL PK 
pdf how-to read a cable
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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

- - - - - -
TOP STORIES
- - - - - -


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

- - - - - -
TOP STORIES
- - - - - -


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

ISLAMABAD 00002767 002 OF 005


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
--------------

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,"

ISLAMABAD 00002767 003 OF 005


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
--------------


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.


--------------
POWER AND WATER
--------------


9. (SBU) Tarbela and Mangla reservoir levels drop after the start of
water releases for sowing wheat. The Business Recorder reported

ISLAMABAD 00002767 004 OF 005


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.)

--------------
AGRICULTURE
--------------

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.)


--------------
TEXTILE
--------------


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

ISLAMABAD 00002767 005 OF 005


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