October / November 2010

INDUSTRY RESEARCH &

ANALYSIS - IRA
NBP Industry Newsletter Credit Management Group
Tracking Opportunity & Risk Related Developments

MAJOR DEVELOPMENTS OCT / NOV 2010 ISSUE TEXTILES

SBP projects 2-3% growth Major Developments 1 Pakistan forced to import over
(Page No. …23) Textiles (Ginning, Spinning, 1 3 M bales of cotton
Weaving, Knits, Woven Apparel)
IMF: Inflation 13.5%, GDP < 2.75% Pakistan will be forced to import over
Oil (Marketing, Refining, Sourcing) 4
(Page No. …24)
Power / Energy 6 3 M bales of raw cotton to meet the
Fiscal deficit reaches 6.3pc in FY10 (Generation, Distribution) demands of local textile industry as
(Page No. …24) Sugar 8 cotton production will remain around
11.5 M bales against set target of 14
Cement / Construction / Steel 9
CA deficit widens by 48% M bales in crop season 2010-11.
(Page No. …24) Automotive 11
Telecommunication 12 Officials at the Ministry of Food and
Trade gap widens
Other Industries 12 Agriculture told that during the
(Page No. …24)
Agriculture 14 current crop season Pakistan expected
Bumper wheat crop likely to achieve the set target due to
Micro Business & SME 19
(Page No. …15) favourable conditions, but devastating
Financial Services 20 floods have swept away cotton crop
Profitability remains up in 2010 Regulatory 22 on 600,000 hectares.
(Page No. …09) Macro Environment 23
Table: Risk-Opportunity 32 Before the recent floods Pakistan was
Two nuclear reactors for Pakistan
(Page No. …06) Trends expecting a bumper crop of 14 M bales
Accelerating Global 33 compared to 12.8 M bales produced
Agreement inked - TAPI gas pipeline Risks - Special Excerpts last year. Officials said that Pakistan's
(Page No. …06) Global Deflation 33 textile industry annually requires
around 14 M bales of cotton, officials
Sovereign & US Debt Crises 35
Pakistan can produce of 7,000 MWs added.
(Page No. …06) US Dollar Crises - An 39
Alternative Reserve Currency
Strategic Divergence – US vs 40
Officials said cotton crop had been
Pakistan forced to import over
3 M bales of cotton China / Russia & Others sown on 3.4 M hectares, out of which
(Page No. …01) Iran – A new Mid-East war 44 0.6 M hectares had been destroyed
in the making and the country lost about 2.5 M bales.
Kick - starting agricultural activity The “AF-Pak” Theater - 48 Officials warned that the country
(Page No. …15) The End Game would face serious shortage of cotton
Economic Implications of 52 in coming days as more than 20% of
Agriculture may need 2 years for recovery US Congressional Elections
(Nov 2010) the cotton crop had been destroyed
(Page No. …14)
by the floods.
310,000 small businesses affected by (Business Recorder – October 13, 2010)
Downgraded: ratings of
Floods largest banks
(Page No. …14) Over 2 M cotton bales destroyed
(Page No. …20)

Circular debt update NPLs estimate - SBP While expressing his views in
(Page No. …06) (Page No. …20) connection with the damage to the

cotton crop as a result of floods,
Chairman APTMA Sindh-Balochistan
Region said that before the floods
Pakistan was expecting a bumper crop
of 14 M bales compared to 12.8 M
bales produced last year.
According to reasonable estimates,
the floods have destroyed
approximately 2.00 to 2.50 M bales
leaving a short fall of about 1.00 M
bales in comparison to last year;
therefore, the import requirement this
year will be additional 1 M bales and
total import requirement would be 4
M bales, which will now be procured
from international market at world
prices.
Under the scenario, it can not be
expected that the spinning mills will
import cotton at international prices
in the absence of continuity and
assurety of non interfering policy by
the Ministry of Textile Industry, as
nobody can afford to import raw
material at world prices and be denied
the rights to sell their product at the
international price of cotton yarn in
the wake of export duties and quotas.
