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UNCLAS SECTION 01 OF 05 ISLAMABAD 000189 
 
SENSITIVE 
SIPDIS 
 
REF: ISLAMABAD 0178 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN EAGR EINV ENRG PREL PK
SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, January 20, 2010 
 
- - - - - - 
TOP STORIES 
- - - - - - 
 
¶1. (SBU) State Bank of Pakistan (SBP) releases FY10 midterm report. 
Business Recorder reported on January 13 that the SBP's overall 
picture of the economy was relatively optimistic with most key 
indicators continuing the positive trends that began at the end of 
last quarter.  According to SBP projections, GDP growth is likely to 
reach 3.3 percent, and exports should total $18.5 to $19 billion in 
FY10.  The fiscal deficit is expected to be comparable to last 
year's, remaining between 4.7 - 5.2 percent of GDP, whereas the 
current account deficit is likely to fall to 3.7 - 4.7 percent of 
GDP from FY 09's 5.3 percent.  The SBP anticipates that the GOP will 
face major challenges in improving the tax-to-GDP ratio, which 
currently stands at 9.8 percent.  (Comment: In light of the weak 
foreign direct investment and marginal growth in industrial 
production the SBP's GDP projection may be ambitious.  End Comment) 
 
¶2. (SBU) Asian Development Bank (ADB) audit reveals irregularities 
in Rental Power Plants (RPPs) awards.  Business Recorder reported on 
January 18 that the ADB found inconsistencies in the criteria used 
to award the RPP contracts.  The report emphasized that, in some 
cases, the RPP agreements were awarded to well-connected individuals 
rather than to the best qualified project.  Implementation of the 
RPPs was also noted with concern, as the GOP would need to increase 
electricity prices 25 to 45 percent to fund more expensive rental 
power.  (Comment: The draft ADB report completed in December is now 
making its way through the various GOP ministries.  The report lays 
out a series of scenarios for the GOP on the cost/benefit of 
introducing RPPs, with an emphasis on the benefits of moving forward 
with fewer RPPs (most likely 8) than the 14 RPPs currently approved. 
 End Comment) 
 
¶3. (SBU) Prime Minister replaces the Minister of Health and sacks 
the drug controller.  The News reported on January 16 that the Prime 
Minister's actions came in response to allegations of widespread 
nepotism and corruption within the Ministry of Health (MOH). 
According to the article, MOH officials were hiring under-qualified, 
politically-connected individuals to run multi-million dollar 
national health programs such as the National Maternal and Child 
Health program.  The report indicated that there were also 
spillovers into the drug registration process, claiming that certain 
pharmaceutical companies were bribing top level MOH officials to 
 
ISLAMABAD 00000189  002 OF 005 
 
 
fast track the registration of their new drugs, a process which 
typically takes several months and, in some cases, years to 
complete.  (Comment: Contacts from the pharma industry have often 
complained about the MOH's inefficiencies.  Whether or not this 
change in leadership will help to clear some of the bottlenecks and 
the bureaucratic red tape within the ministry remains to be seen. 
End Comment) 
 
¶4. (SBU) The Sui Northern Gas Pipelines Limited (SNGPL) suspends 
provision of gas to textile mills.  On January 12, The News reported 
that SNGPL had indefinitely cut the supply of gas to all textile 
mills located in Punjab and NWFP.  Representatives from the Punjab 
chapter of the All Pakistan Textile Mills Association complained 
that these actions were contrary to the Cabinet Committee on Gas 
Load Management's decision to only suspend gas two days a week. 
They added that local textile industries would have no backup energy 
sources left to run their operations as they were already dealing 
with 10 to 12 hour blackouts per day.  (Comment: Due to the spikes 
in domestic consumption during the winter months, textile and other 
industries receive nine-month contracts for gas and are expected to 
find other fuel sources for the remaining 3 months.  However, this 
drama plays out annually, with gas users crying foul when the GOP 
makes unrealistic promises to supply gas over and above the agreed 
nine months.) 
 
-------- 
TEXTILES 
-------- 
 
¶5. (SBU) The textile industry bitterly divided over a new limit on 
cotton yarn exports.  On January 10 Business Recorder reported that 
the Cabinet Committee on Textiles is imposing a cap of 50,000 
kilograms per month on yarn exports.  This is approximately 20 
percent below current export volumes.  Feeling that the limit was 
too generous and would leave Pakistani manufacturers short of raw 
materials, the Pakistan Cotton Fashion Apparel Manufacturers and 
Exporters Association threatened to go on strike.  Conversely, the 
All Pakistan Textile Mills Association was deeply critical of the 
GOP decision, which they viewed as an "anti-free-market" 
intervention.  (Comment: The textile industry is one of Pakistan's 
most important economic sectors.  Skyrocketing cotton prices have 
caused considerable turmoil in recent weeks, adding misery to an 
industry that has been significantly affected by rising costs of 
inputs attributed to the local electricity and gas shortages.  The 
 
