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UNCLAS SECTION 01 OF 06 ISLAMABAD 001905 
 
SENSITIVE 
SIPDIS 
 
REF: ISLAMABAD 1817 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN EAGR EINV ENRG PREL PK
SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, 12 AUGUST 2009 
 
- - - - - - 
TOP STORIES 
- - - - - - 
 
¶1. (SBU) The International Monetary Fund (IMF) approved an 
additional USD 3.24 billion for Pakistan and increased the country's 
Special Drawing Rights (SDR) from 500 percent to 700 percent, 
pushing total assistance up to USD 11.33 billion from USD 7.6 
billion.  The IMF completed its second review of Pakistan's economic 
performance and extended the Stand-By-Arrangement (SBA) through 
¶2010.  The Fund has agreed that Pakistan can use a portion of the 
new funding to finance priority spending until the disbursements of 
donor support pledged for 2009-2010 are received.  Pakistan would 
also benefit from the proposed allocation of Special Drawing Rights, 
which, once approved, would supplement its reserves.  (Comment: The 
additional amount committed by the IMF will relieve pressure on 
Pakistan's budget.  The IMF funding will help cover the expected 
shortfall in tax collection due to an economic slowdown, increased 
costs for IDPs and "delays" in the Friends of Democratic Pakistan 
pledged funds releases.) 
 
¶2. (SBU) In its August review, the IMF lowered its GDP growth 
estimate for the country for FY 2009-2010 from 3.3 percent to 3 
percent noting that Pakistan's growth has been slow, especially in 
the manufacturing sector.  The agriculture sector, buoyed by a 
bumper wheat crop, helped maintain positive GDP growth.  Inflation, 
particularly for food, has continued to decline, though it still 
remains high with core inflation at just below 16 percent in June 
¶2009.  The exchange rate has been relatively stable in recent 
months, and international reserves increased to USD 8.3 billion in 
July, compared to USD 3.5 billion at end-October 2008.  The GOP 
continues to predict 3.3 percent GDP growth for this current fiscal 
year.  (Comment:  Industrial growth will remain a drag on the GDP 
growth rate in FY 2009-2010 as it will be a difficult task to 
reverse the negative 8 percent growth rate from the last fiscal year 
to the GOP project 1.8 percent for this current fiscal year.) 
 
¶3. (SBU) Advisor to the Prime Minister on Finance Shaukat Tarin was 
elected senator (unopposed) and sworn into office on August 7, 
elevating him to the title of Federal Minister of Finance.  Syed 
Naveed Qamar replaced Dr. Asim Hussain as the new Minister of 
Petroleum and Natural Resources also on August 7.  Qamar will be 
dual-hatted, retaining his current post of Minister of 
Privatization. 
 
ISLAMABAD 00001905  002 OF 006 
 
 
 
¶4. (SBU) According to Dawn, the federal government borrowed Rs 121.7 
billion (USD 1.5 billion) for budgetary support during the first 
three weeks of current fiscal year 2009-10 to cover rising 
expenditures and a shortfall in revenue collection due to slow 
economic activity in the country.  FBR collected Rs. 74.077 billion 
(USD 892 million) during July 2009 against the target of Rs. 78 
billion (USD 940 million), reflecting a shortfall of Rs. 3.923 
billion (USD 47 million).  (Comment:  The increased borrowing from 
the banking system is likely to crowd out private sector credit, 
which will negatively affect private sector growth, particularly in 
manufacturing.) 
 
- - - - - - - - - - 
BANKING AND FINANCE 
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¶5. (SBU) On August 1, The News reported that the State Bank of 
Pakistan (SBP) signed a Memorandum of Understanding (MOU) with 
Tameer Microfinance Bank (TMB) stating that the SBP will provide Rs. 
82 million (USD 988,000) to TMB for one year.  State Bank Governor 
Syed Salim Raza commented that the facility would help TMB launch 
branchless banking operations and build its institutional capacity. 
The SBP has developed a National Microfinance Strategy which is 
expected to provide microfinance outreach to 3 million clients by 
2010 and 10 million by 2015.  The strategy is intended to enhance 
the microfinance sector's sustainability and help it raise its 
capital base and human resource capacity.  (Comment:  A Tameer Bank 
official confirmed the article and applauded the State Bank 
Governor's efforts at enhancing microfinancing facilities.) 
 