The clear proof of this can be drawn
from a comparison of cotton import
figures between 2008-09 and 2009-10
when the import figures were 490,000
Metric Tons (2.8 M bales) versus
337,000 Metric Tons (1.98 M bales),
respectively. Had curbs on yarn export
not been placed during the last year
Pakistan would have imported
150,000 MT more of raw cotton at
prices, which would have been much
cheaper than they are today and
consequently availability in the local
market would have been much better.
(Business Recorder – September 15, 2010)
Cotton crisis looming
According to the assessment of the
United Nations, over 1.31 M hectares
of the cultivated area has been
Tracking Opportunity & Risk Related Developments
destroyed by floods in the four
provinces and Azad Kashmir, which
might compel the country to import
many agricultural products including
cotton. The total agriculture sector
losses are estimated to be about Rs
249 B.
Due to flood damage to Pakistan's
cotton crop for the 2010-11 season, the
officials estimate that the country may
import 3.5 to 4 M bales. Major
distortion took place in major cotton-
growing areas of the central Punjab
and southern Sindh.
According to a Food and Agriculture
Organization (FAO) report, the
highest losses were recorded in Punjab
where about 661,637 hectares of land
with standing crops destroyed. In
Sindh, crops on about 357,372 hectares
and Khyber Pakhtunkhwa (KP) about
191,020 hectares were damaged.
(Daily Times – September 14, 2010)
Cotton output to drop by 18.5%
The cotton output in the country is
likely to be lower by 18.5% because
of floods, PCGA Chairman told here.
"I am expecting loss of 18.5% of cotton
due to recent flood in Punjab and
Sindh," he said that government had
targeted 14.11 M bales but now only
11.5 M bales production is expected.
According to him, devastating floods
and heavy rains severely damaged
the cotton crop in the country. Flood-
affected areas in Punjab are estimated
at 1.415 M acres (1415.6 thousand
acres) while in Sindh it is about 303.2
thousand acres. The total area
damaged is calculated at about 1.719M
acres (1719.8 thousand acres).
(Business Recorder – September 14, 2010)
Cotton production declines by 22.95%
Cotton production has declined by
22.95% as the arrival recorded at
ginneries as on September 1 stood at
9,95,191 bales, showing a decrease of
22.95% over the corresponding period
of the last year when ginneries
received 12,91,550 bales.
According to the Pakistan Cotton
Ginners Association's fortnightly
report released said that Punjab - the
major cotton producing province -
contributed 4,88,548 bales to take the
total to 9,95,191 bales.
Sindh's shared in the arrival was
5,06,643 bales.
(Business Recorder – September 4, 2010)
Imports of 4 M cotton bales
Flood damage to Pakistan's key cotton
crop has cut deep into the forecast for
the 2010/11 season, industry officials
said, adding the country is likely to
import at least 4 M bales. The
monsoon flooding, which started over
a month ago, damaged about 524,000
hectares (1.3 M acres), out of the total
3.20 M hectares, under cultivation in
the major cotton-growing areas of
central Punjab and southern Sindh
province.
Government and industry officials
now estimate output of about 11.6 M
bales of 170 kg (374.8 lb) each against
the government target of 14 M bales.
"We will have to probably import a
minimum of 4 M bales to meet our
demand this season after floods
damaged up to 2.25 M bales," a senior
official at the private All Pakistan
Textile Mills Association, told Reuters.
(Business Recorder – September 8, 2010)
Growth in Textile export
The country's textile export has posted
a healthy growth of 23% during the
1st 2 months of the FY 2010-11 mainly
due to high unit price in the world
market.
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According to statistics released by
Federal Statistics Bureau, the country's
overall textile export have reached
$1.975 B mark during the first two
months (July-August) of the CFY as
compared to $1.601 B exports during
the same period of the last FY,
depicting an increase of 23.34% or
$370 M.
(Business Recorder – September 23, 2010)
Worlds cotton output, consumption
World cotton production and
consumption are forecast to balance
around 25.1 M tons in 2010/11 due to
15% rebound in production and 2%
increase in mill use, a statement of the
International Cotton Advisory
Committee said.
The higher production in the USA and
a surplus of five Mbales in India
would compensate for the damage
cause to cotton crop in Pakistan. It
would also facilitate Pakistani
spinners to cover the shortage through
imports, it said.
