BI-WEEKLY REPORT ON ECONOMIC ISSUES, JANUARY 20, 2010

UNCLAS SECTION 01 OF 05 ISLAMABAD 000189

SENSITIVE
SIPDIS

REF: ISLAMABAD 0178

E.O. 12958: N/A
TAGS: ECON, ETRD, EFIN, EAGR, EINV, ENRG, PREL, PK
SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, January 20, 2010

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TOP STORIES
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1. (SBU) State Bank of Pakistan (SBP) releases FY10 midterm report.
Business Recorder reported on January 13 that the SBP's overall
picture of the economy was relatively optimistic with most key
indicators continuing the positive trends that began at the end of
last quarter. According to SBP projections, GDP growth is likely to
reach 3.3 percent, and exports should total $18.5 to $19 billion in
FY10. The fiscal deficit is expected to be comparable to last
year's, remaining between 4.7 - 5.2 percent of GDP, whereas the
current account deficit is likely to fall to 3.7 - 4.7 percent of
GDP from FY 09's 5.3 percent. The SBP anticipates that the GOP will
face major challenges in improving the tax-to-GDP ratio, which
currently stands at 9.8 percent. (Comment: In light of the weak
foreign direct investment and marginal growth in industrial
production the SBP's GDP projection may be ambitious. End Comment)

2. (SBU) Asian Development Bank (ADB) audit reveals irregularities
in Rental Power Plants (RPPs) awards. Business Recorder reported on
January 18 that the ADB found inconsistencies in the criteria used
to award the RPP contracts. The report emphasized that, in some
cases, the RPP agreements were awarded to well-connected individuals
rather than to the best qualified project. Implementation of the
RPPs was also noted with concern, as the GOP would need to increase
electricity prices 25 to 45 percent to fund more expensive rental
power. (Comment: The draft ADB report completed in December is now
making its way through the various GOP ministries. The report lays
out a series of scenarios for the GOP on the cost/benefit of
introducing RPPs, with an emphasis on the benefits of moving forward
with fewer RPPs (most likely 8) than the 14 RPPs currently approved.
End Comment)

3. (SBU) Prime Minister replaces the Minister of Health and sacks
the drug controller. The News reported on January 16 that the Prime
Minister's actions came in response to allegations of widespread
nepotism and corruption within the Ministry of Health (MOH).
According to the article, MOH officials were hiring under-qualified,
politically-connected individuals to run multi-million dollar
national health programs such as the National Maternal and Child
Health program. The report indicated that there were also
spillovers into the drug registration process, claiming that certain
pharmaceutical companies were bribing top level MOH officials to

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fast track the registration of their new drugs, a process which
typically takes several months and, in some cases, years to
complete. (Comment: Contacts from the pharma industry have often
complained about the MOH's inefficiencies. Whether or not this
change in leadership will help to clear some of the bottlenecks and
the bureaucratic red tape within the ministry remains to be seen.
End Comment)

4. (SBU) The Sui Northern Gas Pipelines Limited (SNGPL) suspends
provision of gas to textile mills. On January 12, The News reported
that SNGPL had indefinitely cut the supply of gas to all textile
mills located in Punjab and NWFP. Representatives from the Punjab
chapter of the All Pakistan Textile Mills Association complained
that these actions were contrary to the Cabinet Committee on Gas
Load Management's decision to only suspend gas two days a week.
They added that local textile industries would have no backup energy
sources left to run their operations as they were already dealing
with 10 to 12 hour blackouts per day. (Comment: Due to the spikes
in domestic consumption during the winter months, textile and other
industries receive nine-month contracts for gas and are expected to
find other fuel sources for the remaining 3 months. However, this
drama plays out annually, with gas users crying foul when the GOP
makes unrealistic promises to supply gas over and above the agreed
nine months.)

