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UNCLAS SECTION 01 OF 07 ISLAMABAD 002225 
 
SENSITIVE 
SIPDIS 
 
REF: ISLAMABAD 1905 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN EAGR EINV ENRG PREL PK
SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, 09 SEPTEMBER 2009 
 
- - - - - - 
TOP STORIES 
- - - - - - 
 
¶1. (SBU) The Ministry of Finance has neared agreement with 
commercial banks for the issuance of Rs. 85 billion in term finance 
certificates (TFCs) to flush out "circular" inter-corporate debt in 
the energy sector.  The Ministry of Finance had originally sought 
Rs. 90 billion but some banks balked at taking on more energy and 
public sector debt. (Comment: The financial influx, which should 
happen by September 16, most likely will not be sufficient to 
completely flush the circular debt of the sector.) 
 
¶2. (SBU) On Sept 1, the Business Recorder reported that President 
Asif Ali Zardari issued directives to launch the women-friendly 
'Benazir Behan Basti Program' (BBBP).  Under the proposed program, 
women holding Benazir Income Support Program cards would be given 
government land to construct houses.  Financial support to construct 
the houses will reportedly be sought from Friends of Democratic 
Pakistan. 
 
¶3. (SBU) Pak-Afghan border crossing at Chaman sealed.  Pakistani 
Authorities sealed the border crossing at Chaman September 9 due to 
disputes over inspections of vehicles entering Pakistan.  Afghan 
officials objected to the unloading of vehicles laden with fruit by 
Pakistani authorities, while Pakistani officials reportedly had 
reason to believe that weapons were being smuggled into the country 
from Afghanistan. The border closure resulted in the suspension of 
movement of supplies to NATO forces in Afghanistan. (Comment: 
Although the border reopened September 10, this is the second time 
in less than a month that a dispute involving the movement of 
commercial vehicles has effectively blocked ISAF cargo.) 
 
- - - - - - - - - - 
BANKING AND FINANCE 
- - - - - - - - - - 
 
¶4. (SBU) The International Monetary Fund (IMF) urges the government 
to raise revenues through a value added tax (VAT).  The IMF mission 
chief has told the government that in order to lower its dependence 
on foreign aid, it has to either cut down on spending or raise 
revenue.  A VAT will be able to raise the tax-to-GDP ratio by 3 to 4 
percent, on top of the current ratio of 9 percent, one of the lowest 
in the world. (Comment:  The GOP has sought U.S. technical 
assistance in designing and implementing the VAT, which it plans to 
introduce in FY11.) 
 
 
ISLAMABAD 00002225  002 OF 007 
 
 
¶5. (SBU) Banking spreads, or the difference between banks' cost of 
funds and their lending rates,  dropped by 17 basis points to 7.35 
percent in July 2009.  According to data released by the State Bank 
of Pakistan, banking spreads have been decreasing continuously from 
a peak level reached in January 2009 of 7.78 percent.  Financial 
analysts comment that with the easing of monetary policy, 2009 
lending rates have also come down from a peak of 14.66 percent, to 
13.79 percent in July; however, Pakistan's banking spread and 
interest rates are amongst the highest in the world. (Comment: The 
SBP has justified the high interest because of higher inflation. 
Large banking spreads in Pakistan reflect not only the interbank 
risk but also significant bank markups.) 
 
¶6. (SBU) Banking sector's profitability dropped 31 percent in first 
half of FY09.  Bank profitability fell due to higher provisions for 
Non Performing Loans (NPLs) and higher expenses.  Provisions for 
NPLs swelled to Rs 36 billion, an 88 percent increase for the period 
under review, and administrative expenses increased cumulatively to 
Rs 74.4 billion, a 20 percent increase.  (Comment:  The domestic 
economic slowdown on top of the global financial crises has resulted 
in a higher number of non-performing loans, which are concentrated 
both in the textile sector and in SMEs.) 
 
