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UNCLAS SECTION 01 OF 05 ISLAMABAD 002767 
 
SENSITIVE 
SIPDIS 
 
REF: ISLAMABAD 2539 
 
E.O. 12958: N/A 
TAGS: EAGR ECON ETRD EFIN EINT EINV ENRG PREL PK
SUBJ: BI-WEEKLY REPORT ON THE ECONOMIC ISSUES,04 NOVEMBER 2009 
 
- - - - - - 
TOP STORIES 
- - - - - - 
 
 
1.(SBU) Government to evaluate efficiency of Rental Power Plant 
Projects (RPP) before disbursing advance payments.  On October 19, 
The News reported that the government will now consider issues such 
as the condition of equipment used at RPP facilities and the cost 
effectiveness of their projects before issuing them mobilization 
advances.  This development comes at the insistence of the Asian 
Development Bank, which is currently conducting an energy audit of 
the efficiency and cost effectiveness of the RPPs.  (Comment:  In 
theory the GOP's original rental policy framework requires companies 
to demonstrate their level of efficiency as a prerequisite to 
participating in the bidding process.  In practice this has not been 
the case, as the five rental power plants that were recently awarded 
mobilization advances by the GOP were awarded contracts on a "first 
come first served" basis.  There are strong indications that the 
RPPs still bidding for contracts may raise a complaint with the 
International Court of Arbitration should the GOP seek to enforce 
the policy proposed by the ADB.) 
 
 
¶2. (SBU) The Government meets three International Monetary Fund 
(IMF) targets.  On October 21, Business Recorder reported that 
during the first quarter of the 2009-2010 fiscal year, the GOP 
successfully met three of the budgetary and monetary targets set by 
the IMF.  The GOP has reduced its borrowing stocks, capped its 
budgetary borrowing from the central bank at $13.61 billion and the 
State Bank of Pakistan achieved its two major targets of containing 
net domestic assets and increasing net foreign assets.  Net foreign 
asset currently stand at $5.76 billion compared to the IMF target of 
$4.8 billion and net domestic asset stand at $13.69 billion compared 
to IMF target of $14.39 billion.  (Comment: While this represents a 
significant achievement for the GOP, it has yet  to increase tax 
collection, an IMF priority and a key to maintaining fiscal 
discipline and macroeconomic stability.) 
 
¶3. (SBU) Finance Ministry formally rejects Pakistan State Oil (PSO) 
entreaties to collect power sector arrears on its behalf.  Business 
Recorder reported on Oct 27 that PSO has $843 million in outstanding 
receivables from the power sector with $216 million in letter of 
credit (LCs) coming due on November 13.  According to the report, 
PSO received a letter from the Ministry of Finance denying financial 
 
ISLAMABAD 00002767  002 OF 005 
 
 
assistance and urging PSO to collect payment and "deliver fuel 
supplies on a commercial basis," presumably to those who pay.  PSO 
representatives indicated they would meet with the Ministries of 
Finance and Petroleum and Natural Resources to reverse the Ministry 
of Finance decision and ensure the flow of fuel oil to the power 
sector. 
 
 
¶4. (SBU) Current account deficit drops to $462 million.  The Daily 
Times reported that the current account deficit declined by 89.14 
percent during the first quarter of the 2009-2010 fiscal year.  This 
drop has stabilized the foreign exchange reserves and the exchange 
rate.  The report attributes this fall to a significant decrease in 
Pakistan's trade deficit and a sharp increase in remittances.  Over 
the past year the trade deficit decreased from $4.51 billion to 
$2.75 billion and remittances increased from $1.879 billion to $2.33 
billion.  (Comment: The steady decline in the value of exports are a 
major risk to continued improvement in the current account deficit 
and balance of payments.  This issue also poses a risk to foreign 
exchange reserves and has the potential to destabilize the exchange 
rate.) 
 
 
------------------- 
BANKING AND FINANCE 
------------------- 
 
¶5. (SBU) The Karachi Stock Exchange (KSE) completed the development 
and regulatory work on the Bond Automated Trading System (BATS). 
The KSE has yet to set the go-live date for the trading of Debt 
Market Securities (listed term finance certificates) through BATS. 
The KSE asked members to apply now to get their BATS terminal 
installed/activated by submitting a request to the exchange, along 
with a refundable security deposit of approximately $1800. 
(Comment:  Our KSE contact confirmed the report and said that the 
Bond Trading Platform is another KSE milestone in introducing 
trading of debt securities to the exchange.  KSE has been holding a 
series of presentations to acclimatize the market, asset management 
companies and banks with BAT, and is receiving requests from 
institutions.) 
 
