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FM AMCONSUL KARACHI
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UNCLAS SECTION 01 OF 04 KARACHI 000653 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINV SOCI PK
SUBJECT: PROCTOR AND GAMBLE GROUNDBREAKING CEREMONY; 
AMBASSADOR MEETS KEY KARACHI OFFICIALS 
 
 ¶1.  (SBU)  SUMMARY:  Ambassador Patterson traveled to 
PakistanQs largest city, Karachi, to attend the 
groundbreaking of a new Proctor and Gamble (P&G) factory in 
Port Qasim with Karachi Consul General on December 18.  P&G 
will hire 700 new employees to work in the plant and 
estimates it may help to create up to 7,000 jobs. 
Separately, the Ambassador met Adnan Afridi, Managing 
Director of the Karachi Stock Exchange (KSE), who provided 
a frank assessment of PakistanQs troubled stock markets. 
The KSE dropped 13% in its first three days of trading 
since the removal of the market floor imposed on August 28. 
Afridi predicted a continued decline of an additional 30%- 
40% in PakistanQs stock exchange but believes the market 
will recover after a painful correction.  Sindh Governor 
Dr. Ishrat ul Ebad Khan received the Ambassador and CG at 
the GovernorQs House and spoke to U.S. concerns about 
recent ethnic violence in Karachi.  The Ambassador also met 
Chief Minister Syed Qaim Ali Shah and discussed PakistanQs 
continuing economic problems.  End Summary. 
 
KarachiQs Beleaguered Stock Exchange 
--------------------------------------------- --- 
 
¶2. (SBU)  The Ambassador's meeting with KSE Director Afridi 
took place at the Consul General's Residence because of 
Afridi's concern about security.  He was worried the 
lifting of the floor on KSE stock prices earlier in the 
week might result in violence by irate investors.  Earlier 
this year, there was a riot of money-losing investors in 
Karachi's financial district following a stock market 
plunge.  Afridi also told the Ambassador that KarachiQs 
financial district is on high alert because of NovemberQs 
Mumbai attacks. 
 
¶3. (SBU)  Afridi described a variety of problems facing the 
market including a lawsuit against the KSE, a loss of 
public faith in the Government of Pakistan (GOP) due to its 
wavering stance on helping the markets, and fading investor 
confidence.  Afridi, who studied economics and law at 
Harvard, however, remains a strong believer in free 
markets.  The lawsuit was brought against the management of 
KSE, the Security and Exchange Commission of Pakistan 
(SECP), and the National Clearing Company by a group of 
brokers seeking payment on margin accounts.  Afridi 
estimates that 70-80% of the stock market investment in 
Pakistan comes from margin accounts.  Unlike in the U.S. 
where brokers fund margin accounts, in Pakistan the 
borrowing is done through a third party.  With the sharp 
drop in Pakistan stock prices, many investors are unable to 
cover their margin calls and the brokers are seeking 
payments from the lenders to cover losses in margin 
accounts.  The courts have frozen the accounts named in the 
law suits and the investors cannot liquidate their ccounts. 
Afridi believes these lawsuits should be settled out of 
court. 
 
¶4. (SBU) When asked by the Ambassador how the proposed 
government support fund might work in the stock market, 
Afridi was not overly optimistic.   He bemoaned the 
government's credibility issue, recounting how when the 
stock market began its decline in April, the Finance 
Minister said funds would be made available to support the 
market.  Despite several government proposals involving 
sums of PKR 20 to PKR 30 billion, no agreement was ever 
reached.  Then when Pakistan began discussions with the 
International Monetary Fund (IMF) in October, the IMF 
required that any support to the market would first require 
consultation with the IMF.  Late December 17, the IMF 
agreed to allow Pakistan to provide PKR 20 billion (USD 250 
million) to support the stock market through the purchase 
of shares of seven state owned or managed enterprises.  The 
government plans to offer the shares to Pakistanis living 
abroad.  Afridi expressed concern that calling the program 
a "stabilization fund" may raise investor expectations too 
high.  He is also concerned that local banks may not want 
to get involved in the share purchase program.  Afridi 
stated "a lot of mistrust exists between the government and 
the market."  Afridi also thinks the government has become 
 
KARACHI 00000653  002 OF 004 
 
 
too involved in trying to fix all the economy's problems at 
once.  In sum, the governmentQs lack of credibility 
combined with its perceived interference is scaring off 
investors. 
 
