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UNCLAS SECTION 01 OF 05 ISLAMABAD 000561 
 
SENSITIVE 
SIPDIS 
 
REF: Islamabad 383 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN EAGR EINV ENRG PREL PK
SUBJ: BI-WEEKLY REPORT ON THE ECONOMIC ISSUES, 11 MARCH 2009 
 
----------- 
TOP STORIES 
----------- 
 
¶1. (SBU)  The GOP increased the power tariff for domestic, 
commercial and industrial consumers effective February 25. 
Agriculture consumers and those who use less than 50 units per month 
are exempt from this increase.  The consumers of the Electric Supply 
Companies in Peshawar, Gujranwala, Lahore, Faisalabad, Multan, 
Hyderabad, Quetta, and Karachi will face the brunt of this increase. 
 Finance Advisor Shaukat Tarin had announced that the power tariff 
would be raised before April, but at the insistence of the World 
Bank, the GOP went forward with the current increase.  The GOP and 
the IMF agreed in their letter of intent that "the average base 
[power] tariff will be further increased during 2008-09 according to 
a schedule to be agreed with the World Bank by end-December 2008." 
 
¶2. (SBU)  The Chairman of the Trading Corporation of Pakistan (TCP) 
has been replaced, and the Ministry of Commerce has prohibited the 
TCP from inviting further bids on the import of refined sugar.  The 
Ministry of Commerce has stepped in following complaints relating to 
the TCP tender (reftel), as importers accused the TCP of issuing a 
tailor-made tender to favor a particular Gulf-based exporter of 
sugar.  On March 10, TCP Chairman Mohammed Saeed was replaced by 
Saeed Ahmad Khan, a former Additional Secretary at the Prime 
Minister's Secretariat.  (Comment:  Post sources indicate that the 
Chairman was removed because of alleged fraudulent practices though, 
officially, the GOP has not provided any explanation for his 
removal. He has yet to be assigned to another position within the 
GOP. The newly appointed Chairman has a solid reputation within the 
TCP.  End comment.) 
 
¶3. (SBU)  Pakistan may scrap its Monsanto biotech (BT) cottonseed 
deal.  The Business Recorder reported that Pakistan may back out of 
a proposed agreement with Monsanto on BT cottonseed, and that the 
GOP has signed an agreement with China to transfer its "double-gene 
technology" for BT cottonseed to Pakistan.  China introduced BT 
cottonseed after signing a letter of intent with Monsanto in 1996, 
but later developed its own BT cottonseed after re-inventing 
Monsanto's cottonseed in Chinese laboratories.  The GOP signed a 
letter of intent with Monsanto a year ago, but the GOP is not 
prepared to pay Monsanto $16 per acre as a royalty for the 
introduction of the Bollgard I cottonseed technology (the patent for 
which has expired).  Another issue is that the GOP favors the 
 
ISLAMABAD 00000561  002 OF 005 
 
 
introduction of the latest model of BT cottonseed, Bollgard II. 
(Comment:  Monsanto is reluctant to introduce its latest technology 
into Pakistan, as the GOP has yet to pass a national Plant Breeders' 
Rights Bill that complies with international intellectual property 
rights agreements.  End comment.) 
 
¶4. (SBU)  According to the Business Reporter, the Royal Bank of 
Scotland (RBS) announced that it would seek buyers for its retail 
and commercial business in Pakistan.  RBS reported a loss of $34.3 
billion in 2008, and the sale comes on the heels of RBS's attempted 
reorganization and rebranding of ABN AMRO, which it bought in 2007. 
(Comment:  A Post contact at the Karachi Stock Exchange (KSE) 
confirmed a Dawn newspaper report that at least three financial 
groups are considering purchasing RBS's local operation, although 
the bank has not made an official statement on the matter.  The 
source said the potential buyers are Arif Habib Bank Limited, JS 
Bank and Atlas Bank, but the negotiations are still at a "very 
preliminary stage.") 
 
