VZCZCXRO7632
RR RUEHLH RUEHPW
DE RUEHIL #0178/01 0260502
ZNR UUUUU ZZH
R 260502Z JAN 10
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 7036
INFO RHEFDIA/DIA WASHINGTON DC
RHEFSNG/HMSNG WASHINGTON DC
RHEFHOT/HOTR WASHINGTON DC//USDAO ISLAMABAD PK//
RUWSMXI/AMC INTEL CEN SCOTT AFB IL//INO/J2-J//
RUEPVAA/CDR JSOC FT BRAGG NC//J2/HSE//
RHMFISS/CDR USCENTCOM MACDILL AFB FL//CCJ2-JCH/HSE//
RHLFABN/CDR USESUCOM ABNCP VAIHINGEN GE//ECJ2/ECJ3/ECJ5-A//
RHMFISS/CDR USSOCOM MACDILL AFB FL//SOJ2/HSE//
RHMFIUU/CDR USTRANSCOM TCJ2 SCOTT AFB IL
RHMFISS/CDRUSAREUR HEIDELBERG GE//AEAGB-IAD//
RUEAIIA/CIA WASHINGTON DC//DDI/OEA//
RUEPVAA/COMJSOC FT BRAGG NC
RHMFIUU/COMSOCCENT MACDILL AFB FL//SOCJ2/HSE//
RHEFDIA/DIA WASHINGTON DC//DHO-3//
RHEFDIA/DIA WASHINGTON DC//MIO-4//
RUETIAA/DIRNSA FT GEORGE G MEADE MD//M112/S2132HT//
RUFOADA/JAC MOLESWORTH RAF MOLESWORTH UK
RUEKJCS/JOINT STAFF WASHINGTON DC//J2/J5-EUR//
RUZFNAI/NASIC WRIGHT PATTERSON AFB OH
RUZFNAI/NASIC WRIGHT PATTERSON AFB OH//DEKA/FCTP//
RUZFNAI/NASIC WRIGHT PATTERSON AFB OH//DXOA/TAAO//
RHEFNGB/NGIC INTEL OPS CHARLOTTESVILLE VA
RHEFNGB/NGIC INTEL OPS CHARLOTTESVILLE VA//IANG-CE-CM/IANG-GS-AA//
RHEFNGB/NGIC INTEL OPS CHARLOTTESVILLE VA//IANG/CE/CECM//
RUCXONI/ONI WASHINGTON DC//32/211//
RUEALGX/SAF WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC//USDP-ISA-ADMIN//
RULWAAM/STRATCOM IDHS-90 OFFUTT AFB NE//J22123//
RUEPGAA/US SURVEY DIV SHAPE BE
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RUEHIL/USDAO ISLAMABAD PK
RUCQSAB/USSOCOM INTEL MACDILL AFB FL
RUEHLO/AMEMBASSY LONDON 2241
RUEHNE/AMEMBASSY NEW DELHI 6012
RUEHBUL/AMEMBASSY KABUL 1402
RUEHLH/AMCONSUL LAHORE 8411
RUEHKP/AMCONSUL KARACHI 2811
RUEHPW/AMCONSUL PESHAWAR 7471
RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC

UNCLAS SECTION 01 OF 04 ISLAMABAD 000178 
 
SENSITIVE 
SIPDIS 
 
REF: ISLAMABAD 3042 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN EAGR EINV ENRG PREL PK
SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, January 6, 2010 
 
- - - - - - 
TOP STORIES 
- - - - - - 
 
¶1. (SBU) Electricity tariff increases by 13.6 percent.  On December 
31, the Daily Times reported that the Ministry of Water and Power 
would enforce the change in power prices starting January 1.  This 
GOP initiative is in line with the staggered increase of power 
tariffs agreed to with the IMF, World Bank, and Asian Development 
Bank.  Business Recorder reported on January 5 that members of the 
local business community expect negative economic repercussions 
stemming from this decision, which coincides with an 18 percent 
increase in gas prices. 
(Comment: Public response to the tariff increase has been muted so 
far, perhaps tempered by Ministry of Water and Power leaks of the 
increase in advance of the notification.) 
 
¶2. (SBU) Pakistan passes IMF review receiving $1.2 billion in IMF 
funds.  On December 24, Business Recorder reported that the 
Executive Board of the International Monetary Fund (IMF) completed 
the third review of Pakistan's economic performance.  Satisfied with 
the GOP's efforts to improve its economic environment, the IMF 
approved the disbursement of $1.2 billion, representing the fourth 
tranche of Pakistan's IMF loan, and bringing total disbursements 
under the Pakistan's IMF Stand-By Arrangement to $6.54 billon.  The 
IMF disbursed the monies on December 28. 
 
¶3. (SBU) Annual reservoir maintenance affecting local power supply. 
On December 28, Business Recorder reported that water releases from 
major reservoirs had all but stopped, slashing hydroelectric power 
generation by at least 1,200 megawatts and exacerbating the local 
power shortage problem.  This routine cut in water releases, 
expected to end on January 30, helps to facilitate canal 
maintenance, while saving reservoir water for crop irrigation in the 
spring.  (Comment:   According to our contacts, blackouts in Punjab 
are now lasting six to eight hours a day in the cities and as much 
as 12 to 14 hours a day in the rural areas.  Natural gas rationing 
has compounded the problem, as thermal generation has not been 
sufficient to fill the shortfall of hydropower.  The seasonal load 
shedding comes at an unfortunate time given the January 1 increase 
in the electricity tariff.) 
 