 
¶6. (SBU) The National Clearing Company Limited (NCCPL) to set up a 
debt market protection fund.  On October 31, Business Day reported 
that the NCCPL will establish a "debt market protection fund," 
 
ISLAMABAD 00002767  003 OF 005 
 
 
scheduled to go live in early November.  According to the NCCPL, the 
company will setup and maintain a debt market protection fund and 
every market clearing member will contribute approximately $3000 to 
the pool.  Clearing members, acting as brokers, will be allowed to 
participate in the debt market with minimum net capital balance of 
approximately $300,000, and will only be allowed to participate for 
listed term finance certificates (TFCs).  The member's aggregate 
debt exposure cannot exceed 10 times its net capital balance. 
(Comment:  The details on the NCCPL debt market protection fund is 
on the web: http://www.nccpl.com.pk/news/details.php?para m=NjYTcVYc 
.) 
 
 
------------ 
STOCK MARKET 
------------- 
 
 
7 (SBU) The Karachi Stock Exchange (KSE)-100 Index ended the week of 
October 30 at 9159.18, flat over the previous week's close.  Overall 
market capitalization slightly increased to $31.74 billion, with a 
net foreign portfolio investment inflow of $9.8 million. Despite 
strong corporate results, security concerns continued to dampen 
market performance.  (Comment:  Our KSE contact said the in spite of 
serious security concerns, the benchmark index did not fall below 
the 9,000-barrier as was widely speculated.  This suggested that the 
current downward drift may be done and the lows could attract new 
purchases next week.  Secretary of State Clinton public statements 
on economic cooperation could be a driving force in a market surge.) 
 
 
 
¶8. (SBU) Lahore Stock Exchange (LSE):Security concerns sent the 
Lahore Stock Exchange (LSE) Index tumbling 6.9 percent October 19 to 
¶21.  After the flurry, the market stabilized and trading was average 
the rest of the month. 
 
 
--------------- 
POWER AND WATER 
--------------- 
 
 
¶9. (SBU) Tarbela and Mangla reservoir levels drop after the start of 
water releases for sowing wheat.  The Business Recorder reported 
 
ISLAMABAD 00002767  004 OF 005 
 
 
that the Indus River System Authority cautioned provincial 
governments that the supply of water for winter crops could be 35 
percent short of demand.  (Comment:  Low reservoir levels at this 
point in the growing season could seriously impact the wheat crop. 
Pakistan needs to build more water storage capacity.) 
 
 
¶10. (SBU) Work on Indus Refinery stopped due to security concerns. 
On October 20, the News reported that work on the Indus Refinery 
Limited (IRL) was suspended after the project's sponsors backed out 
as a result of the country's deteriorating security situation.  The 
IRL is now seeking new investors to complete the construction 
project.  IRL was expected to be operational by mid-2009, but 
political turmoil and the downgrading of the country's credit 
rating, left management unable to secure financing for the project. 
 (Comment:  Indus Refinery Limited confirmed the report and said 
that the management is still looking for new investors and 
negotiating with the banks for financing.  The company is open to 
U.S. investment.) 
 
------------ 
AGRICULTURE 
------------ 
 
¶11. (SBU) Government procurement of rice set to begin the first week 
of November.  Contacts from the Pakistan Agricultural Storage and 
Services Corporation (PASSCO), the federal purchaser of agricultural 
commodities, have expressed concerns about their limited financing 
and storage capacity after procuring record stocks of wheat last 
summer.  (Comment: Government intervention in rice markets is just 
as counterproductive as it is in wheat and other commodity markets. 
Newspapers are already running stories about unscrupulous middle men 
and corrupt government agents denying farmers the benefit of the 
government price support.) 
 
 
--------- 
TEXTILE 
--------- 
 
 
¶12. (SBU) Power loom operators strike over the supply and price of 
cotton yarn.  The protest is focused in Faisalabad District, the 
heart of Punjab's textile belt.  According to press reports 
approximately 20 percent of the nations' power loom industries are 
 
ISLAMABAD 00002767  005 OF 005 
 
 
currently involved in the strike, which started on October 27.  Loom 
owners and laborers are demanding government intervention, including 
a prohibition on yarn exports, to ensure an ample supply of cheap 
yarn.  Industry interest groups remain divided over whether to 
support the strike.  Hosiery and readymade garment groups supported 
the loom owners' demands.  However, the All Pakistan Textile Mills 
Association (APTMA), which represents the larger, more sophisticated 
mills, opposed the strike, and cotton growers vowed to fight any 
export ban.   (Comment: Industry pressure could lead to more 
government subsidies and supports rather than a much needed 
restructuring of the lower end of the textile sector.  Eighty seven 
percent of Pakistan's 259,000 looms are in cottage or small 
businesses.  They have limited access to capital, frequently lack 
professional management, and are ill-equipped to compete for 
supplies with international cotton and yarn buyers.) 
 
 
PATTERSON