¶7. (SBU) On August 24, Dawn reported that Meezan Bank Limited and 
international NGO Islamic Relief have signed a memorandum of 
understanding under which the former would assist the NGO to further 
enhance its Islamic microfinance operations in Pakistan by capacity 
building, training and product development support. (Comment: 
Meezan Bank said they are in the early planning stage.) 
 
¶8. (SBU) On August 23, Dawn and Business Day reported that the State 
Bank has announced 'Payment and Settlement' systems of home 
remittances under Pakistan Remittances Initiative (PRI).   A 
circular has been issued by the SBP stating their objective for 
establishing automatic delivery of home remittances (transfers of 
money back home to relatives and friends), in real time with 
confirmation through mobile phone Short Message Service (SMS) to 
remitters and beneficiaries.   Other objectives are to develop a 
robust and reliable ATM network to offer options to beneficiaries to 
withdraw cash during after banking hours and on holidays, and 
integrated and secured payment system infrastructures to make P2P 
payments, payments at merchant sites, payment of utility bills, fund 
transfers etc. (Comment:  This is another step by the State Bank of 
Pakistan to increase the flow of remittances through the formal 
channel.  The circular can be found at: 
http://www.sbp.org.pk/press/2009/index2.asp  During the first two 
months (July-August) of the 2009-10 fiscal year (FY10) an amount of 
 
ISLAMABAD 00002225  003 OF 007 
 
 
$1.525 billion was sent home by overseas Pakistanis, showing an 
impressive 25 percent rise when compared with $1.219 billion 
received in the same period last year.) 
 
- - - - - - - 
STOCK MARKET 
- - - - - - - 
 
¶9. (SBU) The Karachi Stock Exchange (KSE)-100 Index ended the week 
of September 4 at 9,002.67, up 5.4 percent from the previous week 
close.  Overall market capitalization increased to $31.81 billion 
from 30.24 billion.  Net portfolio investment inflow was $86.2 
million - a more than threefold increase over the previous week. 
(Comment:  Adnan Afridi, Managing Director of KSE, said breaking 
9,000 was an important psychological barrier for investors.  Since 
reaching that benchmark, applications for several new IPOs were 
announced.  Afridi pointed out that the net foreign portfolio inflow 
was higher than India's for the week.) 
 
¶10. (SBU) Foreign investors inject $95m into stock market.  Gross 
buying by foreign portfolio investors (FPIs) was worth $142 million 
while selling stood at $47 million resulting in record net buying of 
$95 million in August 2009 which is the highest figure in any single 
month over the last 17.  The release of pending installment of IMF 
loan and approval of additional funding built the confidence of 
offshore fund managers. Due to the foreign buying, the benchmark 
KSE-100 index moved up 12 percent in August.  Foreigners share in 
total volume at the KSE remained at nine percent last month. 
(Comment: Pakistan's inclusion in the Frontiers Index and the 
release of the $1.2 billion IMF tranche bode well for Pakistan's 
stock exchanges. The relative undervaluation of Pakistani stocks 
compared to the regional markets also played a role.) 
 
¶11. (SBU) The Lahore Stock Exchange (LSE) Index soared nearly 18 
percent in two weeks.  Analysts attributed the bull-run to foreign 
investment inflows sparked by a vote of confidence from the IMF, 
Standard & Poor's upgrading Pakistan to B-, and modest new oil 
discoveries.  Market capitalization was up 10 percent and trading 
has been heavy throughout the rally. 
 
- - - - - - - - - - - - 
ENERGY, POWER AND WATER 
- - - - - - - - - - - - 
 
¶12. (SBU) Sindh government and Engro Power Gen Ltd signed an 
agreement for a joint venture on 60/40 basis to exploit Thar Coal 
for energy generation.  Under the agreement, the first project of 
 
ISLAMABAD 00002225  004 OF 007 
 
 
the joint venture would be an open cast mining facility with an 
annual capacity of 3.5 to 6.5 million tones.  Engro has been given 
the responsibility to carry out the feasibility study for a 
600-1000MW Thar Coal-based power plant. (Comment: the World Bank has 
reportedly agreed to provide technical assistance amounting to Rs 
2.4 billion ($30 million) to the government of Sindh and Private 
Power Infrastructure Board (PPIB) to exploit the Thar coal reserves 
for energy.  However, it is not entirely clear that the issues 
surrounding provincial-federal jurisdiction over power plants of 
more than 50MW capacity have been fully resolved.) 
 
