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UNCLAS SECTION 01 OF 07 ISLAMABAD 002477 
 
SENSITIVE 
SIPDIS 
 
REF: ISLAMABAD 2225 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN EAGR EINV ENRG PREL PK
SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, 23 SEPTEMBER 2009 
 
- - - - - - 
TOP STORIES 
- - - - - - 
¶1. (SBU) Consumer Price Index (CPI) drops to 10.7 percent in August. 
 The Business Recorder reported that inflation was lower for August. 
 It had declined steadily from October 2008's peak of 25 percent, to 
11.2 percent in July.  However, analysts are still cautious as 
domestic oil prices could again rise. (Comment:  Analysts also point 
out that core inflation (the CPI basket of goods and services 
excluding food and energy), though receding, is still high.  The 
State Bank of Pakistan (SBP) remains hesitant to cut interest 
rates.) 
 
¶2. (SBU) On September 11, Dawn and other papers reported that 
overseas remittances totaled $780.5 million in August, a 31.8 
percent increase over the same period last year.  The SBP also 
reported that monthly remittances are on pace to top FY09's (July 
1-June 30) total of $9 billion (FY08 was $7.8 billion). The largest 
inflows in August came from the UAE and the United States, with $324 
million and $317 million respectively.  (Comment: The increased 
inflows are the result of a GOP crackdown on informal money changers 
as well as the SBP's Pakistan Remittance Initiative (PRI) which has 
simplified and expedited the formal money transfer system.) 
¶3. (SBU) The conflict between the GOP, courts, and sugar mills 
intensified, even as demand for sugar fell during the Eid holidays. 
On September 24, the Lahore High Court (LHC) accepted a petition to 
initiate contempt of court action against parties involved in 
price-setting negotiations, including the Federal Minister of 
Industries Manzoor Wattoo, and leaders of the Sugar Millers 
Association.  Pakistan's Supreme Court had already refused, on 
September 16, to stay a LHC September 3 decision instructing the 
Punjab government to ensure a retail price for sugar of Rs. 40 per 
kilo, roughly twenty percent below the previous fixed rate. 
Following that, on September 18, it agreed to review a petition from 
the federal and provincial governments to overturn the price decree. 
 At the time of this writing, the Supreme Court is hearing a 
preliminary report from the Competition Commission of Pakistan 
(CCP), accusing sugar millers of illegal cartelization.  (Comment: 
Both the federal and provincial courts appear to be styling 
themselves the champions of the people in a struggle against the 
business and political elite.  LHC's agreement to hear the petition 
requesting the sugar miller's be held in contempt is a formality 
that also gives the court an opportunity to demand that officials, 
including federal bureaucrats, explain the sugar pricing mechanism 
 
ISLAMABAD 00002477  002 OF 007 
 
 
in the country. Coming on the heels of the federal and provincial 
governments' joint appeal of the LHC ruling, the provincial court's 
actions feed the "masses as victims" narrative.  Thanks to 
escalating tensions, Pakistani sugar millers had to opt out of a 
visit to the United States sponsored by the U.S. Trade Development 
Agency to learn how U.S. mill operations generate excess electricity 
for the national power grid.  The fight is likely to result in more 
mudslinging before the matter is resolved, and is only the latest in 
a long string of disastrous interventions in markets.) 
 
¶4. (SBU) President Asif Ali Zardari announces the "Waseela-e-Haq" 
program under auspices of the Benazir Income Support Program (BISP). 
 BISP will now target socio-economic empowerment for women by 
providing them greater opportunities for self-employment.  It will 
do this by selecting 731 families at random, through a monthly 
drawing, giving them each Rs 300,000 to create a business. (Comment: 
 Random selection could rule out potential corruption or patronage 
in granting the seed money, but it also limits the GOP's ability to 
maximize fund benefits: there is no requirement that "winners" have 
a sound business plan or even an idea on the drawing board.  The GOP 
does not intend to provide technical assistance, nor will it be 
tracking the new businesses' success or failure.) 
 
