BI-WEEKLY REPORT ON ECONOMIC ISSUES, FEBRUARY 3, 2010

UNCLAS SECTION 01 OF 04 ISLAMABAD 000410

SENSITIVE
SIPDIS

REF: ISLAMABAD 189

E.O. 12958: N/A
TAGS: ECON, ETRD, EFIN, EAGR, EINV, ENRG, PREL, PK
SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, FEBRUARY 3, 2010

- - - - - -
TOP STORIES
- - - - - -

1. (SBU) Ministry of Finance concerned over the declining tax-to-GDP
ratio. On February 2 Business Recorder reported that, according to
the Finance Ministry's 2009-2010 Fiscal Policy Statement, at the end
of FY 09, Pakistan's s tax-to-GDP ratio stood at 8.8 percent, with
revenue collection totaling $13.6 billion. This represents a 1
percent drop compared to the previous fiscal year. The government
has set a target of $16 billion for FY 10 tax collections. This
would entail a 19.3 percent increase from FY09. Ministry of Finance
officials said that the creation of the new Inland Revenue Service,
Pakistan's IRS, would help streamline the process of introducing the
value-added tax (VAT),a step towards increasing tax collection.
(Comment: These revenue targets are ambitious given the current
domestic and international economic environment and GOP's track
record. The GOP has yet to make much headway on the VAT, and the
National Assembly has yet to pass the enabling legislation for it.
End Comment.)

2. (SBU) National Assembly passes Anti-Money Laundering Bill (AML)
2009. On January 28 The Nation reported that the bill was approved
by the National Assembly on January 27, but the Senate and President
have yet to clear on it. Under the proposed legislation, violators
could face fines of up to $12,000 and jail terms of one to ten
years. (Comment: The Financial Monitoring Unit (FMU),Pakistan's
equivalent to a Financial Intelligence Unit (FIU),is already
functioning and operating under the revised AML Ordinance of 2009,
which closely meets international standards. The AML bill passed by
the National Assembly is identical to the AML Ordinance President
Zardari signed in November 2009. End Comment.)

3. (SBU) Government may cut the Public Sector Development Program
(PSDP) by 50 percent. On January 26 Business Recorder reported that
the Ministry of Finance may cut the $4.97 billion currently
allocated in the budget to fund 2010 PSDP projects in half. This
proposed funding cut is due to the GOP's lack of liquidity
attributed to an increase in defense spending and the delayed
disbursement of Coalition Support Funds from the United States.
(Comment: The PSDP includes substantial funds for infrastructural
development. If implemented, this massive cut in development
expenditures will serve as an additional deterrent for investors and
slow economic growth. End Comment.)

ISLAMABAD 00000410 002 OF 004



4. (SBU) State Bank of Pakistan (SBP) unveils FY10 monetary policy.
On January 31 The News reported that, amidst fears of rising
inflation and limited liquidity, the SBP is maintaining its policy
rate at 12.5 percent. According to the Governor of the SBP, average
inflation is expected to hover between 11 and 12 percent this fiscal
year. SBP officials expressed hope that a decrease in
Non-Performing Loans would strengthen the banks' confidence in the
private sector and in turn increase private sector lending.
(Comment: Increases in international commodity prices and the recent
phase out of electricity subsidies could exacerbate inflation moving
forward. End Comment)

5. (SBU) Lack of water may significantly reduce Punjab's next wheat
harvest. On January 29 Business Recorder reported that farmers are
increasingly concerned by the winter season dry spell. Punjab's
wheat crop could be as much as 4 million tons below this year's
target due to a lack of sufficient irrigation water. (Comment: The
Indus River System Authority is expected to announce provincial
water allotments in the coming weeks. Punjab government officials
believe that demand for irrigation will exceed supply by at least 30
percent this season. End Comment.)