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TEXTILES
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5. (SBU) The textile industry bitterly divided over a new limit on
cotton yarn exports. On January 10 Business Recorder reported that
the Cabinet Committee on Textiles is imposing a cap of 50,000
kilograms per month on yarn exports. This is approximately 20
percent below current export volumes. Feeling that the limit was
too generous and would leave Pakistani manufacturers short of raw
materials, the Pakistan Cotton Fashion Apparel Manufacturers and
Exporters Association threatened to go on strike. Conversely, the
All Pakistan Textile Mills Association was deeply critical of the
GOP decision, which they viewed as an "anti-free-market"
intervention. (Comment: The textile industry is one of Pakistan's
most important economic sectors. Skyrocketing cotton prices have
caused considerable turmoil in recent weeks, adding misery to an
industry that has been significantly affected by rising costs of
inputs attributed to the local electricity and gas shortages. The

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GOP's decision to limit yarn exports, which could be challenged
under WTO regulations, will reduce Pakistan's foreign exchange
earnings, but will help to preserve some desperately needed jobs in
central Punjab. End Comment)

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ENERGY & WATER
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6. (SBU) Local political party challenges electricity tariff hike.
On January 8, the Daily Times reported that the Lahore High Court
(LHC) accepted a petition from the Jamaat-e-Islami (JeI) party
challenging the National Electric Power Regulatory Authority's
recent decision to increase the electricity tariff by 18 percent, in
October and January, claiming that the move was unconstitutional.
The LHC scheduled a hearing on this matter for January 21.
(Comment: JeI is trying to capitalize on popular discontent with
rising electricity costs and persistently dismal service. There is
little basis upon which to seriously question the legitimacy of
NEPRA's actions. By agreeing to hear the case, the LHC has made
clear its intent to meddle in issues related to energy tariffs.
This is a worrying sign, as the LHC intervention in a case involving
sugar prices earlier this year resulted in massive disruptions of
sugar supplies. End Comment)

7. (SBU) Lucky Cement signs Memorandum of Understanding (MoU) with
Oracle Coal Fields. On January 8, Business Day reported that under
this MoU, Sindh Carbon Energy Limited, a subsidiary of Oracle Coal
Fields, will mine the coal to be supplied to Lucky Cement's plants.
Oracle Coal Fields currently has an exploration license for Block 4
of the Thar Coal Field. (Comment: Contacts at Lucky Cement
confirmed the report and expect the project will encourage
exploration and mining of the Thar coal field, while helping to both
reduce dependence on imported coal and increase Pakistan's foreign
exchange reserves. End Comment)

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AGRICULTURE
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8. (SBU) Ministry of Food and Agriculture (MinFA) hoping to sign
Memorandum of Understanding (MoU) with Monsanto. The News reported,
on January 9, that MinFA is particularly interested in introducing
Mosanto's insect-resistant strand of cotton seed into the local

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market. However, while the Ministry of Law and Justice recently
cleared on the draft MoU, the Ministries of Textiles, Finance,
Commerce, Environment, and Science and Technology and the provincial
Ministries of Agriculture have yet to review the document.
(Comment: Pakistan is the world's fourth-largest cotton producer,
third largest raw cotton exporter and a leading yarn exporter.
However, its cotton yield per acre is 13th in the world. The
Monsanto agreement would help to increase per acre cotton
production. End Comment)

9. (SBU) GOP removes taxes on imported sugar. The News reported on
January 13 that Finance Minister Shaukat Tarin had confirmed the GOP
would scrap the 16 percent sales tax and all other duties on white
and refined sugar to facilitate import of the commodity by non-state
importers. The move comes as Pakistan faces a growing shortage of
white sugar. The GOP is looking to import 1.25 million tons of
sugar to help fill this supply gap.
(Comment: This artificially created sugar shortage is primarily
attributed to the GOP's clumsy intervention in the market, setting
local sugar prices significantly lower than international prices
thus encouraging rent seeking behavior and hoarding. End Comment)

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STOCK MARKET
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10. (SBU) Karachi Stock Exchange (KSE). The Karachi Stock Exchange
(KSE)-100 Index closed on January 18 at 9,895.46, a 0.1 percent
increase from the previous week's close. Overall market
capitalization slightly increased to $33.74 billion, with a net
foreign portfolio inflow of $6.84 million. Stabilizing
macroeconomic indicators and the projected 3.3 percent growth in GDP
were the major driving forces keeping the market optimistic.
(Comment: Our KSE contact said the persistent inflow of foreign
portfolio investment and the inflow of funds from the IMF were
buoying the market. End Comment)

11. (SBU) Lahore Stock Exchange (LSE). According to Business
Recorder, banking and oil stocks pushed the LSE Index up 5.76
percent in the first half of January. The LSE index passed 3,000 on
January 4 and has stayed above that mark since. Volume and trading
were heavier than average, and market capitalization was up 4.5
percent.


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PATTERSON