"Let the Market Forces Happen." 
-------------------------------------- 
 
¶5. (SBU)  Afridi believes the KSE has been hurt by Morgan 
StanleyQs decision to remove Pakistan from its MSCI index. 
On December 31, the removal will force many index funds to 
sell Pakistani shares automatically, further depressing the 
market since these funds simply invest in the index.  He 
told the Ambassador he had tried unsuccessfully to engage 
Morgan Stanley on the issue.  Afridi blames the media for 
scaring investors away from the market, especially at the 
present time when money needs to flow back into the market. 
He is also concerned about investors who may lose their 
homes and cars, pledged as collateral for loans to invest 
in the stock market.  He fears this could fuel social 
unrest.  Finally, when asked by the Ambassador if a 
reasonable recovery was possible, Afridi was cautiously 
optimistic:  "We need to keep people alive for three to six 
months and then a recovery may happen...We need to let the 
market forces happen and then there will be a recovery." 
 
Proctor and Gamble Betting on Pakistan's Future 
--------------------------------------------- -------------- 
 
¶6. (SBU) Karachi's Port Qasim Industrial Zone has been 
under development for the past 15 years and includes 112 
ongoing commercial and industrial projects. 
Other than the DHS cargo scan facility, however, no 
American firm has located in Port Qasim.  Proctor and 
Gamble's (P&G) decision to locate a plant in Port 
Qasim is viewed as a vote of confidence in PakistanQs 
future.  P&G plans to begin bulk packaging of diapers at 
the plant and production of laundry detergent when it is 
completed in 2010.  Initially the production will be 
marketed in Pakistan but eventually, P&G hopes to use the 
factory for exports.  Laurent Phillipe, P&G's Director for 
Europe, the Middle East, and Africa pointed out that P&G 
will only use one-third of the 25 acre site initially. 
P&G is optimistic about its future in Pakistan and believes 
it will need the additional room to expand.  He told the 
Ambassador the plant will initially employ 700 people but 
he hopes up to 7000 jobs could result in the area as a 
result of the plant's presence. 
 
¶7.  (SBU) Earlier this year, one P&G employee was killed 
and three were wounded in Hub, Balochistan.  P&G is now in 
the process of shifting their operations from Hub to Port 
Qasim.  P&G had a large turnout of corporate and 
government leaders including Qaisar Shareef, the Country 
Manager for P&G and Shaukat Tarin, Advisor to the Prime 
Minister on Finance, Revenue, and Economic Affairs.  In her 
remarks, Ambassador Patterson called the groundbreaking "a 
good news day in U.S./Pakistan relations."  She noted the 
plant's potential to provide affordable local products to 
replace expensive imports and as a place where youth can 
begin a career in Pakistan.  She also called upon the 
Pakistani Government to lower duty rates on imported 
materials to help create jobs in Pakistan.  In closing she 
reminded the audience that the U.S. is Pakistan's largest 
trading partner and foreign investor. 
 
Peace Committees Formed to Ease Tensions 
--------------------------------------------- ------ 
 
¶8.   (SBU) The Ambassador met with Sindh Governor Dr. 
Israt-ul-Ebad Khan to learn his views on the recent ethnic 
violence and current situation in Karachi.  The Governor 
acknowledged that local investors are hesitant due to 
the security situation in the city and opined that Foreign 
Direct Investment (FDI), such as the P&G investment at Port 
Qasim lend stability to Pakistan and encourages local 
investors to remain.  Khan acknowledged that the harsh 
economic situation coupled with ethnic tensions make the 
 
KARACHI 00000653  003 OF 004 
 
 
population susceptible to manipulation by those seeking to 
foment unrest in the country.  He said the demonstrations 
in October provided a catalyst for the Governor to meet 
with contacts throughout Karachi society.  Peace Committees 
were established to discuss difficult issues and defuse 
tensions before they escalate into demonstrations and 
violence.  The Committees, comprised of a mix of sectarian 
and political representatives, will meet on an on-going 
basis.  "We must have constant dialogue," he noted, "to 
encourage and ensure reporting of suspicious activities in 
the communities." 
 