------------------- 
BANKING AND FINANCE 
------------------- 
 
¶5. (SBU)  Pakistan's circular debt rose from Rs 159 billion in 
January 2009 to Rs 180 billion at the end of February.  The public 
sector entities in petroleum and gas sectors especially are facing a 
financial crunch due to the rising circular debt.  According to a 
report by the Business Recorder, the Oil and Gas Development Company 
Limited is owed Rs 48.254 billion; Sui Southern Gas Company, Rs 
24.670 billion; Sui Northern Gas Pipeline Limited, Rs 7.955 billion; 
Pakistan Petroleum Limited, Rs 9.332 billion; and Mari Gas Company 
Limited, Rs 5.400 billion.  Pakistan State Oil (PSO) is the major 
fuel supplier that is facing circular debt problems. It is owed Rs 
84.2 billion, including Rs 77.1 billion from various clients and Rs 
7.088 billion as price differential claims from the GOP on petroleum 
products.  PSO itself owes Rs 73.717 billion to oil refineries. The 
major clients of these public sector entities are the independent 
power producers, the Water and Power Development Authority and 
Pakistan Electric Power Company.  Due to the financial crunch, PSO 
is depending primarily on direct oil imports rather than on oil 
refineries, which keep all funds as past payments.  The Business 
Recorder reported that PSO is providing oil to Pakistan 
International Airlines (PIA) only on a cash basis.  (Comment:  Per 
its agreement with the IMF, the GOP must have a plan in place to 
 
ISLAMABAD 00000561  003 OF 005 
 
 
clear its circular debt by June, and the GOP is planning on issuing 
Rs 98 billion of five-year Term Finance Certificates to pay off this 
debt.  End comment.) 
 
¶6. (SBU)  The Karachi Stock Market (KSE) 100-index closed at 
5,748.10 on March 6, almost unchanged (up only 20.64 points) from 
its February 27 closing of 5727.46.  Overall market capitalization 
during the week increased from $22.12 billion to $22.27 billion, but 
net foreign portfolio investment outflow was $4.29 million. 
(Comment:  Post sources have attributed the market's lackluster 
performance during the week to political uncertainty, and to 
security concerns following the March 3 terrorist attack on the Sri 
Lankan cricket team.  Analysts said that State Enterprise Fund (SEF) 
market activity was responsible for the market's stability during 
the week.) 
 
¶7. (SBU)  The State Bank of Pakistan (SBP) has announced plans to 
provide a partial microfinance credit guarantee for banks that 
partner with micro-finance banks and micro-finance institutions. 
The SBP's Development Finance Support Department will review all 
applications from micro-finance institutions and have authority to 
approve or deny them.  This department would also vet draft loan 
agreements between commercial banks and micro-finance institutions, 
issue guarantees to lenders and process lending banks' claims 
against guaranteed non-performing loans.  Lending institutions are 
responsible for negotiating the terms and structure of the loan (per 
SBP guidelines) and finalizing the financing agreement.  (Comment: 
More information can be found at: 
www.sbp.org.pk/MFD/PDF/Micro-Facility.pdf ) 
 
¶8. (SBU)  The State Bank of Pakistan (SBP) has agreed to extend an 
Export Financing Scheme loan repayment waiver from March 31 to June 
¶30.  The waiver and its extension apply to exporters whose loans 
were overdue as of December 30, 2008.  The waiver will not apply in 
cases where funds due to an exporter have been delayed due to 
document discrepancy or failure of the exporter to ship the goods in 
accordance with the requirements of the importer.  (Comment:  More 
information can be found at 
www.sbp.org.pk/smefd/circulars/2009/CL2.htm) 
 
¶9. (SBU)  On February 27, State Bank of Pakistan Governor Syed Salim 
Raza urged commercial banks to support financing for small and 
medium-sized enterprises (SMEs).  Raza told the SME Credit Advisory 
Committee that expanding the role of SMEs is a cost effective way to 
 