Beginning stocks will account for only
27% of the world’s supply in 2010/11,
down from 35% in the previous
season. The decline in stocks as a
percent of supply suggests that cotton
prices in 2010/11 will remain
unusually susceptible to changes in
crop prospects, the statement added.
(The News – September 3, 2010)
$1 B foreign orders may be lost
The country is likely to lose at least a
billion dollars of foreign orders next
summer because of the acute shortage
of cotton yarn on the local market,
manufacturers-cum-exporters of
value-added textile sector said.
Expressing fear, they said the raw
commodity's scarcity could curb the
value-added textile sector from
meeting the export deadline for the
Tracking Opportunity & Risk Related Developments
coming Christmas and New Year
events in the West.
"Exporters always book orders at least
three months ahead of the next season,
and if the raw commodity price is
higher or short on the local market
then striking deals with global buyers
becomes difficult," Value-added
Textile Forum Co-ordinator said.
(Business Recorder – October 20, 2010)
Duty on PTA cut to 3%
The government has cut customs duty
on the import of pure terephthalic
acid, a raw material used in the
production of polyester fibre, to 3%
from 7%.
On the contrary, customs duty on
polyethylene terephthalate for bottle
resin has been increased from 7.5 to
9%. This was announced in a
notification issued by the Federal
Board of Revenue.
In another major decision, the FBR
withdrew all duty concessions on the
import of 12 types of raw material and
different types of yarn for the textile
industry.
Elaborating, an FBR official said the
raw material from which concessions
have been removed include textured
yarn (nylon), polyester and other types
of yarn, mixed staple fibre, yarn made
from mixed wool and other products.
(The Express Tribune – October 13, 2010)
Garments export likely to come down in
2010-11
Due to high prices of end product,
Pakistan value-added textile export
did not seem competitive in Europe
as well United States, resultantly
export of garments is likely to come
down from $3.2 B to $3 B during
2010-11.
Representatives of different value-
added organizations, while talking
said on that the value added textile
industry is crippled owing to frequent
load shedding, high electricity and
gas tariff, multiple duties and taxes,
resulting in high cost of doing business
in Pakistan, as compared to the
neighbouring states.
Chairman said that end product cost
has increased manifolds, which is no
more acceptable to USA and Europe.
The prices of the corresponding period
last year, the Federal Bureau of
Statistics said.
The surge in export numbers can be
attributed to higher global demand
and increased per unit price of
Pakistani textile products. Despite
surge in the amount realised, the
quantity exported of almost all the
products under the category
witnessed decline.
According to the data, raw cotton
exports declined to $7.202 M during
July-September against $40.458 M in
the corresponding period last year,
thereby, witnessing a decline of 82.2%.
Contrary to this, cotton yarn exports
witnessed growth. The cotton yarn
exports reached up to $353.617 M,
recording 2.08% growth against
the previous year’s exports of
$346.402 M.
During the period under review,
goods such as cotton cloth, knitwear
and bedwear witnessed a surge of
22.88%, 15.79% and 14.73%,
respectively.
The exports of cotton cloth, which
stood at $432.974 M, increased to
$532.0.35 M, while that of cotton
carded or combed dropped to
$141,000 from $5.37 M.
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Knitwear and bedwear exports surged
from $471.747 M and $420.532 M to
$546.247 M and $482.461 M,
respectively.
Shipments of towel swelled up by
12.12% and that of tents, canvas and
tarpaulin dropped by 38.67%.
Readymade apparels showed
escalation of 38.83%, overseas sales of
made-up articles rose by 26.72% and
other textile materials exports
witnessed a surge of 84.27% during
the period under review.
(The News – October 20, 2010)
OIL
20% decline in Refinery output
The country's refinery production has
declined by 28% in August 2010 as
compared to previous month mainly
due to production stoppage at Parco
after floods devastated the
transportation network in the
surrounding region. According to
provisional figures, the refinery
production in the 1st 2 months of FY11
witnessed a decline of 18% as
compared to the same period of
previous FY.
