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