ISLAMABAD 00000561  004 OF 005 
 
 
create job opportunities and promote economic growth.  According to 
him, SMEs produce about 25 percent of Pakistan's export earnings and 
contribute around 30 percent of the country's gross domestic 
product, yet have not had sufficient access to bank financing.  The 
SME Credit Advisory Committee was established in 2008 and has 
government and private sector committee members.  (Comment:  More 
information can be found at 
www.sbp.org.pk/press/2009/SME-Financing-28-Fe b-09.pdf ) 
 
¶10. (SBU)  According to the March 10 Business Recorder and Geo News, 
the State Bank of Pakistan amended its rules in an attempt to combat 
money laundering and terror finance in Pakistan banks.  The new SPB 
rules increase the obligations of banks and development financial 
institutions to verify their customers through the national identity 
card database, conduct customer due diligence, and continuously 
monitor client accounts.  (Comment:  The State Bank of Pakistan 
confirmed that it amended its pre-existing customer verification and 
due diligence rules, based on the recommendations of a World Bank 
and Asia Pacific Group team which visited Pakistan earlier this year 
to evaluate anti-money laundering and counter-terrorism finance 
laws.) 
 
-------- 
BUSINESS 
-------- 
 
¶11. (SBU)  Pakistan Hotels Association (PHA) officials told 
Consulate Karachi on March 3 that the hotel industry has been hit 
hard over the past year by both the economic downturn and the 
deterioration in security in Pakistan (a situation highlighted by 
the recent attack in Lahore) and many hotels will have difficulty 
breaking even.  This tracks with a February 28 article in The News 
that reported declining profits at five-star hotels in the country, 
which are reporting occupancy rates as low as 35 percent and cutting 
back on restaurant services. 
 
¶12. (SBU)  A Shaheen Air International official told Consulate 
Karachi that his company plans to buy seven used and two new Boeing 
aircraft in preparation for new routes to Mashhad, Iran, and Mumbai. 
 The private airline plans to acquire the used Boeing 737-200 
aircraft from a South African airline and to purchase two new Boeing 
737-900 ERs by the end of 2010.  Shaheen's plans also call for an 
increase in flights to Dubai, Abu Dhabi, Kuwait and Muscat.  The 
airline, which has a fleet of seven Boeing 737s, currently flies to 
 
ISLAMABAD 00000561  005 OF 005 
 
 
six destinations in the United Arab Emirates, Oman, Qatar and 
Kuwait. 
 
---------------- 
ENERGY AND POWER 
---------------- 
 
¶13. (SBU)  On March 3, an Alternative Energy Development Board 
(AEDB) official confirmed to Consulate Karachi media reports that 
the federal Ministry of Water and Power has given AEDB the green 
light to seek tenders on both a 50MW wind energy project and a 50MW 
solar energy plant near Gharo in Sindh Province.  The coastal belt 
of Pakistan has a significant, but unexploited, natural wind 
corridor that some estimate could produce a substantial amount of 
electricity using wind and solar power. 
 
-------------- 
TRANSPORTATION 
-------------- 
 
¶14. (SBU)  According to the Business Recorder, Pakistan, Turkey and 
Iran have agreed in principle to operate container train service 
from Istanbul to Islamabad via Tehran, with the possibility of 
operating passenger trains at a later point.  Details were discussed 
at a meeting of senior railway officials of the three countries held 
in Tehran in late February, with Pakistan represented by General 
Manager Railway (Operations) Saeed Akhtar.  Akhtar said that it 
tentatively was agreed to start service around next August 14. 
Another meeting will be held in April to discuss customs issues. 
Turkey and Iran are already connected by freight and passenger rail 
links.  (Comment:  The General Manager Railways (Operations), Saeed 
Akhtar, confirmed that this service is in the pipeline and that he 
attended the meeting in Tehran last month.  He said that the second 
meeting will be held in April in Islamabad.) 
 
 
PATTERSON