BI-WEEKLY REPORT ON THE ECONOMIC ISSUES, 11 MARCH 2009

UNCLAS SECTION 01 OF 05 ISLAMABAD 000561



SENSITIVE

SIPDIS



REF: Islamabad 383



E.O. 12958: N/A

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

SUBJ: BI-WEEKLY REPORT ON THE ECONOMIC ISSUES, 11 MARCH 2009



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TOP STORIES

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1. (SBU) The GOP increased the power tariff for domestic,

commercial and industrial consumers effective February 25.

Agriculture consumers and those who use less than 50 units per month

are exempt from this increase. The consumers of the Electric Supply

Companies in Peshawar, Gujranwala, Lahore, Faisalabad, Multan,

Hyderabad, Quetta, and Karachi will face the brunt of this increase.

Finance Advisor Shaukat Tarin had announced that the power tariff

would be raised before April, but at the insistence of the World

Bank, the GOP went forward with the current increase. The GOP and

the IMF agreed in their letter of intent that "the average base

[power] tariff will be further increased during 2008-09 according to

a schedule to be agreed with the World Bank by end-December 2008."



2. (SBU) The Chairman of the Trading Corporation of Pakistan (TCP)

has been replaced, and the Ministry of Commerce has prohibited the

TCP from inviting further bids on the import of refined sugar. The

Ministry of Commerce has stepped in following complaints relating to

the TCP tender (reftel),as importers accused the TCP of issuing a

tailor-made tender to favor a particular Gulf-based exporter of

sugar. On March 10, TCP Chairman Mohammed Saeed was replaced by

Saeed Ahmad Khan, a former Additional Secretary at the Prime

Minister's Secretariat. (Comment: Post sources indicate that the

Chairman was removed because of alleged fraudulent practices though,

officially, the GOP has not provided any explanation for his

removal. He has yet to be assigned to another position within the

GOP. The newly appointed Chairman has a solid reputation within the

TCP. End comment.)



3. (SBU) Pakistan may scrap its Monsanto biotech (BT) cottonseed

deal. The Business Recorder reported that Pakistan may back out of

a proposed agreement with Monsanto on BT cottonseed, and that the

GOP has signed an agreement with China to transfer its "double-gene

technology" for BT cottonseed to Pakistan. China introduced BT

cottonseed after signing a letter of intent with Monsanto in 1996,

but later developed its own BT cottonseed after re-inventing

Monsanto's cottonseed in Chinese laboratories. The GOP signed a

letter of intent with Monsanto a year ago, but the GOP is not

prepared to pay Monsanto $16 per acre as a royalty for the

introduction of the Bollgard I cottonseed technology (the patent for

which has expired). Another issue is that the GOP favors the



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introduction of the latest model of BT cottonseed, Bollgard II.

(Comment: Monsanto is reluctant to introduce its latest technology

into Pakistan, as the GOP has yet to pass a national Plant Breeders'

Rights Bill that complies with international intellectual property

rights agreements. End comment.)



4. (SBU) According to the Business Reporter, the Royal Bank of

Scotland (RBS) announced that it would seek buyers for its retail

and commercial business in Pakistan. RBS reported a loss of $34.3

billion in 2008, and the sale comes on the heels of RBS's attempted

reorganization and rebranding of ABN AMRO, which it bought in 2007.

(Comment: A Post contact at the Karachi Stock Exchange (KSE)

confirmed a Dawn newspaper report that at least three financial

groups are considering purchasing RBS's local operation, although

the bank has not made an official statement on the matter. The

source said the potential buyers are Arif Habib Bank Limited, JS

Bank and Atlas Bank, but the negotiations are still at a "very

preliminary stage.")



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BANKING AND FINANCE

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5. (SBU) Pakistan's circular debt rose from Rs 159 billion in

January 2009 to Rs 180 billion at the end of February. The public

sector entities in petroleum and gas sectors especially are facing a

financial crunch due to the rising circular debt. According to a

report by the Business Recorder, the Oil and Gas Development Company

Limited is owed Rs 48.254 billion; Sui Southern Gas Company, Rs

24.670 billion; Sui Northern Gas Pipeline Limited, Rs 7.955 billion;

Pakistan Petroleum Limited, Rs 9.332 billion; and Mari Gas Company

Limited, Rs 5.400 billion. Pakistan State Oil (PSO) is the major

fuel supplier that is facing circular debt problems. It is owed Rs

84.2 billion, including Rs 77.1 billion from various clients and Rs

7.088 billion as price differential claims from the GOP on petroleum

products. PSO itself owes Rs 73.717 billion to oil refineries. The

major clients of these public sector entities are the independent

power producers, the Water and Power Development Authority and

Pakistan Electric Power Company. Due to the financial crunch, PSO

is depending primarily on direct oil imports rather than on oil

refineries, which keep all funds as past payments. The Business

Recorder reported that PSO is providing oil to Pakistan

International Airlines (PIA) only on a cash basis. (Comment: Per

its agreement with the IMF, the GOP must have a plan in place to



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clear its circular debt by June, and the GOP is planning on issuing

Rs 98 billion of five-year Term Finance Certificates to pay off this

debt. End comment.)