¶5. (SBU) Foreign Direct Investment (FDI) declined 57.4 percent in 
July-August 2009.  The SBP reports that FDI was down to $351 million 
in the period July-August, a 57 percent decline from the $825 
million recorded for the same period last year.  This is in spite of 
portfolio investment that posted a 134 percent increase brought on 
by investors' attraction to high profit margins, some undervalued 
equities, and improvements on the national front, namely increased 
foreign exchange reserves and lower inflation. (Comment:  Even with 
relatively high profit margins and some improvement in macroeconomic 
fundamentals attracting transactions at the exchange, foreign direct 
investors are more reluctant to risk investment because of the high 
cost of doing business in Pakistan mostly due to inadequate 
infrastructure and the security problem.) 
 
¶6. (SBU) The GOP released Rs. 85 billion to erase debt in the power 
sector on September 19.  The government raised the funds through the 
sale of Term Finance Certificates (TFCs).  (Comment:  Though the 
issuance of the TFCs and removal of arrears was a necessary first 
step in resolving the debt crisis in the energy sector, the crisis 
will not be resolved until tariff rates cover the cost of energy 
production and distribution.  The GOP agreed with the IFIs to raise 
 
ISLAMABAD 00002477  003 OF 007 
 
 
tariffs in three tranches, beginning with 6 percent on October 1.) 
¶7. (SBU) Ministry of Commerce (MoC) making plans for Reconstruction 
Opportunity Zones (ROZs) in FATA, AJK, NWFP and Balochistan. 
According to a working paper presented to the Planning Commission, 
the MoC is moving closer to establishing a two-year Program 
Management Unit (PMU) responsible for  developing incentive packages 
for investors, systematize enforcement procedures, guard against 
unlawful transshipment of articles from ROZs, and coordinate with 
donor agencies to identify projects within the ROZs.  Solicitation 
for a director and other PMU staff closes September 30. (Comment: 
The MoC expects to establish the PMU in October with Rs. 80.6 
million in funding.) 
¶8. (SBU) Pakistan's cement industry is reacting to an 80 percent 
decline in exports to India in recent months.  The News reported 
that the cement industry has been seeking alternative markets due to 
the much lower sales to India.  One Pakistani manufacturer has sent 
consignments to Sri Lanka, South Africa, Namibia, Oman and 
Mauritius, and others have begun looking to European markets. 
(Comment:  Cement exports to India have slowed due to increased 
Indian capacity and competition.  Shipping costs of heavy bulk goods 
to distant foreign markets are often cost prohibitive. Profit 
margins in these new markets would be significantly lower than sales 
to India.) 
 
- - - - - - - - - - 
BANKING AND FINANCE 
- - - - - - - - - - 
¶9. (SBU) On September 11, Dawn reported that assets of Islamic 
banking institutions in Pakistan reached Rs. 313 billion in June 
2009, up from Rs. 278 billion the previous year.  The investment 
portfolio of Islamic banks has also increased to Rs. 195 billion, up 
from Rs.185 billion in March 2009.  The SBP hopes that by 2012, 
Islamic financial institutions will account for 12 percent of all 
banking in Pakistan. (Comment:  Islamic banking institutions have 
realized growth rates higher than conventional finance institutions 
in the Middle East and Asia the past few years, benefitting from new 
regulations and standards, and a higher awareness due to stepped-up 
marketing by the banks.) 
 
¶10. (SBU) On September 12, Dawn reported that the Securities and 
Exchange Commission of Pakistan (SECP) has imposed requirements for 
"Modarabas" (Islamic financial and investment partnerships) to guard 
against money laundering, terrorist financing and other illicit 
activities.  According to these reports, Modarabas would be required 
 
ISLAMABAD 00002477  004 OF 007 
 
 
to implement procedures to ensure due diligence screening of 
customers, and to adopt "know-your customer" policies to be approved 
by the board of directors of management companies, which are also to 
be created. (Comment:  Under Modarabas partnerships, one party 
provides finance to another party for the purpose of carrying on a 
business. The party who provides the finance is the 'Rabb-ul-Mal', 
and the funded working partner is the 'Modarib'. This is another 
welcome step forward in GOP efforts to increase accountability in 
the banking sector.) 
 