6. (SBU) Punjab may have trouble purchasing the 2010 wheat crop. On
January 26, Dawn reported that the province borrowed over $1.76
billion in 2009 to purchase wheat from local farmers at record high
prices. Punjab has repaid only $ 300 million of the debt
accumulated from last year's purchases, jeopardizing the province's
ability to secure financing for its 2010 purchases. Punjab's Food
Department has already spent $360 million on various subsidies this
fiscal year. (Comment: It is the Punjab government's policy to
purchase stocks of wheat for sale, at a subsidized rate, to flour
mills annually. With mounting debt and limited income, Punjab may
not be able to continue acting as a broker for the domestic wheat
market. End Comment.)

- - - - - - - -
POWER & WATER
- - - - - - - -

7. (SBU) The Karachi Electric Supply Company (KESC) to offer up $50
million worth of company shares. On January 22 Business Recorder
reported that KESC struck this deal with the Asian Development Bank
and the International Finance Corporation in an attempt to settle

ISLAMABAD 00000410 003 OF 004


the $324 million debt that it owes to both international financial
institutions. (Comment: Contacts at the KESC confirmed that this
deal is in the works, but still in its preliminary stages. End
Comment.)

8. (SBU) 4Gas to set up floating LNG terminal at Port Qasim. On
January 28 Business Recorder reported that the Minister for
Petroleum and Natural Resources announced that the Economic
Coordination Committee gave the green light to American-owned 4Gas
to establish a floating LNG terminal at Port Qasim in Karachi. In
five years, 4Gas will establish an $800 million fixed terminal at
the port to manage the long term import of LNG to Pakistan. The
floating terminal's capacity is 3.5 million tons per annum of LNG,
and the terminal is expected to be up and running by December 2011.
(Comment: The GOP's approval was a direct result of the promise of
OPIC financing for the project. The GOP has not yet approved the
second, landed phase, of the project nor secured gas supplies for
it. End Comment.)

9. (SBU) Cabinet rejects proposal to purchase 30 million energy
saving bulbs. According to a January 22 article in The News,
members of the Cabinet refused to sign off on this $82 million
project because of the exorbitant costs of the compact fluorescent
light lamps. Under this 10-year joint Asian Development Bank/
Agence Francaise de Development investment program, the GOP would
distribute the bulbs to residential consumers free of charge, to
replace existing incandescent bulbs. The expectation was that this
initiative would help utility companies reduce peak demand by about
1,100 MW, and cut energy consumption by about 2,500 GWh per year.
(Comment: Contacts at the ADB believe the project will still go
forward in spite of the GOP's concerns. End Comment.)



- - - - - - - -
TRANSPORTATION
- - - - - - - -

10 (SBU) Another airline leaves Pakistan. On January 21, The News
reported that, effective February 17, Singapore Airlines will
suspend its flights from Karachi and Lahore. This decision comes in
response to growing security concerns, which have scared away the
small number of tourists and business travelers previously flying to
Pakistan. Industry representatives indicated that the absence of a

ISLAMABAD 00000410 004 OF 004


GOP policy to promote the aviation industry has exacerbated the
problem. Currently, out of the 42 airports in country, 18 are
functional and of these 9 are equipped to cater to international
traffic. (Comment: Singapore Airlines officials confirmed the news
and said that they are completely suspending their Pakistan
operations as they no longer view the country as an attractive
market. End Comment.)

- - - - - - -
STOCK MARKET
- - - - - - -

11. (SBU) Karachi Stock Exchange (KSE). The KSE 100 Index ended the
week of January 29 at 9,632.76, down 1.5 percent from the previous
week's close. Overall market capitalization decreased slightly from
$32.97 to $32.45 billion, with net foreign portfolio investment
outflow of $1.32 million. Market activity was primarily driven by
foreign participants, who invested because of attractive prices in
the domestic market compared to other South Asian markets. The
SBP's decision not to change its policy rate failed to buoy the
market as most investors had already anticipated the move.
(Comment: The stock market remained volatile due to the large sale
of stocks in the regional markets. The depreciation of the
Pakistani rupee also negatively affected the stock exchange's
performance. End Comment.)

12. (SBU) Lahore Stock Exchange (LSE). According to Business
Recorder, banking and oil stocks pulled the LSE down 2.45 percent in
the second half of January, but the index continued to hover around
3,000. Volume and trading were relatively light.

PATTERSON