¶13. (SBU) Pakistan State Oil (PSO) needs Rs. 158 billion by October 
31 to avoid Letter of Credit (L/Cs) default.  PSO has again warned 
the Ministry of Finance (MoF) that its letters of credit (L/Cs) for 
oil imports will default, this time if the ministry does not arrange 
the Rs 158 billion.  According to a report in the Business Recorder, 
net outstanding receivables by PSO against the Water and Power 
Development Authority (Wapda), Hubco, Kapco and other customers 
stood at Rs 83 billion as of August 31, 2009. (Comment: The L/C 
problem just adds to PSO's woes.  PSO is already in default to the 
oil refineries amounting to Rs 12 billion, and on its receivables 
side the power sector is its largest payee, having received furnace 
oil from PSO worth Rs 2 billion a day.  Due to PSO's non-payments, 
the refineries have reduced their production, which has, in turn, 
forced PSO to import refined oil at higher purchase prices. In a 
conversation with the Executive Director Finance Yaqoob Sattar at 
PSO, Sattar said that PSO has different payment terms with different 
refineries. On average they have a 3-week credit line with most 
refineries. After which the amount is said to be in default.) 
 
¶14. (SBU) On August 25, Business Recorder reported that Gul Ahmed 
Energy Limited (GAEL), an independent power producer (IPP), stopped 
supply of 125 megawatts (MW) electricity to Karachi Electric Supply 
Company (KESC) due to non-payment of at least Rs 3.25 billion in 
debt.  This is the second time within one month that GAEL has 
stopped supply to KESC for non-payment.  Without payment from the 
utility, GAEL is unable to purchase fuel and pay operating expenses. 
 (Comment:   GAEL confirmed the report.  Delayed, or non-payment to 
IPPs is an ongoing problem with KESC.  Each month IPPs suspend 
production up to several hours at a time causing shortages and 
exacerbating the situation on an already under-supplied grid.) 
 
¶15. (SBU) Indus and Jehlum daily river flows declined roughly 40 
percent over the last two weeks, as mountain snowmelt and monsoons 
tapered off, according to Water and Power Development Authority 
(WAPDA) data.  Water releases for irrigation and power have exceeded 
inflows, and both Tarbela and Mangla reservoir levels have started 
 
ISLAMABAD 00002225  005 OF 007 
 
 
to recede.  (Comment: The GOP's failure to build more water storage 
capacity is already sparking conflict between irrigation demands for 
current rice, cotton, and sugar cane crops, and future water 
requirements for sowing wheat in November.  Additional demand for 
hydroelectric power generation may tilt the balance toward current 
crops.) 
 
- - - - 
TRADE 
- - - - 
 
¶16. (SBU) On August 25, the Daily Times reported foreign shipping 
lines have increased terminal handling charges (THC) by around 30 to 
35 percent, thereby negating the recent government reduction of port 
charges.  The increase in charges is heavily affecting local 
traders, who termed the increase "unjustifiable" and condemned it. 
Traders claim they are already paying various "fictitious" on-port 
charges, including another THC being charged by the terminal 
operators.  (Comment:  That shipping lines are charging terminal 
handling fees at all speaks to the weakness of a system that should 
have clear lines of authority for charging these fees, a power 
fundamentally that rests with port authorities.  Contacts at the 
port and Karachi Chamber of Commerce and Industry (KCCI) underlined 
the need to constitute a powerful watchdog from Customs to regulate 
the shipping lines, agents and freight forwarders.) 
 