¶4. (SBU) The Karachi Electric Supply Company (KESC) to set up Thar's 
first coal power plant.  On December 16, the Business Day reported 
 
ISLAMABAD 00000178  002 OF 004 
 
 
that KESC signed a Memorandum of Understanding (MoU) with the 
UK-based company Oracle Coalfields, to set up the first major 
coal-fired power plant fueled by coal mined from Thar coalfields in 
Sindh.  According to the MoU, Oracle will own and operate the mine, 
supplying coal to the KESC-run power plant.  (Comment:  Contacts at 
KESC indicated that this agreement is still in its preliminary 
stages, adding that they are still trying to determine exactly how 
they can go about exploiting the Thar coalfields.) 
 
¶5. (SBU) Current account deficit down to $1.35 billion.  On December 
18, Dawn reported that Pakistan's current account deficit fell to 
$1.359 billion during the first five months of FY10, compared to 
$7.318 billion during the same period in FY09.  This 18 percent drop 
is attributed to a smaller trade deficit, increased remittances, and 
inflows from the IMF and donors. 
(Comment:  This drop in the current account deficit demonstrates 
recent Pakistani success in getting its macroeconomic house in 
order.  However, contacts in the banking sector have suggested that 
the GOP should not "overvalue" the situation, which could easily 
change should oil prices increase or Pakistan's exports continue to 
decline.) 
 
¶6. (SBU) The Ministry of Petroleum and Natural Resources increases 
gas prices by 18 percent.  On December 22 Business Recorder reported 
that the Ministry of Petroleum and Natural Resources had presented a 
proposal to the Prime Minister to increase gas prices, including the 
price of Compressed Natural Gas (CNG), by 18 percent for all 
consumers starting early January.  Representatives from the Sui 
Northern Gas Pipeline and Sui Southern Gas Company gas utility 
companies indicated that this plan would generate over $2.9 billion 
in needed revenue.  Local industry expressed serious concern over 
the proposal, emphasizing that they were already facing difficulties 
because of the increasing cost of inputs.  The News reported on 
December 30 that CNG stations were planning to strike to oppose the 
possible CNG price hike.  The Chairman of the All Pakistan CNG 
Association said 2,912 of Pakistan's 3,006 CNG filling stations 
would remain closed for 3-4 days, adding that if the GOP went ahead 
with the price rise, the Association would challenge the tariff hike 
in the courts.  On January 1, The News confirmed that the Prime 
Minister approved the proposed tariff hike, which took effect that 
same day; however, following discussions with the Minister of 
Petroleum and Natural Resources, the CNG association called off 
their proposed strike.  (Comment:  This tariff hike is a positive 
sign that the GOP is serious about reducing subsidies and 
 
ISLAMABAD 00000178  003 OF 004 
 
 
rationalizing energy pricing and consumption.  Contacts at the All 
Pakistan CNG Association said that they would not contest the tariff 
raise if CNG prices remained 40 percent lower than petrol prices.) 
 
¶7. (SBU) The Competition Commission of Pakistan (CCP) fines local 
LPG producer and marketing association $3.7 million for collusive 
behavior.  On December 17, Business Recorder reported that following 
an extensive investigation the CCP had found that the Jamshoro Joint 
Venture Limited (JJVL), the country's largest LPG producer, and the 
Liquefied Petroleum Gas Association of Pakistan (LPGAP), the largest 
association of local LPG marketing companies, were involved in price 
fixing.  According to the report, JJVL and LPGAP were intentionally 
manipulating the supply and the price of locally produced LPG in 
order to push LPG importers, such as Progas, out of the market. 
JJVL and LPGAP are currently contesting the $3.7 million in fines 
imposed by the CCP in the Supreme Court.  (Comment:  Since its 
inception in 2007, the CCP has fought to promote a competitive 
environment in Pakistan and to protect consumer interests by 
regulating monopolies and combating collusive practices.  It has 
filed 76 cases against local businesses, including alleged cartels 
in the sugar, banking and cement industries.) 
 
- - - - - - - - - 
BANKING & FINANCE 
- - - - - - - - - 
 
¶8. (SBU) State Bank of Pakistan (SBP) Quarterly Report shows massive 
rise in Non Performing Loans (NPL).  On December 24, Business 
Recorder reported that during the quarter ending September 30, the 
banking system experienced slow growth and a massive increase in 
NPLs, mainly due to the overall slowdown in local economic activity. 
 According to the SBP's Quarterly Performance report, NPLs increased 
from $4.79 billion in the quarter ending June 2009 to $5.08 billion 
in the quarter ending September 2009.  (Comment:  Despite the growth 
of NPLs, the banks remain well-capitalized as the risk-based capital 
adequacy ratio of all banks operating in country improved to 14.3 
percent during this period.) 
 
- - - - - - - 
STOCK MARKET 
- - - - - - - 
 
¶9. (SBU) Karachi Stock Exchange (KSE).  According to Business 
Recorder, the KSE 100 Index closed the year on December 31 at 
 
ISLAMABAD 00000178  004 OF 004 
 
 
9,386.92.  This represents a 0.3 percent increase from the previous 
week's close.  KSE was up nearly 53 percent in 2009.  Overall market 
capitalization decreased slightly from $32.27 billion to $32.15 
billion, with a net foreign portfolio investment inflow of $4.11 
million.  (Comment:  The market saw a short week of trading due to a 
local holiday and unexpected closures following the December 28 
bombing and arson in Karachi.  Volumes were low during the week as 
investors remained concerned about the economic impact of the 
Karachi attack, and the ongoing security problems in the country.) 
 
¶10. (SBU) Lahore Stock Exchange (LSE).  Business Recorder reported 
that the LSE index climbed 5.5 percent in December shrugging off 
fears of turmoil after the National Reconciliation Ordinance 
expired.  The volume of shares traded over the month of December 
fluctuated, with an equal number of shares registering gains and 
losses, and market capitalization was up by 4.3 percent. 
 
PATTERSON