BI-WEEKLY REPORT ON THE ECONOMIC ISSUES FROM 25 FEBRUARY 2009

UNCLAS SECTION 01 OF 05 ISLAMABAD 000443

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TAGS: EAGR, ECON, ETRD, EFIN, EINT, EINV, ENRG, PREL, PK
SUBJ: BI-WEEKLY REPORT ON THE ECONOMIC ISSUES FROM 25 FEBRUARY 2009

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TOP STORIES
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1. (SBU) The Business Recorder reported that the European Union and
Pakistan signed a civil aviation agreement on February 24, which
allows EU-based airlines to operate flights to Pakistan from any EU
state which already has an agreement with Islamabad. "The agreement
signed today is good news for both Pakistani and EU airlines as well
as for passengers, as it removes the legal uncertainty" from
existing bilateral deals, said EU Commission vice-president Antonio
Tajani. Legal clarification was necessary because a European court
ruled in 2002 that aviation agreements between one EU nation and a
non-EU country were discriminatory and in breach of EU law. The EU
has negotiated similar accords with 45 countries. Comment: Manzar
Jamal, Director Air Traffic, Civil Aviation Authority told ECON on
February 25 that General Pervaiz Haider, Additional Secretary
Aviation, signed the agreement yesterday. Per the agreement, EU
states that do not have a bilateral agreement with Pakistan but
which have an agreement with another EU state that has an agreement
with Pakistan will be able to fly to Pakistan. Pakistan has aviation
agreements with 18 EU members. Jamal noted that India has had three
rounds of negotiations with the EU on this topic but has been unable
to reach agreement.

2. (SBU) Money sent home by overseas Pakistanis in the first seven
months of Pakistani fiscal year 2009 (from July to January) surged
to $4.277 billion, an increase of over 18 per cent from the same
period in FY 08 ($3.623 billion). The main sources of these funds
were the U.S., the U.A.E., Saudi Arabia, and the Gulf Cooperation
Council countries (Bahrain, Kuwait, Qatar and Oman). (Comment: We
have heard from several GOP and international officials that this
surge is not necessarily a positive - it may be an indication that
Pakistanis have lost their overseas jobs, particularly in places
like Dubai that are experiencing massive layoffs, and are
transferring assets prior to returning home. End comment.)

3. (SBU) A City District Government of Karachi (CDGK) official told
CG Karachi on February 20 that the CDGK municipal services office
has begun implementing the city's new "infrastructure tax" on
residential and commercial land owners. One million bills had been
sent, and an additional 700,000 bills would be sent out over the
next few days. He noted that the tax is intended to cover municipal
services such as street sweeping and garbage collection, as well as
infrastructure improvements including roads, parks, and
streetlights. The new fee structure is based on a resolution passed
by the Karachi city council in June 2008. The Karachi Water and
Sewer Board is also collecting fees for fire protection, street

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sweeping and garbage disposal.

4. (SBU) The Karachi Stock Exchange closed down 118 points at 5,850
on February 24. The market has hovered between 5,000 and 6,000
points since the beginning of 2009, down approximately two-thirds
from its high of more than 15,000 in April 2008. (Comment: The
Karachi Stock Exchange fell another 294 points on February 25 to
close at 5,580, its sharpest decline since June 2006. The sharp
market drops were presumably a market reaction to the deteriorating
domestic political situation following the disqualification of
opposition leaders Nawaz and Shahbaz Sarif. End Comment.)

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Banking and Finance
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5. (SBU) The February 13 Business Recorder and other papers quoted
State Bank of Pakistan (SBP) Governor Syed Salim Raza stating that
new SBP initiatives were designed to ease bank liquidity
requirements in order to encourage financial institutions to expand
microfinancing arrangements. Raza made the comments at the Karachi
launching of the "Access to Finance Survey," jointly sponsored by
the Swiss Agency for Development Cooperation and the World Bank.
(Comment: An SBP spokesperson confirmed the Governor's statement,
but added that the SBP had yet to issue any regulations on the
issue. End comment.)

6. (SBU) According to a Pakistan Bankers' Association (PBA)
official, his organization and the International Finance Corporation
(IFC) agreed on February 18 to work together to implement
sustainable banking principles in Pakistan. Included in their goals
are new banking products targeting renewable energy, energy
efficiency, micro-finance, financing for women entrepreneurs, and
low-income housing loans. They will also promote greater
transparency and sustainable development. The PBA and IFC will work
together to develop guidelines, tools, and checklists to help
Pakistani banks evaluate associated social and environmental risks.

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Business
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7. (SBU) The Cabinet Committee on Privatization recently approved
privatization of 21 State owned enterprises. In the Committee
meeting, Federal Minister for Privatization Syed Naveed Qamar said
that the new privatization policy envisions transfer of 12 percent
of shares of all State owned enterprises to the workers of these
entities. He said that the committee approved privatization of

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Peshawar Electric Supply Company (Pesco),National Power
Construction Company, Faisalabad Electric Supply Company (Fesco) and
Kot Addu Power Company (Kapco). It also approved privatization of
SME Bank Limited, Pakistan Railways, Heavy Electrical Complex,
Pakistan Machine Tool Factory, Pakistan Mineral Development
Corporation (PMDC),Marafco Industries, PTDC Motels and Restaurants,
Utility Stores Corporation, Pakistan Post, National Insurance
Company, Pakistan Reinsurance Company and State Life Insurance
Corporation. (Comment: Islamabad 412 reports in more detail on the
new privatization policy. End comment.)