¶11. (SBU) On September 17, the News and other papers reported that 
the SBP has re-engineered its treasury operations on foreign 
exchange interbank deals, trade confirmations, and settlements to 
bring them more in line with international best practices.  All 
banks have been advised of the proposed changes and have been urged 
to ensure compliance. (Comment:  For more information on the 
specific changes please refer to 
http://www.sbp.org.pk/tod/2009/C01.pdf) 
 
¶12. (SBU) On September 25, Business Day, the News and other papers 
reported that Pakistan's total liquid foreign reserves have 
increased to an all-time high of $14.47 billion.  On Sept 19, 
foreign reserves held by the SBP stood at $10.94 billion and net 
foreign reserves held by other banks in the country stood at $3.53 
billion. (Comment:   SBP reserves stood at only $4.9 billion a year 
ago.  Relative fiscal prudence, IMF inflows, and higher official 
remittances have all contributed to the higher reserves.) 
 
- - - - - - - 
STOCK MARKET 
- - - - - - - 
 
¶13. (SBU) September 25 saw record turnover at the Karachi Stock 
Exchange, for the last 1.5 year trading period.  Habib Bank noted 
that trading was boosted by the Friends of Democratic Pakistan 
meeting in New York and the passage of the Kerry-Lugar Bill.  Over 
the two week period, the KSE index rose from 9,058 to 9,664, market 
capitalization increased from $31.8 billion to $33.8 billion, and 
net foreign portfolio investment inflows continued, totaling 
approximately $45 million. 
 
¶14. (SBU) On September 16, the media reported that the Karachi Stock 
Exchange (KSE) adopted the Industry Classification Benchmark (ICB) 
system, used for sector and industry classification and analysis. 
 
ISLAMABAD 00002477  005 OF 007 
 
 
The system was first launched by London's FTSE and the Dow Jones 
Indexes and is in use worldwide. (Comment:  KSE has joined other 
exchanges and global financial institutions which have integrated 
ICB into their research, trading and investment workflows.   The 
adoption of ICB will also assist an overall strategy to introduce 
derivative and structured products at the exchange.) 
 
¶15. (SBU) The Lahore Stock Exchange (LSE) Index continued to climb 
in recent weeks, surpassing 3,000 and doubling the market's position 
since the beginning of the year.  Market capitalization kept pace 
with share prices and volume was heavy. 
 
- - - - - - - - - - 
PROVINCIAL FINANCES 
- - - - - - - - - - 
 
¶16. (SBU) The Punjab government converted an $850 million revolving 
line of credit into a four-year term loan.  The debt had piled up 
largely because of deficit spending on subsidies for wheat, roti 
(local bread), and sugar.  The conversion to the term loan, arranged 
with the State Bank of Pakistan (SBP), is largely designed to reduce 
interest charges.  Punjab will still have a line of credit, but a 
senior Punjab bureaucrat stated that the new line is not nearly as 
large as the old one, a resizing that reflects Punjab's inability to 
curb spending. (Comment: Punjab's profligate ways will be subject to 
increasing constraints, as future deficit spending on subsidies and 
development projects in Punjab will have to be financed in advance 
through loans or bonds either through commercial banks or the SBP, 
neither of which will be cheap or easy.) 
 
