BI-WEEKLY REPORT ON ECONOMIC ISSUES, 22 APRIL 2009

UNCLAS SECTION 01 OF 06 ISLAMABAD 000885



SENSITIVE

SIPDIS



REF: ISLAMABAD 561



E.O. 12958: N/A

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

SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, 22 APRIL 2009



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TOP STORIES

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1. (SBU) The Friends of Democratic Pakistan met in Tokyo to pledge

USD 5.28 billion over two years to stabilize Pakistan's economy and

to support investment in healthcare, education, and infrastructure.



2. (SBU) The State Bank of Pakistan (SBP) lowered the discount rate

by 100 basis points to 14 percent on April 20. SBP Governor Raza

cited the positive inflation outlook as the main factor behind the

decision. However, the Chambers of Commerce for Multan, Rawalpindi,

Islamabad, and Tribal Areas have all deemed the cut in the discount

rate inadequate.



3. (SBU) According to Dr. Ashfaque Hasan Khan, former Special

Secretary on Finance, Pakistan's GDP is forecasted to decrease USD

4.9 billion this year. The Nominal Gross Domestic Product is

expected to be USD 162.6 billion in 2008-2009, down from USD 167.2

billion last fiscal year. Foreign investment declined by 36 percent

during the first nine months of the fiscal year, while the output of

the country's large-scale manufacturing declined 5.73 per cent.



4. (SBU) Pakistan's current account deficit decreased USD 2 billion,

approximately 21 percent, during the first nine months of the

current fiscal year. The decrease was mainly due to higher home

remittances and a sharp decline in the trade deficit.



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BANKING AND FINANCE

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5. (SBU) The Securities and Exchange Commission of Pakistan (SECP)

announced the discontinuation of the carry forward system (CFS) and

deliverable futures products according to Business Recorder.

Investors in the equity market were reportedly disappointed with

SECP's decision because they expected an alternative to be

announced, not just an end to the existing system. (Comment: KSE

official Anita Mirza denied the news on April 9 and said the SECP

decision to discontinue CFS had no impact on the market because CSF

investment was already low.)



6. (SBU) On April 11, The News reported that bank officials called

off a merger between KASB Bank and Atlas Bank after they failed to



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agree on a swap ratio. However, Atlas Bank may now merge with Saudi

Pak Commercial Bank (SPCB) instead. The merger is subject to

approval by the State Bank of Pakistan and other regulatory bodies.

The SBP has been pushing for mergers and acquisitions to consolidate

the banking industry as recent high inter-bank lending rates have

compounded difficulties for smaller banks. (Comment: Atlas Bank

official confirmed on April 15 that there would be no merger with

KASB because negotiations did not materialize and were finally

called off. Atlas Bank confirmed it was negotiating with SPCB

saying that both banks are busy performing due diligence and that it

will take at least three months to finalize the deal.)



7. (SBU) Two of the largest Pakistani banks, Habib Bank Limited and

Muslim Commercial Bank (MCB),expressed their interest to the

Karachi Stock Exchange (KSE),in separate notices to acquire

domestic operations over Royal Bank of Scotland (RBS). The banks

said they were applying to the State Bank of Pakistan (SBP) to start

their due diligence of RBS Pakistan. On April 14, Jahangir Siddiqui

and Co. Ltd (JSCL),a Karachi-based financial services company, also

expressed its interest in buying RBS Pakistan. RBS, which has a

market capitalization of approximately USD 266 million, ventured

into the Pakistani market after acquiring global operations of ABN

AMRO last year. It decided to sell off its operations in 36

countries, including Pakistan, after booking huge losses from

sub-prime mortgages. (Comment: Notices from both banks can be found

on the KSE website. JSCL Corporate Communication department

confirmed the news, but said it is in the preliminary stages of due

diligence.)



8. (SBU) The SBP announced the capital requirement reduction on

April 15 to boost the banking sector. The bank reduced its previous

limit of Rs 23 billion (USD 287 million) to Rs 10 billion (USD 125

million). According to the SBP circular, it will require banks to

raise their minimum paid-up capital (free of losses) on a sliding

scale, culminating in Rs 10 billion by December 31, 2013. SBP

stated it took this action "in view of the global slowdown in growth

and capital accumulation by financial institutions and

representations from shareholders." (Comment: Complete text of the

circular can be found on the SBP website.)



9. (SBU) The Karachi Stock Exchange (KSE)-100 index was up last

week. KSE ended April 17 at 7,794.95, 2.32 percent above its April

10 closing. The total share turnover was down to 259.36 million

from 372.94 million during the prior week. Market capitalization



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rose slightly to USD 28.88 billion. The net foreign investment

outflow was USD 6.5 million, after a small inflow the week before.

The banking, energy, fertilizer and cement sectors remained among

the top performers. (Comment: KSE contacts told Post that the

expectations of a substantial commitment from Friends of Pakistan

coupled with the anticipation of interest rate cuts and the State

Bank of Pakistan's decision to reduce minimum capital requirements

for banks were the major factors in the market increase.)



10. (SBU) The Lahore Stock Exchange (LSE) has been volatile, but

still rose almost three percent over the last two weeks. Most

analysts attributed a string of losses April 14-17 to the Pakistan

Muslim League-Nawaz's (PML-N) deliberations about, and ultimate

rejection of, an offer to join the Pakistan People's Party (PPP)-led

coalition national government. The LSE rose again April 20 on news

of a successful Friends of Democratic Pakistan meeting.



