VZCZCXRO1637
RR RUEHLH RUEHPW
DE RUEHIL #0437/01 0550758
ZNR UUUUU ZZH
R 240758Z FEB 10
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 7518
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 2497
RUEHNE/AMEMBASSY NEW DELHI 6147
RUEHBUL/AMEMBASSY KABUL 1533
RUEHLH/AMCONSUL LAHORE 8567
RUEHKP/AMCONSUL KARACHI 2958
RUEHPW/AMCONSUL PESHAWAR 7623
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 000437 
 
SENSITIVE 
SIPDIS 
 
REF: ISLAMABAD 410 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EFIN EAGR EINV ENRG PREL PK
SUBJ: BI-WEEKLY REPORT ON ECONOMIC ISSUES, FEBRUARY 17, 2010 
 
- - - - - - 
TOP STORIES 
- - - - - - 
 
¶1. (SBU) Government releases $42 million to cash-strapped Pakistan 
State Oil (PSO).  On February 15, Business Recorder reported that 
the government had disbursed the funds in order to support the 
company, which is "on the verge of collapse" because of extensive 
debt.  According to the article, PSO management was unhappy with 
what they considered a "meager sum" as they were expecting to 
receive over $141 million from the Ministry of Finance.  PSO 
representatives fear they will be unable to continue servicing the 
power sector without an immediate injection of additional funds into 
the company.  Pakistan State Oil currently owes over $1 billion to 
local oil refineries. 
(Comment:  This is not first, and almost certainly not the last 
time, that PSO has had to press the Ministry of Finance to release 
funds.  Until the circular debt issue is fully resolved and the 
energy sector reformed, PSO will continue to have to scrounge to 
meet its payment obligations as it waits on payments from Pakistan's 
power companies.  End Comment.) 
 
¶2. (SBU) IMF sets a 5.1 percent budget deficit target for fiscal 
year 2009-10.  On February 17, The News reported that the IMF agreed 
to increase Pakistan's budget deficit target from 4.9 percent to 5.1 
percent.  As part of this initiative both parties agreed that the 
GOP would neither increase nor implement any new taxes.  In 
addition, the IMF decreased the tax revenue target from $16.42 
billion to $16.2.  The IMF is expected to release Pakistan's 5th 
tranche of funds totaling $1.21 billion some time next month. 
(Comment: Contacts at the IMF confirmed this change in the budget 
deficit target.  Even with the more liberal budget deficit target, 
the GOP will have a hard time meeting the IMF requirement, primarily 
due to increased military spending and debt servicing.  End 
Comment.) 
 
¶3. (SBU) Inflation increases to 13.6 percent.  On February 11 The 
News reported that inflation had increased by 3.16 percent compared 
to December 2009.  According to the director of the Top Lines 
Securities (TLS) brokerage firm, this rise in inflation is 
attributed to recent hikes in power tariffs, and increases in 
commodity prices.  (Comment:  The State Bank Pakistan had already 
predicted that the GOP would miss the IMF's 9 percent inflation 
target.  End Comment.) 
 
ISLAMABAD 00000437  002 OF 004 
 
 
 
¶4. (SBU) Limited rainfall in Sindh likely to spoil wheat crop.  On 
February 7, Business Day reported that Sindh's lower agricultural 
belt, which includes Sanghar, Hyderabad, Mirpurkhas and Nawabshah, 
is facing a serious dry spell.  Water levels in Sindh are at the 
lowest point of the last decade.  According to officials at the 
Water and Power Development Authority (WAPDA), the flow of water 
from the canals is 20 percent less than the average for this season. 
 (Comment: While water flows from the canals remain relatively low 
nationwide, recent rains have helped to dampen concerns regarding 
the prospects of the 2010 wheat crop.  End Comment.) 
 
¶5. (SBU) GOP proposes capital gains tax (CGT).  Business Recorder 
reported on February 13 that the government had invited stakeholders 
to provide their input on the imposition of a capital gains tax 
(CGT).  Representatives from the Karachi Stock Exchange (KSE) 
suggested that the GOP implement the tax gradually, starting with a 
5 percent CGT this fiscal year with an incremental increase to 10 
percent by fiscal year 2014-2015.  KSE also said that the CGT should 
only be applicable to short-term capital gains on holdings of less 
than six months.  (Comment: The KSE is proposing an incremental 
increase in the CGT to ensure that portfolio investment inflows and 
investment activities are not disrupted.  End Comment.) 
 