- - - - - - - - - - - - 
ENERGY, POWER AND WATER 
- - - - - - - - - - - - 
 
¶17. (SBU) Water levels in the Tarbela and Mangla dams dropped 
precipitously in September, according to Water and Power Development 
Authority (WAPDA) data.  Tarbela has been falling two feet per day, 
and Mangla one foot per day.  Large water releases that were made 
for the current cotton and rice crops vastly exceeded inflows, which 
were lower than normal for this time of year. (Comment:  Current 
demand has trumped any concerns about the future.  If river flows 
remain low, Pakistan could face a severe water shortage this 
November when the next wheat crop is sown, precipitating yet another 
wheat crisis.) 
 
ISLAMABAD 00002477  006 OF 007 
 
 
 
¶18. (SBU) On September 20, the News and other papers reported that 
owners of compressed natural gas (CNG) stations are worried about 
GOP plans to switch off natural gas supplies for CNG use this coming 
winter.  Pakistan, in the face of a severe energy crisis, has been 
cutting back on gas supplies to CNG filling stations, which are not 
considered a priority industry.  Around 2.4 million vehicles utilize 
CNG however. (Comment:  The GOP's plans to suspend supply to a 
sector that consumes only six percent of the nation's total gas 
supply indicates desperate measures to try and meet the growing 
needs of the power sector.  The CNG industry will be severely 
impacted; not only will 2.4 million car owners be effected, 2500 CNG 
station owners will be hard pressed to cover over Rs. 90 million 
invested in retrofitting their facilities for CNG.) 
 
- - - 
TRADE 
- - - 
 
¶19. (SBU) On September 12, Business Recorder reported the country's 
largest custom clearing system, Pakistan Customs Computerized System 
(PaCCS), is in danger of being shut down unless a final agreement is 
reached with its service provider, Agility, a leading Kuwait based 
logistics operator.  Agility has been providing service to the PaCCS 
without pay since April 2009, due to expiration of its service 
agreement with the Federal Board of Revenue. (Comment: PaCCS enables 
importers and exporters to file customs declarations online, pay 
duties at their nearest local national bank, and clear cargo without 
visiting a customs office.  It was put into place 3 years ago, and 
has been well received by the terminals (the Ports of Karachi and 
Qasim) who have enjoyed increased efficiencies and better 
transparency.  Despite its success, the GOP has refused to renew the 
PaCCS operating contract. There are rumors that customs officials at 
FBR are trying to find an alternative to PaCCS in order to game the 
system and collect kickbacks.  The terminal companies say that PaCCS 
has effectively limited corruption.) 
 
- - - - - - 
AGRICULTURE 
- - - - - - 
 
¶20. (SBU) On September 25, Business Recorder reported on the 
potential for significant cotton shortages throughout the country 
due to an outbreak of the cotton leaf curl virus (CLCV).  This 
 
ISLAMABAD 00002477  007 OF 007 
 
 
deadly pest, caused from the use of uncertified and illegal 
cottonseeds, has badly hit cotton crops across the country. 
(Comment:   The Sindh Abadgar Board (SAB) and Sindh Chamber of 
Agriculture confirmed the report and said there are estimated CLVC 
related damages of 5 to 10 percent in  upper Sindh, and warned that 
up to 70 percent of crops may have been affected in Punjab.) 
 
¶21. (SBU) The GOP is predicting a one million-ton sugar shortfall in 
the next year due to a low sugarcane harvest.  The Business Recorder 
reported that the poor harvest will be a result of this year's 
'worst ever' treatment of sugar growers by mill owners who have 
further depressed prices paid for sugar stocks.  In view of the 
situation, the GOP plans to bridge the gap with 0.7 million tons of 
raw sugar imports in the upcoming crushing season, and the Economic 
Co-ordination Committee (ECC) has allowed 0.3 million tons of raw 
sugar imports by the private sector this year. (Comment:  There is 
some evidence that cane growers were actually paid a decent price 
and were paid faster than most previous years (because the 
government forced millers to do so). Agricultural acres in cane 
production have indeed declined, but mostly because of the high 
support price for wheat.  Note further that cane yields, like most 
other crops in Pakistan, are lower than they should be.) 
 
PATTERSON