6. (SBU) The Karachi Stock Market (KSE) 100-index closed at

5,748.10 on March 6, almost unchanged (up only 20.64 points) from

its February 27 closing of 5727.46. Overall market capitalization

during the week increased from $22.12 billion to $22.27 billion, but

net foreign portfolio investment outflow was $4.29 million.

(Comment: Post sources have attributed the market's lackluster

performance during the week to political uncertainty, and to

security concerns following the March 3 terrorist attack on the Sri

Lankan cricket team. Analysts said that State Enterprise Fund (SEF)

market activity was responsible for the market's stability during

the week.)



7. (SBU) The State Bank of Pakistan (SBP) has announced plans to

provide a partial microfinance credit guarantee for banks that

partner with micro-finance banks and micro-finance institutions.

The SBP's Development Finance Support Department will review all

applications from micro-finance institutions and have authority to

approve or deny them. This department would also vet draft loan

agreements between commercial banks and micro-finance institutions,

issue guarantees to lenders and process lending banks' claims

against guaranteed non-performing loans. Lending institutions are

responsible for negotiating the terms and structure of the loan (per

SBP guidelines) and finalizing the financing agreement. (Comment:

More information can be found at:

www.sbp.org.pk/MFD/PDF/Micro-Facility.pdf )



8. (SBU) The State Bank of Pakistan (SBP) has agreed to extend an

Export Financing Scheme loan repayment waiver from March 31 to June

30. The waiver and its extension apply to exporters whose loans

were overdue as of December 30, 2008. The waiver will not apply in

cases where funds due to an exporter have been delayed due to

document discrepancy or failure of the exporter to ship the goods in

accordance with the requirements of the importer. (Comment: More

information can be found at

www.sbp.org.pk/smefd/circulars/2009/CL2.htm)



9. (SBU) On February 27, State Bank of Pakistan Governor Syed Salim

Raza urged commercial banks to support financing for small and

medium-sized enterprises (SMEs). Raza told the SME Credit Advisory

Committee that expanding the role of SMEs is a cost effective way to



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create job opportunities and promote economic growth. According to

him, SMEs produce about 25 percent of Pakistan's export earnings and

contribute around 30 percent of the country's gross domestic

product, yet have not had sufficient access to bank financing. The

SME Credit Advisory Committee was established in 2008 and has

government and private sector committee members. (Comment: More

information can be found at

www.sbp.org.pk/press/2009/SME-Financing-28-Fe b-09.pdf )



10. (SBU) According to the March 10 Business Recorder and Geo News,

the State Bank of Pakistan amended its rules in an attempt to combat

money laundering and terror finance in Pakistan banks. The new SPB

rules increase the obligations of banks and development financial

institutions to verify their customers through the national identity

card database, conduct customer due diligence, and continuously

monitor client accounts. (Comment: The State Bank of Pakistan

confirmed that it amended its pre-existing customer verification and

due diligence rules, based on the recommendations of a World Bank

and Asia Pacific Group team which visited Pakistan earlier this year

to evaluate anti-money laundering and counter-terrorism finance

laws.)



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BUSINESS

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11. (SBU) Pakistan Hotels Association (PHA) officials told

Consulate Karachi on March 3 that the hotel industry has been hit

hard over the past year by both the economic downturn and the

deterioration in security in Pakistan (a situation highlighted by

the recent attack in Lahore) and many hotels will have difficulty

breaking even. This tracks with a February 28 article in The News

that reported declining profits at five-star hotels in the country,

which are reporting occupancy rates as low as 35 percent and cutting

back on restaurant services.



12. (SBU) A Shaheen Air International official told Consulate

Karachi that his company plans to buy seven used and two new Boeing

aircraft in preparation for new routes to Mashhad, Iran, and Mumbai.

The private airline plans to acquire the used Boeing 737-200

aircraft from a South African airline and to purchase two new Boeing

737-900 ERs by the end of 2010. Shaheen's plans also call for an

increase in flights to Dubai, Abu Dhabi, Kuwait and Muscat. The

airline, which has a fleet of seven Boeing 737s, currently flies to



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six destinations in the United Arab Emirates, Oman, Qatar and

Kuwait.



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ENERGY AND POWER

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13. (SBU) On March 3, an Alternative Energy Development Board

(AEDB) official confirmed to Consulate Karachi media reports that

the federal Ministry of Water and Power has given AEDB the green

light to seek tenders on both a 50MW wind energy project and a 50MW

solar energy plant near Gharo in Sindh Province. The coastal belt

of Pakistan has a significant, but unexploited, natural wind

corridor that some estimate could produce a substantial amount of

electricity using wind and solar power.



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TRANSPORTATION

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14. (SBU) According to the Business Recorder, Pakistan, Turkey and

Iran have agreed in principle to operate container train service

from Istanbul to Islamabad via Tehran, with the possibility of

operating passenger trains at a later point. Details were discussed

at a meeting of senior railway officials of the three countries held

in Tehran in late February, with Pakistan represented by General

Manager Railway (Operations) Saeed Akhtar. Akhtar said that it

tentatively was agreed to start service around next August 14.

Another meeting will be held in April to discuss customs issues.

Turkey and Iran are already connected by freight and passenger rail

links. (Comment: The General Manager Railways (Operations),Saeed

Akhtar, confirmed that this service is in the pipeline and that he

attended the meeting in Tehran last month. He said that the second

meeting will be held in April in Islamabad.)





PATTERSON