Reviewing refineries individually,
Parco witnessed its market share
falling drastically to 29% in the two
months of FY11 from 42% after
production closure in August 2010.
PRL and BYCO too witnessed their
shares deteriorating to 20% (from 21%)
and 3% (from 8%) respectively during
this period. On the other hand, NRL
remained the key gainer witnessing
its market share surging to 24% (from
13%) in the two months of FY11.
(Business Recorder – September 16, 2010)
Dependency on imported LPG increases
The dependency on the imported
Liquefied Petroleum Gas (LPG) has
Tracking Opportunity & Risk Related Developments
increased following a decline in its
local production by a huge amount of
700 to 800 tons per day. The prices of
liquefied petroleum gas (LPG) are
stable in the market despite a surge
of Rs.9,360 per ton in its rate by a local
producer OGDCL.
This was stated by the chairman of
FPCCI Standing Committee on LPG
and All Pakistan LPG Distributors
Association Chief in a press release.
(The Nation – September 5, 2010)
Oil import bill increases
The country’s oil import bill for the
1st 2 months (July-August) of the FY
20010-11 has increased by 25.28%,
Federal Bureau of Statistics reported.
Total oil imports, including crude and
petroleum products, amounted to $1.9
B during July-September period of the
prevalent FY from $1.52 B in the same
period last year.
On the contrary, the petroleum
products imports stood at $933.1 M
as against $994.7 M, showing a decline
of 6.20% YoY in growth over the same
period of FY10.
Showing the similar trend, the
quantum of the petroleum crude
products imported into the country
during the period under review
reached the level of $950 M when
compared to $509 M in Jul-Aug FY10.
In addition, this group showed 86.90%
YoY raise in growth.
According to official figures released
by the Federal Bureau of Statistics, in
August 2010 alone, the petroleum
group’s imports swelled by 16.67 per
cent on month-on-month basis.
Likewise the entire imports in this
broad category up by 7.19%.
The FBS data revealed that Pakistan
spent $858 M on the import of oil
products in the month of August this
year as against $7.35 M of the
corresponding month of 2009.
(The Nation – September 29, 2010)
Oil sales down in August
The oil sales in local market have
declined by 24% to 1.418 M tons
during the month of August 2010. The
decrease in sales of Furnace Oil (FO)
and High Speed Diesel (HSD) were
amongst the major causes for the
overall decline, analysts said. The sales
of HSD have declined by 34%
followed by FO sales, which were
down 21%, an analyst at JS Global
Capital said.
The oil sales during the 1st 2 months
of FY11 stood at 3.285 M tons, down
8% on yearly basis. PSO sales during
this period dipped by 12% to 2.2 M
tons mainly due to its larger presence
in the flood affected areas compared
to growths of 17% and 14% witnessed
in the sales of APL and SHELL,
respectively. As a result, PSO lost its
market share by 322bps to 67.2%.
Meanwhile APL and SHELL
improved their shares to 6.1% (up
130bps) and 14.8% (up 277bps),
respectively.
(Business Recorder – September 9, 2010)
OGDCL to start drilling in Zin Block
Pakistan’s security forces have finally
given clearance to the OGDCL to start
drilling in one of the most prospective,
but insurgency-hit parts of
Balochistan, top company officials
said.
OGDCL will initiate drilling of the
first well in Zin Block of Dera Bugti
district, to check the size and quality
of gas reservoir more than six years
after a survey suggested presence of
hydrocarbon reserves there, they said.
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“Work heads off later this month or
in the first week of November,” one
of the officials said requesting
anonymity. “Some evaluation of the
reserve needs to be carried out, but
seismic and geological studies are
already with us.”
The largest petroleum producer has
engaged six platoons, 216 soldiers of
the Frontier Constabulary for security.
“OGDCL will pay for their service
and the company has even bought
them equipment.”
(The News – October 12, 2010)
OGDCL seen borrowing next year
Once Pakistan’s most cash rich
company, OGDCL now has only Rs.6
B in liquid reserves, which will force
it to borrow from banks in the first
half of 2011, a top company official
said.
The company’s assets that can be
readily converted into cash have come
down sharply from around Rs.19 B in
June 2010 after payments of deferred
taxes and dividends, said the official,
requesting anonymity.
