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