BI-WEEKLY REPORT ON ECONOMIC ISSUES, 02 DECEMBER, 2009

UNCLAS SECTION 01 OF 03 ISLAMABAD 002895



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SIPDIS



REF: ISLAMABAD 2767



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

SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, 02 DECEMBER, 2009



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TOP STORIES

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1. (SBU) GOP Grants the Oil and Gas regulatory Authority (OGRA) Full

Autonomy to Set Oil Prices Starting December 1. According to the

Daily Times this decision stems from a recommendation agreed with

the International Monetary Fund to give complete autonomy to

regulatory authorities in the energy sector. With this change, OGRA

will reportedly no longer need to consult with the Ministry of

Petroleum and the Finance Ministry before setting oil prices, which

are now to be set on a monthly basis, and will be more reflective of

international prices.

(Comment: In the past, the GOP's efforts to try and raise domestic

fuel prices have been met with stiff resistance from local

politicians trying to keep their constituents happy. Even efforts

for more frequent adjustments have been frequently announced and

then not fully implemented. If finally implemented, this step will

reduce political interference in setting oil prices. The recent

increase in world oil prices lends more urgency for the GOP to

follow through on this decision.)



2. (SBU) Decline in Foreign Investment. On November 19, Business

Recorder reported that foreign direct investment (FDI) declined by

53 percent during the first four months of the current fiscal year.

According to the State Bank of Pakistan (SBP),FDI totaled $621.8

million from July-October of this year compared to $1.33 billion

during the same period in FY09.

(Comment: According to our contacts in the banking sector, domestic

shocks including power shortages, the deteriorating security

situation, and growing political instability caused this significant

capital flight. Foreign portfolio investment, however, surged by

266 percent during the same period, due primarily to Pakistan's low

stock valuations compared to other regional players and which offers

attractive investment opportunity to investors.)



3. (SBU) Local Refineries Facing Increasing Liquidity Problems. On

November 23, Business Recorder reported that Pakistan's five

refineries were "on the verge of a financial collapse," having fully

exhausted their cash reserves and having reached their borrowing

limits. According to the article, these cash flow problems are

inhibiting their ability to secure crude oil supplies for

processing. Refineries reported large losses from 2008-2009 and so



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far this year due to fluctuations in the price of petroleum products

and crude oil.

(Comment: Contacts working in local refineries indicated that these

financial problems are significantly affecting their operational

efficiencies. If the government does not address the problem,

refining operations may eventually no longer be commercially

viable.)



4. (SBU) State Bank of Pakistan (SBP) Cuts Policy rate to 12.5

percent. On November 23, Business Recorder reported that the State

Bank of Pakistan cut the policy rate by 50 basis points. According

to the Central Bank, the overall level of risk and uncertainty in

the economy has increased considerably, due to the present security

situation, and the GOP's growing budgetary problems. Theoretically,

the drop in the SBP's policy rate will help boost the local economy

and increase investor confidence.

(Comment: The reduction in the policy rate has been one of the

business community's longstanding demands, pointing to the high

costs of doing business in Pakistan as a major impediment to

investing locally. This decrease in the policy rate should help to

partially address this concern.)



5. (SBU) Businessmen and Industrialists Oppose Increase in Power and

Gas Tariffs. On November 18, the Daily Times reported that the GOP

is contemplating increasing the power tariff by 12 percent and the

natural gas tariff by 26 percent. If passed, this change will take

effect in January 2010. In the article, Zahid Maqbool, president of

the Islamabad Chamber of Commerce and Industry, criticized the GOP's

"unilateral approach to decision making," while highlighting the

fact that any increase in utility tariffs would significantly stifle

local industry.

(Comment: Local businesses have indicated that they are already in

financial hot water due to multiple factors including security

concerns, power outages, high interest rates, and dwindling exports.

Increases to the power tariff would certainly add fuel to that

fire; however failure to raise the rates will inevitably aggravate

utility companies' existing cash flow problems.)



6. (SBU) Trademark Office Plans to Increase Filing and Registration

Fees. On November 17, Dawn reported that the Karachi-based

Trademark office is proposing a plan to increase trademark filing

fees from $11 to $34 and registration fees from $34 to $107. This

increase would help pay for the complete automation of the trademark

registration process while cutting the trademark application process



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down to three months. Representatives from the local Chamber of

Commerce are fully supportive of the improvement, which would enable

businessmen to access their trademark information online.



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STOCK MARKET

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

of November 26 at 9,206.21, 0.48 percent up from the previous week's

close on November 19. Overall market capitalization decreased

slightly from $31.99 to $31.81 billion, with net foreign portfolio

investment inflow of $1.3 million. Political uncertainty and

heightened security concerns kept investors wary. The State Bank's

rate cut failed to move the market, as the majority of investors

anticipated the move. Fertilizer, banking, and oil marketing

companies outperformed in the market.

(Comment: KSE and brokerage firm contacts repeated that, despite

minor economic improvements, "political and security" concerns

continued to affect the market.)



PATTERSON