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UNCLAS SECTION 01 OF 04 ISLAMABAD 000410 
 
SENSITIVE 
SIPDIS 
 
REF: ISLAMABAD 189 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN EAGR EINV ENRG PREL PK
SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, FEBRUARY 3, 2010 
 
- - - - - - 
TOP STORIES 
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¶1. (SBU) Ministry of Finance concerned over the declining tax-to-GDP 
ratio.  On February 2 Business Recorder reported that, according to 
the Finance Ministry's 2009-2010 Fiscal Policy Statement, at the end 
of FY 09, Pakistan's s tax-to-GDP ratio stood at 8.8 percent, with 
revenue collection totaling $13.6 billion.  This represents a 1 
percent drop compared to the previous fiscal year.  The government 
has set a target of $16 billion for FY 10 tax collections.  This 
would entail a 19.3 percent increase from FY09.  Ministry of Finance 
officials said that the creation of the new Inland Revenue Service, 
Pakistan's IRS, would help streamline the process of introducing the 
value-added tax (VAT), a step towards increasing tax collection. 
(Comment: These revenue targets are ambitious given the current 
domestic and international economic environment and GOP's track 
record.  The GOP has yet to make much headway on the VAT, and the 
National Assembly has yet to pass the enabling legislation for it. 
End Comment.) 
 
¶2. (SBU) National Assembly passes Anti-Money Laundering Bill (AML) 
¶2009.  On January 28 The Nation reported that the bill was approved 
by the National Assembly on January 27, but the Senate and President 
have yet to clear on it.  Under the proposed legislation, violators 
could face fines of up to $12,000 and jail terms of one to ten 
years.  (Comment: The Financial Monitoring Unit (FMU), Pakistan's 
equivalent to a Financial Intelligence Unit (FIU), is already 
functioning and operating under the revised AML Ordinance of 2009, 
which closely meets international standards. The AML bill passed by 
the National Assembly is identical to the AML Ordinance President 
Zardari signed in November 2009.  End Comment.) 
 
¶3. (SBU) Government may cut the Public Sector Development Program 
(PSDP) by 50 percent.  On January 26 Business Recorder reported that 
the Ministry of Finance may cut the $4.97 billion currently 
allocated in the budget to fund 2010 PSDP projects in half.  This 
proposed funding cut is due to the GOP's lack of liquidity 
attributed to an increase in defense spending and the delayed 
disbursement of Coalition Support Funds from the United States. 
(Comment: The PSDP includes substantial funds for infrastructural 
development.  If implemented, this massive cut in development 
expenditures will serve as an additional deterrent for investors and 
slow economic growth.  End Comment.) 
 
ISLAMABAD 00000410  002 OF 004 
 
 
 
¶4. (SBU) State Bank of Pakistan (SBP) unveils FY10 monetary policy. 
On January 31 The News reported that, amidst fears of rising 
inflation and limited liquidity, the SBP is maintaining its policy 
rate at 12.5 percent.  According to the Governor of the SBP, average 
inflation is expected to hover between 11 and 12 percent this fiscal 
year.  SBP officials expressed hope that a decrease in 
Non-Performing Loans would strengthen the banks' confidence in the 
private sector and in turn increase private sector lending. 
(Comment: Increases in international commodity prices and the recent 
phase out of electricity subsidies could exacerbate inflation moving 
forward.  End Comment) 
 
¶5. (SBU) Lack of water may significantly reduce Punjab's next wheat 
harvest.  On January 29 Business Recorder reported that farmers are 
increasingly concerned by the winter season dry spell.  Punjab's 
wheat crop could be as much as 4 million tons below this year's 
target due to a lack of sufficient irrigation water.  (Comment: The 
Indus River System Authority is expected to announce provincial 
water allotments in the coming weeks.  Punjab government officials 
believe that demand for irrigation will exceed supply by at least 30 
percent this season.  End Comment.) 
 
¶6. (SBU) Punjab may have trouble purchasing the 2010 wheat crop.  On 
January 26, Dawn reported that the province borrowed over $1.76 
billion in 2009 to purchase wheat from local farmers at record high 
prices.  Punjab has repaid only $ 300 million of the debt 
accumulated from last year's purchases, jeopardizing the province's 
ability to secure financing for its 2010 purchases.  Punjab's Food 
Department has already spent $360 million on various subsidies this 
fiscal year.  (Comment: It is the Punjab government's policy to 
purchase stocks of wheat for sale, at a subsidized rate, to flour 
mills annually.  With mounting debt and limited income, Punjab may 
not be able to continue acting as a broker for the domestic wheat 
market.  End Comment.) 
 