ISLAMABAD 00000189  003 OF 005 
 
 
GOP's decision to limit yarn exports, which could be challenged 
under WTO regulations, will reduce Pakistan's foreign exchange 
earnings, but will help to preserve some desperately needed jobs in 
central Punjab.  End Comment) 
 
------------- 
ENERGY & WATER 
------------- 
 
¶6. (SBU) Local political party challenges electricity tariff hike. 
On January 8, the Daily Times reported that the Lahore High Court 
(LHC) accepted a petition from the Jamaat-e-Islami (JeI) party 
challenging the National Electric Power Regulatory Authority's 
recent decision to increase the electricity tariff by 18 percent, in 
October and January, claiming that the move was unconstitutional. 
The LHC scheduled a hearing on this matter for January 21. 
(Comment: JeI is trying to capitalize on popular discontent with 
rising electricity costs and persistently dismal service.  There is 
little basis upon which to seriously question the legitimacy of 
NEPRA's actions.  By agreeing to hear the case, the LHC has made 
clear its intent to meddle in issues related to energy tariffs. 
This is a worrying sign, as the LHC intervention in a case involving 
sugar prices earlier this year resulted in massive disruptions of 
sugar supplies.  End Comment) 
 
¶7. (SBU) Lucky Cement signs Memorandum of Understanding (MoU) with 
Oracle Coal Fields.  On January 8, Business Day reported that under 
this MoU, Sindh Carbon Energy Limited, a subsidiary of Oracle Coal 
Fields, will mine the coal to be supplied to Lucky Cement's plants. 
Oracle Coal Fields currently has an exploration license for Block 4 
of the Thar Coal Field.  (Comment:  Contacts at Lucky Cement 
confirmed the report and expect the project will encourage 
exploration and mining of the Thar coal field, while helping to both 
reduce dependence on imported coal and increase Pakistan's foreign 
exchange reserves.  End Comment) 
 
------------ 
AGRICULTURE 
------------ 
 
¶8. (SBU) Ministry of Food and Agriculture (MinFA) hoping to sign 
Memorandum of Understanding (MoU) with Monsanto.  The News reported, 
on January 9, that MinFA is particularly interested in introducing 
Mosanto's insect-resistant strand of cotton seed into the local 
 
ISLAMABAD 00000189  004 OF 005 
 
 
market.  However, while the Ministry of Law and Justice recently 
cleared on the draft MoU, the Ministries of Textiles, Finance, 
Commerce, Environment, and Science and Technology and the provincial 
Ministries of Agriculture have yet to review the document. 
(Comment:  Pakistan is the world's fourth-largest cotton producer, 
third largest raw cotton exporter and a leading yarn exporter. 
However, its cotton yield per acre is 13th in the world.  The 
Monsanto agreement would help to increase per acre cotton 
production.  End Comment) 
 
¶9. (SBU) GOP removes taxes on imported sugar.  The News reported on 
January 13 that Finance Minister Shaukat Tarin had confirmed the GOP 
would scrap the 16 percent sales tax and all other duties on white 
and refined sugar to facilitate import of the commodity by non-state 
importers.  The move comes as Pakistan faces a growing shortage of 
white sugar.  The GOP is looking to import 1.25 million tons of 
sugar to help fill this supply gap. 
(Comment: This artificially created sugar shortage is primarily 
attributed to the GOP's clumsy intervention in the market, setting 
local sugar prices significantly lower than international prices 
thus encouraging rent seeking behavior and hoarding.  End Comment) 
 
------------- 
STOCK MARKET 
------------- 
 
¶10. (SBU) Karachi Stock Exchange (KSE).  The Karachi Stock Exchange 
(KSE)-100 Index closed on January 18 at 9,895.46, a 0.1 percent 
increase from the previous week's close.  Overall market 
capitalization slightly increased to $33.74 billion, with a net 
foreign portfolio inflow of $6.84 million.  Stabilizing 
macroeconomic indicators and the projected 3.3 percent growth in GDP 
were the major driving forces keeping the market optimistic. 
(Comment:  Our KSE contact said the persistent inflow of foreign 
portfolio investment and the inflow of funds from the IMF were 
buoying the market.  End Comment) 
 
¶11. (SBU) Lahore Stock Exchange (LSE).  According to Business 
Recorder, banking and oil stocks pushed the LSE Index up 5.76 
percent in the first half of January.  The LSE index passed 3,000 on 
January 4 and has stayed above that mark since.  Volume and trading 
were heavier than average, and market capitalization was up 4.5 
percent. 
 
 
ISLAMABAD 00000189  005 OF 005 
 
 
PATTERSON