BI-WEEKLY REPORT ON ECONOMIC ISSUES, JANUARY 6, 2010

UNCLAS SECTION 01 OF 04 ISLAMABAD 000178

SENSITIVE
SIPDIS

REF: ISLAMABAD 3042

E.O. 12958: N/A
TAGS: ECON, ETRD, EFIN, EAGR, EINV, ENRG, PREL, PK
SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, January 6, 2010

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TOP STORIES
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1. (SBU) Electricity tariff increases by 13.6 percent. On December
31, the Daily Times reported that the Ministry of Water and Power
would enforce the change in power prices starting January 1. This
GOP initiative is in line with the staggered increase of power
tariffs agreed to with the IMF, World Bank, and Asian Development
Bank. Business Recorder reported on January 5 that members of the
local business community expect negative economic repercussions
stemming from this decision, which coincides with an 18 percent
increase in gas prices.
(Comment: Public response to the tariff increase has been muted so
far, perhaps tempered by Ministry of Water and Power leaks of the
increase in advance of the notification.)

2. (SBU) Pakistan passes IMF review receiving $1.2 billion in IMF
funds. On December 24, Business Recorder reported that the
Executive Board of the International Monetary Fund (IMF) completed
the third review of Pakistan's economic performance. Satisfied with
the GOP's efforts to improve its economic environment, the IMF
approved the disbursement of $1.2 billion, representing the fourth
tranche of Pakistan's IMF loan, and bringing total disbursements
under the Pakistan's IMF Stand-By Arrangement to $6.54 billon. The
IMF disbursed the monies on December 28.

3. (SBU) Annual reservoir maintenance affecting local power supply.
On December 28, Business Recorder reported that water releases from
major reservoirs had all but stopped, slashing hydroelectric power
generation by at least 1,200 megawatts and exacerbating the local
power shortage problem. This routine cut in water releases,
expected to end on January 30, helps to facilitate canal
maintenance, while saving reservoir water for crop irrigation in the
spring. (Comment: According to our contacts, blackouts in Punjab
are now lasting six to eight hours a day in the cities and as much
as 12 to 14 hours a day in the rural areas. Natural gas rationing
has compounded the problem, as thermal generation has not been
sufficient to fill the shortfall of hydropower. The seasonal load
shedding comes at an unfortunate time given the January 1 increase
in the electricity tariff.)

4. (SBU) The Karachi Electric Supply Company (KESC) to set up Thar's
first coal power plant. On December 16, the Business Day reported

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that KESC signed a Memorandum of Understanding (MoU) with the
UK-based company Oracle Coalfields, to set up the first major
coal-fired power plant fueled by coal mined from Thar coalfields in
Sindh. According to the MoU, Oracle will own and operate the mine,
supplying coal to the KESC-run power plant. (Comment: Contacts at
KESC indicated that this agreement is still in its preliminary
stages, adding that they are still trying to determine exactly how
they can go about exploiting the Thar coalfields.)

5. (SBU) Current account deficit down to $1.35 billion. On December
18, Dawn reported that Pakistan's current account deficit fell to
$1.359 billion during the first five months of FY10, compared to
$7.318 billion during the same period in FY09. This 18 percent drop
is attributed to a smaller trade deficit, increased remittances, and
inflows from the IMF and donors.
(Comment: This drop in the current account deficit demonstrates
recent Pakistani success in getting its macroeconomic house in
order. However, contacts in the banking sector have suggested that
the GOP should not "overvalue" the situation, which could easily
change should oil prices increase or Pakistan's exports continue to
decline.)

6. (SBU) The Ministry of Petroleum and Natural Resources increases
gas prices by 18 percent. On December 22 Business Recorder reported
that the Ministry of Petroleum and Natural Resources had presented a
proposal to the Prime Minister to increase gas prices, including the
price of Compressed Natural Gas (CNG),by 18 percent for all
consumers starting early January. Representatives from the Sui
Northern Gas Pipeline and Sui Southern Gas Company gas utility
companies indicated that this plan would generate over $2.9 billion
in needed revenue. Local industry expressed serious concern over
the proposal, emphasizing that they were already facing difficulties
because of the increasing cost of inputs. The News reported on
December 30 that CNG stations were planning to strike to oppose the
possible CNG price hike. The Chairman of the All Pakistan CNG
Association said 2,912 of Pakistan's 3,006 CNG filling stations
would remain closed for 3-4 days, adding that if the GOP went ahead
with the price rise, the Association would challenge the tariff hike
in the courts. On January 1, The News confirmed that the Prime
Minister approved the proposed tariff hike, which took effect that
same day; however, following discussions with the Minister of
Petroleum and Natural Resources, the CNG association called off
their proposed strike. (Comment: This tariff hike is a positive
sign that the GOP is serious about reducing subsidies and

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rationalizing energy pricing and consumption. Contacts at the All
Pakistan CNG Association said that they would not contest the tariff
raise if CNG prices remained 40 percent lower than petrol prices.)

7. (SBU) The Competition Commission of Pakistan (CCP) fines local
LPG producer and marketing association $3.7 million for collusive
behavior. On December 17, Business Recorder reported that following
an extensive investigation the CCP had found that the Jamshoro Joint
Venture Limited (JJVL),the country's largest LPG producer, and the
Liquefied Petroleum Gas Association of Pakistan (LPGAP),the largest
association of local LPG marketing companies, were involved in price
fixing. According to the report, JJVL and LPGAP were intentionally
manipulating the supply and the price of locally produced LPG in
order to push LPG importers, such as Progas, out of the market.
JJVL and LPGAP are currently contesting the $3.7 million in fines
imposed by the CCP in the Supreme Court. (Comment: Since its
inception in 2007, the CCP has fought to promote a competitive
environment in Pakistan and to protect consumer interests by
regulating monopolies and combating collusive practices. It has
filed 76 cases against local businesses, including alleged cartels
in the sugar, banking and cement industries.)

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BANKING & FINANCE
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8. (SBU) State Bank of Pakistan (SBP) Quarterly Report shows massive
rise in Non Performing Loans (NPL). On December 24, Business
Recorder reported that during the quarter ending September 30, the
banking system experienced slow growth and a massive increase in
NPLs, mainly due to the overall slowdown in local economic activity.
According to the SBP's Quarterly Performance report, NPLs increased
from $4.79 billion in the quarter ending June 2009 to $5.08 billion
in the quarter ending September 2009. (Comment: Despite the growth
of NPLs, the banks remain well-capitalized as the risk-based capital
adequacy ratio of all banks operating in country improved to 14.3
percent during this period.)

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STOCK MARKET
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9. (SBU) Karachi Stock Exchange (KSE). According to Business
Recorder, the KSE 100 Index closed the year on December 31 at

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9,386.92. This represents a 0.3 percent increase from the previous
week's close. KSE was up nearly 53 percent in 2009. Overall market
capitalization decreased slightly from $32.27 billion to $32.15
billion, with a net foreign portfolio investment inflow of $4.11
million. (Comment: The market saw a short week of trading due to a
local holiday and unexpected closures following the December 28
bombing and arson in Karachi. Volumes were low during the week as
investors remained concerned about the economic impact of the
Karachi attack, and the ongoing security problems in the country.)

10. (SBU) Lahore Stock Exchange (LSE). Business Recorder reported
that the LSE index climbed 5.5 percent in December shrugging off
fears of turmoil after the National Reconciliation Ordinance
expired. The volume of shares traded over the month of December
fluctuated, with an equal number of shares registering gains and
losses, and market capitalization was up by 4.3 percent.

PATTERSON