“We can avoid banks in remaining
months of this fiscal (Jul/Jun 2010/11)
only if inter-corporate circular debt
falls,” he said. “But I don’t see that
happening anytime soon.”
OGDCL awaits payment of over Rs.80
B by 5 refineries and the 2 gas utilities.
The company has annual cash flow of
Rs.93 B from sale of oil and gas and
its strong balance sheet has helped it
stay away from banks during last five
years. The state-run petroleum giant
will have to raise between $400 and
$500 M from banks in fiscal 2011/12,
he said. “Loan proposals and
negotiations for credit lines will start
as early as December 2010.”
(The News – October 8, 2010)
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21 gas fields - Ogra raises wellhead prices
Oil and Gas Regulatory Authority
has raised the wellhead prices of
around 21 gas producing fields due
to variation in exchange rate and
global oil prices effective from July-
December 2010. Ogra official said that
impact of increase in recent well head
gas prices will also be reflected in
consumer prices effective from
January 1, 2011.
Ogra has revised wellhead gas prices
of 32 gas fields and there has been
made no change in prices of some gas
fields. The government sets, through
Ogra, the wellhead price and then gas
is provided to the gas distribution
companies, like SNGPL and Sui SSGC
for sales to industrial, commercial and
domestic consumers.
(Business Recorder – October 10, 2010)
Oil consumption falls
The oil consumption in the country
has declined to 4.7 M tons during the
first quarter of FY11, 7% lower than
the same quarter last year. The oil
consumption continued to post weak
data following the flash floods as
demand dipped 6% in September 2010
as compared to the same month last
year.
Likewise, oil sales were 2% lower from
the previous month as the seasonal
Ramadan effect kicked in as well.
Analysts said that the shutdown of
some power plants due to flood
inundation and improved hydel
generation ability proved demand
dampener for furnace oil (FO), while
retarded agricultural activity dragged
down diesel sales. Hence,
consumption in the 1st Q of FY11 was
down 7% on y-o-y basis.
(Business Recorder – October 8, 2010)
Oil import bill up
The oil import bill increased to $2.392
B during the first quarter of the CFY
from $2.188 B in the corresponding
quarter FY10, showing an increase
of 9.33%, the Federal Bureau of
Statistics said.
The import of petroleum products
came down by 10.79% to $1.295 B
during the period under review from
$1.452 B in July-September 2009.
The imports of crude petroleum,
however, registered a significant
increase of 49.08% to $1.096 B from
$735 M. The y-o-y imports in
September fell sharply by 25.65% to
$509.43 M against $685.2 M during
the same month last year.
(The News – October 20, 2010)
Deregulation of Oil prices
The ECC of the Cabinet has approved,
in principle, de-regulation of oil prices
and Inland Freight Equalisation
Margin (IFEM). The ECC has also
approved to fix margins of oil
marketing companies (OMCs) and
dealers which will result in reduction
of oil prices by 35 paisa per litre if
calculated based on price of October,
an official of Petroleum Ministry said.
The ECC has also directed Petroleum
Ministry to seek ratification of decision
from the Cabinet before its
implementation. "IFEM will fall in
controlled-deregulation because the
Oil and Gas Regulatory Authority
(Ogra) will notify it from one
destination to other destination but
so far as prices of petroleum products
are concerned, refineries and OMCs
will determine the prices on monthly
basis whereas Ogra will monitor it,"
the official said, adding that imported
price will be benchmark for prices and
refineries as well, as OMCs will not
be allowed to charge over set 'bench
mark price' to protect consumers
interests. He said that in new oil
05

pricing formula, the role of Ogra was
more effective.
(Business Recorder – October 19, 2010)
64,188 bpd per day Oil production
The country's oil production stood at
64,188 barrel per day (bpd) in the 1st
Q of FY11, as compared to 63,907bpd
in the corresponding quarter in FY10,
slightly up by only 0.4% on y-o-y basis.
The gas production, however,
increased by 2.3% on y-o-y basis to
4.037bcfd in this quarter against
3,946mmcfd in the same quarter last
year.
