BI-WEEKLY REPORT ON THE ECONOMIC ISSUES FROM 13 FEBRUARY 2009

UNCLAS SECTION 01 OF 04 ISLAMABAD 000353



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

SUBJ: BI-WEEKLY REPORT ON THE ECONOMIC ISSUES FROM 13 FEBRUARY 2009



REF: ISLAMABAD 305



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TOP STORIES

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1. (SBU) An IMF assessment team will consult with GOP officials in

Islamabad and Dubai over the next two weeks to determine progress in

meeting their benchmarks for the Stand-by Arrangement. The team's

report will be presented to the IMF Board by the end of March. GOP

estimates for Pakistan's GDP growth for the current fiscal year

(ending June 30) had been in the 3-3.5 percent range, but the

prevailing view among non-government interlocuters is that growth

would remain stagnant.



2. (SBU) On January 31, the State Bank of Pakistan (SBP) announced

that it was leaving the discount rate of 15 percent unchanged

(reftel). The business community had hoped for an easing of rates,

and rumors had been circulating that a lower rate was to be

announced. Consulate General Karachi reports that the business

community there was "dismayed" by the decision. Presidents of two

major business associations - the Federation of Pakistan Chamber of

Commerce and Industry (FPCCI) and the Karachi Chamber of Commerce

and Industry (KCCI) - expressed their unhappiness to the Consul

General, citing interest rates as just one more factor (along with

energy costs and unreliability) harming their competitiveness. Ayub

Mehar of FPCCI complained that the SBP had not consulted with the

business community prior to the decision, although KCCI President

Anjum Nisar said he had given his views to the State Bank governor.

FCPCI President Sultan Ahmad Chawla said the high rates have

hindered economic initiatives such as the Long Term Facilities

Financing program and the Equity Transfer Fund. (Comment: GOP

policy makers are in a difficult position of trying to wring out

inflation without unduly stifling growth; inflation has not fallen

appreciably since November, when the discount rate was first raised

to 15 percent, leaving real interest rates negative.)



3. (SBU) An Asian Development Bank (ADB) team of financial experts

from Manila briefed ECON February 11 on their program and budget

support loans to the GOP. They plan to disburse USD 1.75 billion in

Pakistani FY08/09 and USD 1.428 billion in FY09/10. The ADB has

programs on accelerating economic transformation (removing economic

distortions such as subsidies and circular debt in the energy

sector) and strengthening the financial sector (consolidated

supervision of the banks and corporations). They are working with

the State Bank and the Securities and Exchange Commission of



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Pakistan. They are also working on social safety net programs and

assisting the GOP with its National Trade Corridor program. We have

sent the chart with a break down of their programs to EEB and SCA.



4. (SBU) Secretary Suleman Ghani of the Ministry of Commerce led a

Pakistani trade delegation to India for the two day South Asian

Association for Regional Cooperation (SAARC). The main topics on

the agenda included the South Asia Free Trade Area (SAFTA) and ways

to confront the global economic downturn in South Asia. (Comment:

The delegation is returning to Pakistan on February 13. Ministry of

Commerce told ECON that details of visit would be released next

week.)



5. (SBU) In a controversial move, Prime Minister Gilani transferred

Finance Secretary Dr. Waqar Masood from the Ministry of Finance and

appointed him Secretary in the Textile Division. The decision was

made over the objection of Advisor to Prime Minister on Finance,

Shaukat Tarin, who was on a state visit to Japan. Masood is still on

the job, however, and his replacement Salman Siddiqui, formerly with

the Ministry of Kashmir Affairs, has not yet made an appearance.



6. (SBU) Advisor to Prime Minister on Finance Shaukat Tarin traveled

to Japan to seek economic assistance and to give details on

Pakistan's economic reform efforts. Tarin also asked Japan to set

exclusive economic zones in Karachi and Gawadar. The Government of

Japan expressed full solidarity with Pakistan in its efforts on the

war on terror and announced Non-Project Grant Assistance totaling

USD 27 million in the underdeveloped areas of Balochistan and NWFP.



7. (SBU) The Karachi Stock Exchange closed at 5,399.36, losing 30.07

points on Thursday, February 12, 2009. The index remains down 5

percent since the start of 2009 and down 65.2 percent from its

lifetime high of 15,676.34 on April 18, 2008.



