VZCZCXRO0499
RR RUEHLH RUEHPW
DE RUEHIL #3117 2681309
ZNR UUUUU ZZH
R 241309Z SEP 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 9028
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHBUL/AMEMBASSY KABUL 9183
RUEHNE/AMEMBASSY NEW DELHI 3819
RUEHLO/AMEMBASSY LONDON 8763
RUEHKP/AMCONSUL KARACHI 0382
RUEHLH/AMCONSUL LAHORE 6124
RUEHPW/AMCONSUL PESHAWAR 4935
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEAIIA/CIA WASHDC
RUEKJCS/SECDEF WASHINGTON DC

UNCLAS ISLAMABAD 003117 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ECON EFIN PREL PK
SUBJECT: STATE BANK OF PAKISTAN DISCUSSES INCREASING EQUITY MARKET 
LIQUIDITY 
 
¶1. (SBU) Summary: State Bank of Pakistan (SBP) officials met with 
market stakeholders on September 22 to discuss proposed fiscal and 
monetary measures to provide increased liquidity to equity markets. 
The Karachi Stock Exchange's KSE-100 Index has been frozen at 9,144 
points, its value on August 27, to prevent further deterioration in 
the index's value.  The Karachi Stock Exchange Board of Directors 
has banned the short selling of stocks and the blank sale of futures 
contracts until at least November.  Stock broker representatives 
called on regulators to do more, including provide capital gains tax 
exemptions for banks and extend capital gains tax exemptions for 
non-bank corporate and institutional investors past 2010.  End 
Summary. 
 
¶2. (SBU) The State Bank of Pakistan (SBP) met with Security and 
Exchange Commission and Karachi Stock Exchange (KSE) officials on 
September 22 to discuss proposed fiscal and monetary measures to 
provide increased liquidity to equity markets.  The Karachi Stock 
Exchange's KSE-100 Index has been frozen at 9,144 points, its value 
on August 27.  The market has fallen below 9,144 points on three 
occasions, triggering a halt to trading.  Trading on individual 
shares is also suspended if share value drops below the August 27 
level.  The SBP has consulted with both government officials and 
private sector representatives to consider a fiscal and monetary 
package to increase liquidity prior to a future removal of the 
trading floor on KSE share and indexes. 
 
¶3. (SBU) In an attempt to curb market speculation, the Karachi Stock 
Exchange Board of Directors announced that, effective September 24, 
the short selling of stocks and the blank sale of futures contracts 
will be temporarily prohibited.  These prohibitions will remain in 
effect until November, at which point the Board of Directors will 
review the policy. 
 
¶4. (SBU) Stock broker representatives Arif Habib, Aquil Karim Dedhi 
and Jahangir Siddiqi, also in attendance at the September 22 
meeting, requested that the SBP relax banking regulations to allow 
further bank investment in the market.  Currently, banks can invest 
20 percent of available capital in market equities and ten percent 
of available capital in futures.  Broker representatives reportedly 
requested capital gains tax exemptions for banks, currently in place 
until 2010 for non-bank investors.  The representatives also 
requested that the capital gains tax exemption for non-bank 
corporate and institutional investors be extended past 2010 for 
those companies that participate in share buyback programs.  The 
representatives also asked that buyback dividends be exempted from 
taxation and that mutual funds, with the approval of share holders, 
be allowed to invest up to 50 percent of available capital in the 
KSE stabilization fund. 
 
¶5. (SBU) In response to broker recommendations, SBP Governor Akhtar 
reported that the SBP had already pumped Rs 200 billion (USD 2.56 
billion) in additional liquidity into the market this year and will 
closely monitor market needs in deciding whether to extend 
additional liquidity to the markets.  KSE Deputy Manager Juanid 
Mirza reported to local media that while these initial 
recommendations were currently under review, it was likely that the 
State Bank would eventually approve many, if not all, of the 
proposals.  According to Mirza, declining investor confidence 
coupled with capital flight would eventually force the SBP's hand, 
as Pakistan's liquidity crunch looks set to worsen. 
 
PATTERSON