(Business Recorder – October 09, 2010)
POWER / ENERGY
Two nuclear reactors for Pakistan
China on gave its firmest government
confirmation yet of plans to build two
new nuclear reactors for Pakistan, but
a Foreign Ministry spokeswoman said
she did not know about talks over a
bigger reactor deal. The spokeswoman
said China plans to help Pakistan
expand its Chashma nuclear energy
complex in Punjab by building two
reactors in addition to one already
operating and another nearing
completion.
Her comments also suggested Beijing
may see no need to seek approval for
the two new Chashma reactors from
the Nuclear Suppliers Group (NSG),
an international council of
governments, some of whose
members have voiced qualms about
the deal.
"This project is based on an agreement
signed between the two countries in
2003 about co-operation in the nuclear
power field," he told a regular news
conference, citing plans to build the
No 3 and No 4 reactors of about 300
megawatts each at Chashma. "China
Tracking Opportunity & Risk Related Developments
has already notified the International
Atomic Energy Agency about the
relevant details, and invited the IAEA
to exercise safeguards and oversight
of this project," said he added.
(Business Recorder – September 22, 2010)
Pakistan can produce of 7,000 MWs
Pakistan can produce as much as 7,000
MW from coal based power
generation projects by 2015 if the
government aggressively pursues
investors, said Secretary Coal and
Energy Sindh, in an exclusive
interview published in monthly
Energy Update.
He said that there are projections that
at least 2,700 MW of electricity will be
generated from Thar coal with the
existing number of projects and
current pace of development by 2015.
However, if the infrastructure is
completed on priority basis and
international donors like World Bank
and ADB are actively persuaded by
the government, then the power
generation can be increased to 7000
MW.
He pointed out that one British
company Oracle, one Australian firm,
one joint venture with Engro, one
UAE Company and a joint venture
between Sindh and federal
government for coal gasification are
at various stages of initial work and
the response from is very positive and
they are willing to undertake coal-
based projects in Thar and other
coalfields of Sindh.
(Daily Times – September 23, 2010)
Agreement inked - TAPI gas pipeline
Turkmenistan, Afghanistan, Pakistan
and India signed the framework of an
agreement to construct a gigantic
pipeline pumping natural gas to South
Asia, a Pakistani official said.
Turkmenistan, holder of the world’s
fourth-largest natural gas reserves, is
keen to revive plans to build the Tapi
pipeline through Afghanistan to the
markets of Pakistan and India. The
former Soviet state is looking to
diversify energy sales from its
traditional market, Russia, and is
courting investors from the West,
China and other Asian countries.
The planned pipeline would have
initial capacity for 33 billion cubic
metres a year and would run for
nearly 2,000 km (1,250 miles),
including 735 km across Afghanistan
and another 800 km through Pakistan.
(The Express Tribune – September 21, 2010)
Circular debt update
“The circular debt of the petroleum
ministry has soared to Rs 235 billion,
undermining efforts of the entities
working in the oil sector, especially
the refineries which are now running
at 60 percent of their capacity, the
government will have to take some
concrete steps to resolve the issue once
and for all,” says an official.
(Daily Times – October 8, 2010)
Bradford Power wants to set up wind
power project
A foreign consortium company of
Canada and China M/s Bradford
Power has shown interest to set up a
wind power project of 200 MW in
Pakistan and estimated investment of
$500 M. This was said by official of
the Bradford Power (Pvt) Ltd while
talking to the Minister for Water and
Power. A delegation of the Bradford
called on him.
The official informed the Minister that
the Bradford Power (Pvt) Ltd is a
special purpose company established
by A-Power, P.R. China and Monteva
Holding Inc, Canada for setting up
wind power projects in Pakistan as
06

independent power producer and the
said project will be completed in two
years in Sindh province.
(Business Recorder – September 28, 2010)
Purchase of power from small producers
With short-term power deficit
estimated at 5,000 MW, the
government has decided to allow
distribution companies (Discos) of
Wapda to enter into direct power
purchase contracts with small
independent power producers (SIPPs)
of up to 50MW capacity under a crash
programme.
Under the new policy likely to be
formally approved by the ECC of the
cabinet at its next meeting, smaller
local investors will sign sale and
purchase agreements with Discos for
25 years.