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ENERGY AND POWER

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11. (SBU) Prime Minister Yousuf Raza Gilani inaugurated the Zorlu

Wind Energy Project on April 19. A Turkish company, Zorlu Enerji

Group, established the plant at Jhimpir, Thatta, Sindh. The first

phase of the wind power plant will produce 6MW from 5 wind turbines

and will meet the electricity demands of 7,400 homes. By the end of

2010, the wind farm will produce 300MW and the wind turbines will

displace 10,500 tons of carbon dioxide pollution each year. At the

inauguration, Prime Minister Gilani said an additional 24 wind farm

projects, with a cumulative capacity of 1,200MW, are under various

stages of development. (Comment: CG Karachi and EconOff attended

the inauguration. During his remarks, the PM stated that

development of alternative energy was important for Pakistan's

energy security, reducing pollution, and decreasing dependence on

oil imports. He heralded the project as "green, economical, and

indigenous" power, and a new era for Pakistan.)



12. (SBU) Pakistani media reported on the particularly negative

impact of load-shedding (rolling blackouts) on the textile industry.

The energy problems hit Faisalabad especially hard, home to roughly

60 percent of Pakistan's textile exports, according to the

Faisalabad Chamber of Commerce and Industry. Sheikh Ashfaq Ahmed,

Chairman of the Faisalabad Dry Port Trust, told the press that

Faisalabad port business was down 40 percent over the last 5 months



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due to load shedding and inconsistent gas supplies. (Comment:

Consulate Lahore is aware of at least one U.S. company that may be

unable to expand its plant because of inconsistent gas deliveries.)



13. (SBU) Prime Minister Gilani officially inaugurated the 165 MW

Attock Generation Power Plant in northern Punjab, which began

operation in March. The government also announced the expansion of

the Chashma power complex which will include two new plants expected

to generate a total of 680 MW. (Comment: This presumably

represents the decision to purchase two additional Chinese-built

reactors for Chashma initially announced at the time of Zardari's

first official visit to China last year. End Comment.)



14. (SBU) Business Recorder reported that Matrix Group Consulting

Limited (MGCL),a US-based company, will construct two power plants

totaling USD 1 billion at Port Qasim (PQA) and Karachi Port (KPT).

The PQA plant will run on coal while the KPT plant will use wind

energy. MGCL President Cathleen M. Ihasz said her company plans to

bring more energy and infrastructure investment and development to

Pakistan. (Comment: KPT Public Relations Manager confirmed that two

new plants will be built on April 14. He said that the Matrix Group

is in the very preliminary stages of preparing a technical report

for these projects, and more details would emerge soon.)



15. (SBU) On April 15, Business Recorder reported that the Karachi

Electric Supply Company (KESC) initiated a new "scorecard" under an

accountability and transparency drive to combat Karachi's power

crisis. The strategy includes attracting millions of dollars in

investment as well as planning several new power plants (totaling

960MW),grid stations and feeders. KESC will also increase system

monitoring and work to improve transmission and distribution.

(Comment: KESC Director Operations announced that it will invest

USD 361 million and noted that the city will continue to suffer

prolonged power outages until management invests to increase power

generation capacity, works to reduce transmission and distribution

losses (including theft),and improves management/employee

relations.)



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AGRICULTURE

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16. (SBU) Pakistan's rice exports increased to USD 1.55 billion

according to Business Recorder. Rice exports will likely reach USD



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2.2 billion by the end of the current fiscal year. Abdul Rahim

Janoo, Chairman of the Rice Exporters Association of Pakistan

(REAP),said new rice markets are possible as Pakistan also seeks to

recapture traditional markets.



17. (SBU) According to Pakistani media reports, the provincial

Punjab government increased its target acquisition of wheat to 4

million metric tons, up from its initial estimate of 3 million tons.

The bumper wheat crop may cover deficiencies in other provinces.

The yield of wheat is also up 5-7 percent in Sindh compared to this

time last year.



18. (SBU) Chief Minister Shahbaz Sharif shelved the "One Rupee Roti"

proposal, but intends to continue Two Rupee Roti scheme

"indefinitely" according to reports in the News and Daily Times.

Pakistani media also reported on the Chief Minister's promise to

make the provincial Annual Development Plan (ADP) more

"poor-friendly," enhancing Sharif's populist credentials.



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TAXATION

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19. (SBU) Shaukat Tarin, Adviser to the Prime Minister on Finance

and Economic Affairs, spoke at the Overseas Chamber of Commerce &

Industry (OCCI) on April 7. During his remarks, Tarin stated that

the Pakistani economy shows signs of improvement. He insisted on

the need for tax reform, and reducing the types of taxes to income

and consumption. Future plans to broaden the tax net may include

adding taxes on real estate, agriculture, and capital gains. Tarin

also categorically ruled out any reduction in the defense budget.



20. (SBU) Speaking at a press conference on April 9, Shabbir Ahmed,

Chairman of the Pakistan Bedwear Exporters Association (PBEA),said

the government may impose an 18 per cent value-added tax (VAT) on

the textile sector next fiscal year. The Towel Manufactures'

Association of Pakistan (TMAP) and PBEA called the imposition of VAT

an "anti-industry and anti-employee" move by the government. Ahmed

said the VAT would create cash-flow problems for the industry, and

called on the GOP to establish a UK like tax refund system

(exporters receives a refund as soon as the shipment reaches ports)

or to not impose a VAT. (Comment: Pearl Fabric, one of the major

stakeholders in towel exports, told post the Advisor to Finance and

Textile Minster assured the company that the government will not



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impose VAT on any of the textiles exporting categories.)



PATTERSON