¶9.  (SBU) Governor Khan said, "It is the duty of political 
parties to influence their communities to tolerance," and 
noted that the ANP appears to have very little actual 
ground control of the Pashtun community.  Khan believes the 
Pashtuns do not want trouble with their neighbors, but seek 
only to make an income and live peacefully.  "It is not 
necessarily a fight between ethnic groups," Khan said.  The 
people of Karachi had high hopes for the ANP to represent 
their constituents as a secular party, but the leadership 
has proven to be dishearteningly incompetent, Khan opined, 
adding that the ANP must tackle the issue of ethnic 
tensions head on. 
 
Inflation is at the Heart of the Food Shortage 
--------------------------------------------- ----------- 
 
¶10.  (U) When questioned about the food supply in rural 
Sindh, the Governor responded that the actual food supply 
is sufficient for the population.  However, food costs have 
escalated to two or three times the pre-election cost while 
salaries have remained the same, creating an artificial 
food shortage.  The housing market has gone flat in 
Pakistan and unemployment has risen, meaning the average 
family can afford less of the basic necessities.  The 
Governor said he believed it is the combination of economic 
pressures which make Karachi susceptible to ethnic 
tensions. 
 
Chief Minister Shah Offers Congratulations on Recent 
Presidential Elections 
--------------------------------------------- ---------- 
 
¶11.  (SBU) Chief Minister (CM) Syed Qaim Ali Shah offered a 
congratulatory message to Ambassador Patterson on the 
outcome of the November presidential election in the United 
States in a December 18 meeting.  CM Shah expressed thanks 
for the USG's efforts to decrease tensions between Pakistan 
and India following the Mumbai terrorist attacks. Shah said 
Pakistan was shocked at the horrible attacks and had great 
sympathy for India, noting that "Karachi has remained 
peaceful since this government came into service." 
Pakistan has followed the USGQs recommendation to restrict 
Jamaat ul-Dawa (JuD) activities, he advised.  Twenty-six 
people have been detained thus far.  CM Shah acknowledged 
the Ambassador's comment that JuD had many charitable 
elements and said he was confident the government had the 
capacity to run the schools and hospitals supported by the 
group, though there were not many such elements in 
Sindh. 
 
¶12.  (SBU) Addressing the law and order situation in 
Karachi, the CM said that the situation was not tense, but 
in a city as large as Karachi there will always be 
concerns.  Shah said he believed that the continued 
emigration into Karachi is evidence that the city is 
stable.  However, Pakistan does need a lot of help with 
development.  The Government of Pakistan (GOP) appreciated 
U.S. assistance with direct and indirect investment, but 
needed continued help to tackle unemployment, increase 
education, and promote good health and hygiene in efforts 
to eliminate poverty.  Under the previous GOP, 1600 schools 
were closed; those have reopened over the past year; the CM 
said that the number of girls in school has increased due 
to incentives offered to families for enrollment, such as 
scholarships for books and clothing.  In 2009, for the 
first time, a meal will also be offered at school.  The 
 
KARACHI 00000653  004 OF 004 
 
 
greatest assistance need for interior Sindh remained 
disease prevention due to extreme poverty.  CM Shah advised 
that throughout Pakistan there was a dire need for police 
training and outfitting; the equipment in use was outdated 
and insufficient to meet the needs of a people under 
terrorist threat. 
 
¶13.  (SBU) Comment:  P&G's decision to enter the Pakistan 
market at a moment when so many investors are withdrawing 
is an important symbol of U.S. commitment to support 
Pakistan's economic development.  We will look for 
opportunities to highlight their presence as we work to 
reinforce our message that U.S. interests in the country 
transcend the global war on terror. 
FAKAN