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BANKING AND FINANCE

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8. (SBU) Banks are increasingly reluctant to grant loans to local

industry in the Northwest Frontier Province (NWFP) due to slowing

economic activity and growing violence. Sarhad Chamber of Commerce

and Industry (SCCI) president Sharafat Ali Mubarak reportedly said

that "there are about 2,500 industrial units (companies) in the

province and only 594 of these are functional."



9. (SBU) The Ministry of Finance has reportedly instructed the State



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Bank of Pakistan (SBP) to cut off credit to Pakistan Railways.

According to Business Recorder, Pakistan Railways has continuously

surpassed its overdraft limit. Currently, Pakistan Railways'

overdraft amounts to PKR 34 billion (USD 430 million),more than

eight times the sanctioned limit of PKR 4 billion (USD 50 million).



10. (SBU) On February 11, the State Bank of Pakistan (SBP) announced

that personal loans and credit cards would be capped at PKR 1

million (USD 12,658) per person. The SBP also stipulated that

before issuing any loans/credit cards, banks needed to obtain a

consumer credit report from the Credit Information Bureau of the

SBP. In addition, applicants will need to divulge any existing

exposure from the entire banking sector. (Comment: We have heard

from commercial banks here that credit cards were being issued with

little regard to creditworthiness of potential customers. High

interest rates are causing banks' consumer portfolios to

deteriorate.)



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BUSINESS

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11. (SBU) Insanhullah, the Chairman of Pakistan's Stone Development

Company (PASDEC),announced that mining and excavation have

increased in the Federally Administered Tribal Areas (FATA) with an

export target of USD 500 million by 2013. Mining and quarrying

contributes nearly 0.5 percent to Pakistan's Gross Domestic Product

(GDP),with an estimated value of PKR 16 billion (USD 200 million).





12. (SBU) Karachi Port Trust plans to become the first port in the

world to be able to handle ships with a draft of 18 meters. This

will allow cargo ships of over 100,000 dead weight tonnage to berth

at the port. According to Pakistani media, work on a deep water

container terminal will begin in March 2009 and be completed in four

years. The total cost is estimated at PKR 19 billion (USD 237

million). Most ports around the world can handle ships with a draft

of 16-17 meters.



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ENERGY AND POWER

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13. (SBU) The United Arab Emirates (UAE) has offered to donate a

power plant of 320 MW capacity as a gift to the people of Pakistan

to help overcome energy crisis. Minister for Water and Power Raja



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Pervez Ashraf signed an MOU on February 4 in Dubai to work out the

detailed plan for implementation of the agreement covering the

dismantling, packing and shifting of the plant to Pakistan.

(Comment: Zarar Aslam, Additional Secretary Ministry of Water and

Power, told ECON that negotiations started two years ago and

confirmed that both governments have reached an agreement. The UAE

Government will bear the cost of dismantling the plant (which is not

particularly efficient) and transporting it to Pakistan. The GOP

plans to divide it into three smaller plants - two of them to be set

up in Punjab and one in Karachi to produce electricity during hours

of peak demand.)



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AGRICULTURE

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14. (SBU) The Economic Coordination Committee (ECC) directed the

Trading Corporation of Pakistan (TCP) on February 3 to import

200,000 metric tons of refined sugar. The decision was made in an

effort to stabilize the supply and price of sugar in Pakistan.



15. (SBU) On February 6, The News reported that Federal Commerce

Minister Makhdoom Amin Fahim announced an inquiry into a recent TCP

tender for rice. The TCP is suspected of embezzling approximately

PKR 250 million. On February 12, Business Recorder reported that the

TCP was also accused of violating procurement rules on a November

2008 imported wheat procurement tender. Comment: The Ministry of

Commerce confirmed with ECON that it has begun a probe into TCP's

recent tenders.



16. (SBU) The News reported that the SBP issued guidelines on

Islamic financing to help banks formulate specific Shari'a-compliant

products for agricultural loans. Developed with stakeholder input,

these guidelines cover financing of farm and non-farm sector

activities including livestock, fisheries, poultry, horticulture,

and orchards.



17. (SBU) The Trading Corporation of Pakistan has received a bid

from Cargill for 50,000 tons of U.S. white wheat. This is the first

U.S. wheat bid that can be financed using the recently approved USDA

GSM-102 credit guarantee program. (Comment: In an effort to improve

the wheat tender, TCP has invited members of the wheat trade to meet

on February 15 to address the perceived shortcomings of the previous

wheat tender.)



PATTERSON