- - - - - - - - 
STOCK EXCHANGE 
- - - - - - - - 
 
¶6. (SBU) The Karachi Stock Exchange (KSE)-100 Index ended the week 
of February 12 at 9,813.08, up 0.44 percent over the previous week's 
close.  Overall market capitalization increased slightly from $33.09 
billion to $33.25 billion.  The week initially opened on a tentative 
note as the bomb blast in Karachi the previous Friday kept investors 
hesitant.  Foreign portfolio investment, which has been relatively 
muted for the last few weeks, gathered some steam towards the end of 
the week with a net foreign portfolio investment inflow of $3.62 
million.  (Comment: Contacts at KSE and local brokerage houses said 
the past week saw a roller coaster ride in the KSE index, which is 
highly susceptible to both economic and political developments in 
the country.  According to these contacts, the inflation rate, which 
was released last week, dampened investors' mood as it was higher 
than expected.  End Comment.) 
 
¶7. (SBU) Lahore Stock Exchange (LSE).  The LSE continues to hover 
 
ISLAMABAD 00000437  003 OF 004 
 
 
just over the 3,000 mark.  The index climbed 2.1 percent in the 
first half of February, recovering from a modest decline in late 
January.  Market capitalization was up a strong 2.83 percent. 
 
- - - - - - - 
POWER & WATER 
- - - - - - - 
 
¶8. (SBU) Shell Petroleum decides to remove itself from the Pakistani 
LPG business after 44 years of operation.  On February 12, The News 
reported that Shell made the decision as a result of the 73.8 
percent decline in Shell Gas Pakistan's profits from October through 
December 2009 compared to the same period in 2008.  Shell Petroleum 
Company Limited is currently seeking potential investors to purchase 
67.91 percent of its LPG shareholdings in Pakistan.  Comment: In 
recent months at least two major energy sector companies have 
expressed interest in divesting from Pakistan; AES and Shell.  End 
Comment.) 
 
¶9. (SBU) The Government of NWFP building six small dams in Nowshera. 
 On February 14 Business Recorder reported that the total project 
cost will be $18 million.  The dams would be used to irrigate 14,633 
acres of agricultural land and 4 percent of the water will be used 
to supply drinking water for local residents.  Construction on the 
dams is wrapping up and all six are projected to become operational 
by June 2010. 
 
- - - - - - - - - - - - - 
TRANSPORTATION & SHIPPING 
- - - - - - - - - - - - - 
 
¶10. (SBU) Advance scanner system installed at city's port.  On 
February 10, Daily Times reported that the GOP had recently 
installed the Rapiscan Eagle Gantry scanner system at Karachi Port. 
This scanner will enable port authorities to detect smuggled 
weaponry and drugs, and is capable of rapid, automated scanning of 
containers, cargoes and vehicles. 
 
- - - - - - 
AGRICULTURE 
- - - - - - 
 
¶11. (SBU) Government decides to monitor sugar mills' production.  On 
February 13 Business Recorder reported that the Ministry of 
 
ISLAMABAD 00000437  004 OF 004 
 
 
Industries has instructed the provincial governments to depute 
officials to all local sugar mills to monitor their daily 
production.  Representatives from the Pakistan Sugar Mills 
Association (PSMA) were in an uproar over the decision and have 
deemed the measure as "an anti-business move."  The GOP's decision 
is attributed to the ongoing shortage of sugar on the local markets 
and the government's desire to ensure that millers are reporting 
their production numbers accurately.  In early January, the GOP had 
given the green light to the private sector to import sugar duty 
free.  In spite of these tax breaks, the private sector has imported 
no sugar to date.  According to a February 17 article in Business 
Recorder, private sector representatives have no incentive to import 
sugar into the country because of the price disparity between the 
prevailing local price of sugar and the costs of importing sugar. 
(Comment:  The GOP is hoping that this latest initiative will help 
discourage the hoarding and the smuggling of sugar into neighboring 
countries; however, all of these problems result from the GOP's 
policy of maintaining sugar prices artificially low compared to 
international market prices.  The GOP will continue to face similar 
issues until it decides to finally let market forces set the price 
of local commodities.  End Comment.) 
 
¶12. (SBU) The establishment of industrial zones in Bostan, 
Balochistan, may damage agricultural tube wells.  On February 3, 
Daily Jang Quetta reported that local populations from Bostan met 
with the acting speaker Balochistan Assembly and the Senior 
Provincial Minister regarding concerns over the proposed 
establishment of an industrial zone in Bostan.  They argued that 
Bostan is an agricultural area, and the establishment of an 
industrial zone in the area will damage the water table.  (Comment: 
Contacts in Bostan said that the declining underground water level, 
the main source of water in the area, is the key concern of people. 
They added that agriculture in the area had suffered in recent years 
given that a large number of tube wells had gone dry while the 
remaining tube wells have to go deeper every year.  The 
establishment of industries in the area will require a large amount 
of water, which would compete with the scarce water available for 
agricultural purposes.  End Comment.) 
 
PATTERSON