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POWER & WATER 
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¶7. (SBU) The Karachi Electric Supply Company (KESC) to offer up $50 
million worth of company shares.  On January 22 Business Recorder 
reported that KESC struck this deal with the Asian Development Bank 
and the International Finance Corporation in an attempt to settle 
 
ISLAMABAD 00000410  003 OF 004 
 
 
the $324 million debt that it owes to both international financial 
institutions.  (Comment: Contacts at the KESC confirmed that this 
deal is in the works, but still in its preliminary stages.  End 
Comment.) 
 
¶8. (SBU) 4Gas to set up floating LNG terminal at Port Qasim.  On 
January 28 Business Recorder reported that the Minister for 
Petroleum and Natural Resources announced that the Economic 
Coordination Committee gave the green light to American-owned 4Gas 
to establish a floating LNG terminal at Port Qasim in Karachi.  In 
five years, 4Gas will establish an $800 million fixed terminal at 
the port to manage the long term import of LNG to Pakistan.  The 
floating terminal's capacity is 3.5 million tons per annum of LNG, 
and the terminal is expected to be up and running by December 2011. 
(Comment: The GOP's approval was a direct result of the promise of 
OPIC financing for the project.    The GOP has not yet approved the 
second, landed phase, of the project nor secured gas supplies for 
it.  End Comment.) 
 
¶9. (SBU) Cabinet rejects proposal to purchase 30 million energy 
saving bulbs.  According to a January 22 article in The News, 
members of the Cabinet refused to sign off on this $82 million 
project because of the exorbitant costs of the compact fluorescent 
light lamps.  Under this 10-year joint Asian Development Bank/ 
Agence Francaise de Development investment program, the GOP would 
distribute the bulbs to residential consumers free of charge, to 
replace existing incandescent bulbs.  The expectation was that this 
initiative would help utility companies reduce peak demand by about 
1,100 MW, and cut energy consumption by about 2,500 GWh per year. 
(Comment: Contacts at the ADB believe the project will still go 
forward in spite of the GOP's concerns.  End Comment.) 
 
 
 
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TRANSPORTATION 
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10 (SBU) Another airline leaves Pakistan.  On January 21, The News 
reported that, effective February 17, Singapore Airlines will 
suspend its flights from Karachi and Lahore.  This decision comes in 
response to growing security concerns, which have scared away the 
small number of tourists and business travelers previously flying to 
Pakistan.  Industry representatives indicated that the absence of a 
 
ISLAMABAD 00000410  004 OF 004 
 
 
GOP policy to promote the aviation industry has exacerbated the 
problem.  Currently, out of the 42 airports in country, 18 are 
functional and of these 9 are equipped to cater to international 
traffic.  (Comment: Singapore Airlines officials confirmed the news 
and said that they are completely suspending their Pakistan 
operations as they no longer view the country as an attractive 
market.  End Comment.) 
 
- - - - - - - 
STOCK MARKET 
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¶11. (SBU) Karachi Stock Exchange (KSE).  The KSE 100 Index ended the 
week of January 29 at 9,632.76, down 1.5 percent from the previous 
week's close.  Overall market capitalization decreased slightly from 
$32.97 to $32.45 billion, with net foreign portfolio investment 
outflow of $1.32 million.  Market activity was primarily driven by 
foreign participants, who invested because of attractive prices in 
the domestic market compared to other South Asian markets.  The 
SBP's decision not to change its policy rate failed to buoy the 
market as most investors had already anticipated the move. 
(Comment: The stock market remained volatile due to the large sale 
of stocks in the regional markets.  The depreciation of the 
Pakistani rupee also negatively affected the stock exchange's 
performance.  End Comment.) 
 
¶12. (SBU) Lahore Stock Exchange (LSE).  According to Business 
Recorder, banking and oil stocks pulled the LSE down 2.45 percent in 
the second half of January, but the index continued to hover around 
3,000.  Volume and trading were relatively light. 
 
PATTERSON