¶6. (SBU) On July 31, State Bank Governor Syed Salim Raza called for 
commercial banks to increase lending to the private sector in order 
to stimulate the economy, according to The News.  Speaking at the 
Private Sector Credit Advisory Council (PSCAC), Raza commented that 
liquidity in the banking system has never been as high as it is 
today and noted that growth in non-performing loans (NPLs) has 
slowed in the last quarter of 2008-09.  During fiscal 2007-08, 
overall private sector credit grew 16.5 per cent compared to an 
increase of only 0.7 per cent during 2008-09.  This slowdown is 
attributed mainly to a dearth in economic activity in Pakistan 
coupled with the global recession.  Loans for working capital 
declined 7.6 percent during FY09 for the textile, manufacturing, 
commerce and trade sectors; while fixed investment financing 
 
ISLAMABAD 00001905  003 OF 006 
 
 
increased by 26.4 percent mainly for investment in manufacturing, 
electricity, gas, water, transport, storage and communication 
sectors. 
 
¶7. (SBU) Import payments of furnace oil may put the Pakistani Rupee 
under pressure.  From August 1 onwards, according to a recent SBP 
policy, all purchases of foreign exchange relating to the import of 
diesel and other refined petroleum products will be made by banks 
through the interbank market.  This policy complies with the IMF 
condition that the SBP transfer the burden of foreign exchange for 
the import payment of diesel and other petroleum products to the 
banks.  Banks will have to arrange approximately USD 450-500 million 
per month for the import payments which will put more pressure on 
the already depreciating Pakistani rupee against the dollar and euro 
due to high demand of the dollar in the interbank market.  (Comment: 
 Import of furnace oil and diesel has been in the private sector for 
some years now.  A year ago the SBP took upon itself to arrange 
foreign currency for private oil importers.  The IMF has now 
convinced the GOP to stop this practice and let private banks 
arrange foreign currency for oil importers. This will put pressure 
on the interbank foreign currency rates and the value of the 
Pakistani Rupee.) 
 
- - - - - - - 
STOCK MARKET 
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¶8. (SBU) The Karachi Stock Exchange KSE-100 Index closed at 8,044.5, 
after losing 37.56 points on Tuesday, August 11, 2009.  Overall 
market capitalization slightly increased to USD 28.21 billion.  Net 
foreign portfolio investment inflow was USD 18.6 million, the 
highest since April 2008.  The outgoing week saw Lucky Cement 
posting better than expected results, which triggered positive 
movement in cement sector.  Some blue chip results, such as MCB 
(Muslim Commercial Bank), PSO (Pakistan State Oil), Hubco (Hub Power 
company) and OGDC (Oil and Gas Development Corporation) will be 
released the week of August 17.  The major stock players and bankers 
believe these results, coupled with the positive decision of the IMF 
to release and augment funds under Pakistan's Standby Arrangment, 
would set the tone for the market next week.  The index is up 40 
percent since the start of the calendar year but down 49 percent 
from its lifetime high of 15,676.34 on April 18, 2008.  (Comment: 
Our KSE contact said the persistent inflow of foreign investment, 
prominent since the inclusion of Pakistan into the MSCI Frontier 
 
ISLAMABAD 00001905  004.6 OF 006 
 
 
Index in May 2009, and the positive IMF decision to release further 
funds were the major driving forces that kept the optimism and 
provoked investors to stay at market with higher holdings.) 
 
¶9. (SBU) The Lahore Stock Exchange (LSE) fluctuated day to day, but 
closed the two weeks ending August 8 where it began.  Market 
capitalization was up 1.8 percent, and volume was average all month. 
 
 
- - - - 
TRADE 
- - - - 
 
¶10. (SBU) In the Federally Administered Tribal Areas (FATA) budget 
Rs. 5 million (USD 60,241) was allocated for Reconstruction 
Opportunity Zones (ROZs) in the FATA Annual Development Program 
(FADP) 2009-10.  The FATA government also allocated Rs1.150 billion 
(USD 13 million) under the 2009-10 FADP for 44 projects focusing on 
small dam construction, mineral exploration, skill development, 
research and development, industries, housing, tourism and SME 
financing.  (Comment:  The allocation of Rs.5 million for ROZs shows 
the GOP's resolve towards ROZ legislation. However, government 
officials and businessmen both still maintain that the success of 
ROZs in the FATA crucially depends on the security situation.) 
 