- - - - - - 
AGRICULTURE 
- - - - - - 
 
¶17. (SBU) On September 4, the Daily Times reported that 30 to 40 
percent of the onion crop was damaged during the recent monsoon 
rains in Sindh, and prices are expected to increase in the upcoming 
months.  The most affected districts are Sanghar, Tando Allayar, 
Hyderabad and Mirpurkhas.  Currently onion prices are stable in the 
wholesale and retail markets in Karachi because of substantial 
supply from Balochistan.  The article added that the prices of onion 
are also stable in Punjab and NWFP, which are receiving bulk supply 
from Afghanistan. (Comment: While the Sindh Abadgar Board said that 
rains certainly affected the onion harvest, it refuted reports of a 
30-40 percent loss.  The Board, however, estimated a 10-12 percent 
loss.) 
 
¶18. (SBU) Saudi Arabia is the latest Gulf State to express interest 
in leasing large tracts of Punjab farmland, according to press 
reports.  The United Arab Emirates has been negotiating a possible 
deal since April, when the government of Pakistan first announced 
 
ISLAMABAD 00002225  006 OF 007 
 
 
that it would lease or sell millions of acres to foreigners in a bid 
to attract foreign direct investment and to import modern 
agriculture practices.  A senior advisor to Punjab Chief Minister 
Shahbaz Sharif said the provincial government was cooperating with 
federal authorities on the program.  Farmers' associations and some 
analysts have opposed the idea, asserting that it would harm small 
farm interests and jeopardize the country's already fragile food 
security. (Comment: Pakistanis are right to be cautious, but blanket 
objections are misplaced.  The Gulf States intended to secure their 
own food supplies with these investments, not necessarily enhance 
Pakistan's connections to global markets.  However, export-oriented, 
modern agri-business investment can be an excellent way to improve 
agriculture practices overall.  Pakistan's crop yields are well 
below potential, so there is no inherent conflict between domestic 
food security and significant crop exports.) 
 
¶19. (SBU) The federal and provincial governments launched a fruit 
processing center in Multan.  The project was a joint effort between 
the Small and Medium Enterprise Development Authority (SMEDA) and 
the Punjab Small Industries Corporation (PSIC).  The facility's 
suppliers are expected to be small growers in the area. The project 
has an independent board of directors and is supposed to operate as 
a self sustaining business. (Comment: Processing centers are badly 
needed to stem post harvest losses that claim as much as 30 to 40 
percent of Pakistan's fruit crops.  The plant's success will depend 
on whether it really functions as a competitive private enterprise, 
or if it becomes part of a government farm income support scheme.) 
 
- - - - - 
SUGAR 
- - - - - 
 
¶20. (SBU) The Lahore High Court (LHC) entered the so-called "sugar 
wars" September 3rd by ordering the Punjab government to maintain 
the retail price of sugar at PKR 40 per kilogram (kg), almost 20 
percent below the set price of PKR 47 per kg.  Millers, wholesalers, 
and retailers all balked at the decision, saying that they had 
acquired stocks based on previous prices and could not be forced to 
sell the sweetener at a loss.  Not wanting to oppose the LHC ruling, 
some retailers pulled sugar from their shelves according to 
anecdotes from contacts and reports in the press, leading to 
shortages throughout the province.  (Comment: The LHC's intervention 
is just another step on the government's spectacularly misguided 
path of price controls.  The Pakistan Muslim League - Nawaz 
(PML-N)-led Punjab government scored political points in August when 
it objected to the Pakistan People's Party (PPP) central 
government's original sugar price, but the LHC has put the province 
 
ISLAMABAD 00002225  007 OF 007 
 
 
in an awkward position by lowering the price further still. 
Politically, the PML-N cannot appeal the LHC decision, but the 
provincial government lacks the distribution infrastructure, 
finances, and perhaps the desire to fulfill the court order.  The 
PPP central government is not eager to bail the PML-N out of its 
dilemma.) 
 
PATTERSON