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 <br />
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