- - - - - - - - - - - - 
ENERGY, POWER AND WATER 
- - - - - - - - - - - - 
 
¶11. (SBU) According to Water and Power Development Authority (WAPDA) 
data and media reports, the Punjab government dramatically reduced 
water releases from Mangla dam on July 23 in order to fill the 
reservoir for the province's irrigation needs.  This move slowed 
Mangla hydroelectric production, which had already dropped the 
previous month due to mechanical failures.  As rolling blackouts 
continue, the province denied an appeal from the federal government 
to release more water for power generation.  The Mangla reservoir 
could take the rest of the month to fill.  WAPDA figures show 
Tarbela reservoir climbed almost 3 feet per day over the last two 
weeks, despite substantial water releases for power and irrigation. 
It stands just 15 feet below capacity.  (Comment: The Punjab 
government's decision to reduce Mangla dam water releases came one 
week after the Indus River System Authority (IRSA) rejected the 
province's request for more irrigation water through the 
 
ISLAMABAD 00001905  005 OF 006 
 
 
Chashma-Jhelum link canal.  IRSA advised the Punjab government to 
look to Mangla for additional irrigation supply so closing the 
Mangla tap for any other use appears to be the Punjab government's 
reply.  Conflicts over hydroelectricity and irrigation are likely to 
intensify when summer snowmelt and monsoons end.) 
 
¶12. (SBU) Extensive rolling blackouts continue to plague the 
country, but related civil strife has dissipated since the protests 
of late July.  In a meeting with Consulate Lahore officials on 
August 6, Lahore Electric Supply Company (LESCO) officials blamed 
unscheduled load shedding on poor decisions by the national grid 
control center in Islamabad.  The media covered dueling positions on 
the use of rental power plants to boost electricity supplies short 
term, while Prime Minister Gilani of the Pakistan People's Party 
(PPP) and Punjab Chief Minister (CM) Shahbaz Sharif of the 
opposition Pakistan Muslim League-Nawaz (PML-N) discussed the power 
crisis during a July 26 summit in Lahore.  (Comment: The PPP led 
federal government has fared reasonably well in the public debate 
over rental power stations thanks to the PML-N's relative silence. 
In a July 28 meeting with A/PO, a PML-N official acknowledged the 
necessity of the federal government's short-term plan to utilize 
rental power.) 
 
¶13. (SBU) On August 10, Dawn reported that China plans to put on 
hold the Coastal Oil Refinery Project at Gwadar in Balochistan. 
According to the media, China has formally informed the Government 
of Pakistan that there has been no progress on the Coastal Oil 
Refinery project; therefore, the project has been removed from the 
FY 2009-10 Financial Development Program between Pakistan and China. 
 The proposed Coastal Oil Refinery, which was designed to reach a 
daily output of 60,000 barrels crude oil, was part of China's plan 
to invest USD 12 billion in multiple projects in Pakistan. 
 
 
 
 
 
- - - - - 
BUSINESS 
- - - - - 
 
¶14. (SBU) According to SBP data, foreign investors in Pakistan 
remitted USD 763 million abroad in FY 2008-09 despite low economic 
activity in Pakistan and the global economic recession.  The 
 
ISLAMABAD 00001905  006 OF 006 
 
 
repatriated amount during for FY 2008-09 was 17 percent lower than 
in FY 2007-08.  Foreign investors repatriated USD 593.8 million from 
return on FDI in FY 2008-09 versus USD 673.3 million in FY 2008-09, 
a drop of 12 percent.  The power sector registered the largest 
amount repatriated where foreign investors repatriated USD 184.4 
million FY 2008-09 against USD 169.6 million in FY 2007-08, an 
increase of 9 percent.  The financial services sector was second 
largest sector with USD 79 million remitted.  Repatriation from 
trade, however, increased by 122 percent to USD 73.1 million from 
USD 32.8 million, while petroleum refining repatriation stood at USD 
77.3 million with an increase of 40 percent.  (Comment: The rise in 
profits and dividend outflows in the last fiscal year despite a 
significant drop in FDI is the result of large FDI inflows in the 
past and is likely to continue despite the current decrease and 
slowdown in FDI inflows.) 
 
PATTERSON