BI-WEEKLY REPORT ON ECONOMIC ISSUES, 16 DECEMBER, 2009

UNCLAS SECTION 01 OF 04 ISLAMABAD 003042



SENSITIVE

SIPDIS



REF: ISLAMABAD 2895



E.O. 12958: N/A

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

SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, 16 DECEMBER, 2009



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TOP STORIES

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1. (SBU) Asian Development Bank (ADB) okays eight rental power

plants (RPPs). On December 10, Business Recorder reported that the

ADB had recently completed its assessment of the fourteen signed RPP

projects. Of the fourteen, the ADB cleared only eight rental power

projects (RPPs) with a total capacity of 1,156MW which had reached a

stage of contract fulfillment where they could not be discontinued

without legal ramifications. Their estimated commissioning dates are

from January to June 2010. The ADB's final report is due for public

release on January 8, following a detailed presentation on

preliminary findings to the GOP on December 22.

(Comment: The ADB audit, conducted jointly with the Ministry of

Finance, refrained from criticizing the RPP contracting process but

concluded that eight RPPs would be sufficient to fill the short-term

power generation gap.)



2. (SBU) The Federal Board of Revenue (FBR) pursuing efforts to

collect back taxes. On December 1, Business Recorder reported that

the FBR has set January 31 as the official deadline for officials

from the FBR Inland Revenue and Enforcement Division to recover

these arrears from registered firms, business units and corporate

entities. It is currently working on devising an "Arrears Recovery

Plan" to include the creation of an "Arrears Monitoring System" with

the aim of facilitating this process.

(Comment: Tax collection represents one of the major IMF targets

that the GOP failed to meet during the most recent IMF review. This

initiative represents a willingness to address the problem, whether

or not the GOP has the will and capacity to follow through remains

to be seen.)



3. (SBU) Foreign remittances rise by 29 percent. On December 11,

Business Day reported that during the first five months

(July-November) of the current fiscal year, remittances increased

year-on-year by over 29 percent to $3.8 billion. The highest

inflows during this period were from UAE, United States, and Saudi

Arabia.

(Comment: Remittances via the formal sector continue to increase

and reach record numbers. Several initiatives taken by the State

Bank of Pakistan (SBP) to increase regulation and oversight of money

lenders, as well as improving the efficiency of banks in processing

remittances, seem to be working.)



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4. (SBU) Pressure group occupies North West Frontier Province (NWFP)

gas wells. On December 13, Dawn reported that a pressure group led

by former Member of the National Assembly, Shah Abdul Aziz, occupied

two new gas wells on recently discovered fields in the Karak

district from December 11-13 interrupting supply and forcing top

provincial officials to mediate their terms of withdrawal. Armed

men from the Khattak Ittihad, a group composed of local residents,

occupied wells recently drilled by Hungarian oil company MOL in

western Karak. The group lifted its occupation only after an

agreement that NWFP Chief Minister Amir Haider Hoti would mediate

the dispute. In a December 14 meeting, Hoti agreed that the

provincial government would pay to extend gas distribution lines to

several isolated villages in western Karak near the gas fields and

MOL agree to provide free gas to villages within 3 miles of each of

the wellheads.



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STOCK MARKET

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5. (SBU) Karachi Stock Exchange (KSE)-100 Index ended the week of

December 11 at 9,037.30, which represents a 0.3 percent increase

from the previous week's close. Overall market capitalization

decreased slightly from $31.20 billion to $31.10 billion.

(Comment: Despite reports by Moody's that the economy is

stabilizing and the external liquidity situation improving, the

deteriorating security environment and structural problems in the

power sector continue to put pressure on the economy; however,

reports of increased oil and gas production from the Manzalai fields

in Sindh and a 20 percent increase in remittances in November buoyed

investor confidence.)





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ENERGY & POWER

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6. (SBU) Renewable energy power projects: SBP introduces financing

facility. On December 1, the SBP introduced a financing facility

for renewable energy power projects of up to 10 Mw with preference

given to projects in underdeveloped parts of the country. According

to a local circular, sponsors of power projects will be able to use

the financing facility through banks for the purchase of new,



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imported and locally manufactured, plant machinery and equipment.

However, financing will only be available to prospective sponsors

who have met the Alternative Energy Development Board (AEDB) and the

GOP's Renewable Energy Policy requirements.

(Comment: Many banks are not funding energy related projects,

stating that their loan portfolios are already too heavily weighted

to power projects. This new facility may help to inject some much

needed liquidity into the sector.)



7. (SBU) Public transportation workers stage strike in Karachi.

Business Recorder reported on December 10 that the Karachi Transport

Ittehad (KTI),a local union for transport workers, had called for a

strike to voice their discontent with the recent increase in local

fuel prices. According to the report, 70 percent of bus operators

stayed off the roads forcing commuters to rely on cabs and

rickshaws. Irshad Bukhari, President of the KTI, indicated that the

association planned to call another strike during the first week of

January, adding that the strike's end date would be contingent on

the Oil and Gas Regulatory Authority's (OGRA) willingness to reduce

oil prices.





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TEXTILES

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8. (SBU) Shortage of cotton yarn sparks minor demonstration. On

December 7, Dawn reported that factory owners and employees held a

demonstration in Faisalabad to protest the recent hike in the price

and limited availability of cotton yarn on the local market.

According to Ikhlaq Ahmad, Chairman of the All Pakistan Cotton Power

Looms Association, the price of cotton yarn and polyester cotton

yarn has increased by 30 to 40 percent over the last five months.

He added that the excessive export of quality cotton yarn to

neighboring countries such as China and Bangladesh was further

exacerbating the problem. To date 50,000 power looms have had to

shut down and 40,000 have had to draw down their operations due to

their inability to acquire yarn on the domestic market.

(Comment: On the one hand, Pakistan's willingness to allow market

signals in yarn is a positive development. On the other hand, the

value-added textile industry is squeezed by rising input and energy

costs. These could negatively affect the textile industry's

ability to honor contracts with international buyers. Since the

textile industry contributes over 60 percent of the country's total



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exports, the situation does not bode well for Pakistan's balance of

payments and foreign exchange reserves.)



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TRANSPORTATION

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9. (SBU) National Highway Authority (NHA) awards Chinese firm $118

million motorway crossing contract. According to Business Recorder,

the China Water and Electric Company would be responsible for

undertaking the 36 mile Faisalabad-Gojra stretch of the

Faisalabad-Multan motorway project, consisting of four interchanges,

nine flyovers and nine bridges. The construction is expected to

take approximately 3 years. The Asian Development Bank will

shoulder 85 percent of the $118 million project costs, with the GOP

covering the remaining 15 percent of the expenses.





PATTERSON