8. (SBU) Pakistan's trade deficit widened to $10.727 billion during
the first seven months (July to January) of the Pakistani 2009
fiscal year, compared to a deficit of $10.357 billion in the same
period of the last fiscal year, an increase of 3.5 percent.
According to official data released by Federal Bureau of Statistics,
Pakistan's exports were $10.934 billion from July to January this
year, compared with the exports of $10.122 billion in the same
period last year, an increase of 8.02 percent. Approximately 83.5
percent of exports during the first half of the year were rice,
cement and chemicals. Approximately 95 percent of imports in the
first half of the year were petroleum, fertilizer and wheat.
(Comment: An official at the Ministry of Commerce stated that low
export growth is due to a number of factors including unprecedented
power and gas outages, depreciation of the rupee, increase in cost
of capital, and production and capacity constraints. End comment.)

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Energy and Power
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9. (SBU) The Ministry of Petroleum appointed Irfan Qureshi to be the
Managing Director of Pakistan State Oil (PSO) on February 24.
Qureshi, who will take charge in the next week, is replacing Kalim
Siddiqi. Qureshi is currently the Manager of Government Policy and
Public Affairs at Caltex (Chevron) Pakistan Limited. Siddiqui has
been Managing Director of PSO since October 2008. State-owned PSO
is the largest oil marketing company in Pakistan, followed by Shell,
Caltex and Total. Comment: A good contact of the Economic Section,
Qureshi is a persistent and versatile professional with 30 yeas'
experience in sales, marketing, logistics, customer service, and
public and government relations.

10. (SBU) Pakistan State Oil (PSO) has paid Rs. 5 billion to oil
refineries to enable them to place orders for new imports of crude
oil, although it still owes them Rs. 63 billion. The Business
Recorder reported that the Finance Ministry released this amount
after the Petroleum Ministry intervened. Earlier, the Finance

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Ministry had released Rs. 6.35 billion to Pakistan Electric Power
Company (Pepco) to make payments to PSO. PSO also has reportedly
paid Rs. 4.5 billion to oil refineries during the past week. PSO
still is owed Rs. 75 billion by its clients, including government
agencies.

11. (SBU) Pakistan has signed an agreement with the World Bank
whereby it will pass future price increases on petroleum products on
to consumers, rather than absorbing them as a subsidy, the Business
Recorder reported.

12. (SBU) According to the Business Recorder, an inter-ministerial
committee has been formed to address LPG pricing. The Committee met
January 30 and reviewed proposals for setting a uniform LPG price.
A tax on locally produced LPG would create a level playing field for
LPG importers; the lower price of locally produced LPG compared to
imported LPG has hurt importers' business and impedes the flow of
LPG imports into the country. A second option under consideration
is to waive the general sales tax on imported LGP.

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Agriculture
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13. (SBU) As a step to curb sugar hoarding, the State Bank of
Pakistan (SBP) now requires a 50 percent cash margin to finance
trade in sugar. The price of sugar has been rising over the last
two weeks because demand is high and the supply is low. To
discourage sugar hoarding, the SBP cautioned banks and development
financial institutions to strictly comply with this regulation. The
SBP has instructed banks and development financial institutions that
all existing loans or advances against security of sugar stocks
(disbursed before the crushing period of 2008) should be fully
adjusted not later than March 31, 2009. (Comment: Islamabad 383
reports on the recent forays of the Trading Corporation of Pakistan
into the sugar trade. The SBP regulation makes it more expensive for
sugar traders to hold onto their sugar stocks, and provides them
with a strong financial incentive to move sugar into the market in a
timely fashion. End comment.)

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Telecommunications
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14. (SBU) The Director of Economic Affairs for the Pakistan
Telecommunications Authority met with Econ the week of February 25,
and reported that the once robust sector is suffering due to the
economic slowdown. However, telecommunications companies continue

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to invest in infrastructure, and the Authority hopes to see growth
in the broadband segment of the market. PTA reported that
teledensity in Pakistan is approximately 60 percent, with 90 percent
of this attributable to cellular phones.

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Development
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15. (SBU) The FATA Development Authority (FDA) provided 196 diplomas
on February 23 to students graduating from the Khyber Institute for
Technical Education (KITE). The Pakistan Army established KITE in
collaboration with the FDA, providing four months of technical
education in fields such as basic computing, office automation,
basic surveying, auto mechanics, refrigerator/AC repair, and mobile
phone repair.

16. (SBU) A number of NWFP government officials are urging
internally displaced persons (IDPs) to return to their homes in
Swat, and have promised them more than Rs. 3.8 million in
development aid. Officials promised to provide Rs. 300,000 to the
family of every deceased person and Rs. 50,000 to the family of
every injured person. The Awami National Party (ANP) has sought
donations from the United Nations and international relief bodies,
as well as the United Arab Emirates, to rebuild educational
institutions, hospitals, bridges, roads and mosques. A Pakistani
Army spokesman said on February 23 that the peace deal in Swat would
be followed by a comprehensive strategy for development and
reconstruction in the area.

FEIERSTEIN