(Dawn – September 27, 2010)
OGDCL to drill 11 wells in Balochistan
The Oil and Gas Development
Company Limited has planned to drill
11 development wells in Uch Gas field
area of Balochistan. Two wells are
already being drilled while drilling of
planned wells will start during CFY.
Seismic data acquisition work has
been planed to delineate a drillable
structure at the field.
The company has completed
geological mapping and seismic data
acquisition work in Kalchas Block of
Balochistan Province. OGDCL has
also made preparation to start drilling
of an exploratory well in Zin area of
District Dera Bugti as well.
(Business Recorder – September 8, 2010)
KAPCO posts Rs 5.08bn profit after tax
Kot Addu Power Company (KAPCO)
has posted a record profit after tax
(PAT) of Rs 5.089 B for the year ending
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on June 30, 2010 and announced a
final cash dividend of Rs.2.75 per
share. According to financial results,
the profit before tax surged to Rs.7.730
B during the period under review.
The EPS of the company stood at
Rs 5.78.
(Daily Times – September 3, 2010)
KESC raises $280 M for
560 MW power plant
The Karachi Electric Supply Company
(KESC) has raised $280 M from
International Finance Corporation,
Asian Development Bank and local
lenders to set up 560 MW Combined
Cycle Power Plant , it has learnt.
"We have been successful in raising
$280 M in debt for this critical project
through IFC, ADB and a syndicate of
local lenders," KESC said in the letter
(written to Ministry of Water and
Power on August 27, 2010) adding
that the project is expected to come
online, in phases, from July 2011 to
March 2012 period. It said that to-date
3 L/Cs have been posted to the
Engineering, Procurement and
Construction (EPC) contractor for a
combined total of $215 M.
(Business Recorder – September 4, 2010)
Neelum Jhelum Hydro-electric Project
The Islamic Development Bank (IDB)
has reportedly agreed to extend $220
M for 969 MW Neelum Jhelum
Hydroelectric Project (NJHEP) in
addition to $138 M which has already
been leased, official sources told.
Sources said that IDB is leasing $138
M for some of the civil work
components of the Neelum Jhelum
Hydroelectric Project (NJHEP).
The Bank has now offered lease
financing of $220 M for turbines,
generators and associated
transformers of the project. A formal
request had already been submitted
to IDB and Economic Affairs Division,
sources added. An IDB appraisal
mission is in Islamabad to discuss
modalities of further financing for the
project.
(Business Recorder – September 8, 2010)
Further delay in LNG project
With gas and electricity shortfalls on
the rise, a multi-billion-dollar project
for import of liquefied natural gas
(LNG) for 20 years through a
consortium of European companies
is facing ‘procedural’ problems.
According to sources, the petroleum
ministry did not send the complete
record of the project to the law
ministry while seeking its advice on
a deal finalised with the consortium
comprising 4Gas and GDF Suez. The
ministry was asked to advise if the
project should be signed in view of
the Supreme Court judgment on the
matter.
“The law ministry interpreted the
project on the basis of partial
information as a part of the summary
did not reach it,” an official said.
(Dawn – September 24, 2010)
Take over by OMV
OMV has taken over Petronas
International Corporation’s rights to
explore and produce gas in Pakistan.
The purchase will increase OMV’s gas
production in Pakistan to around
25,000 barrels of oil equivalent (BOE)
a day by 2014, OMV said in a press
release.
The Vienna-based oil and gas giant
currently produces around 14,000 BOE
a day in Pakistan and 318,000 BOE
worldwide.
07

The agreement includes the Mubarak,
Mehar and Daphro exploration
licences and the Mehar and Mubarak
development and production leases.
(The Express Tribune – September 22, 2010)
Argentina willing to assist
Argentina expressed its interest to
play the role to improve petroleum
and power sector of Pakistan
particularly Hydroelectricity and Gas
Transportation sector.
According to the press release issued
by the Argentine Embassy,
Ambassador of Argentina in Pakistan
has been making efforts to persuade
the Argentinean Company IMPSA
Corporation to participate in the
several hydro projects that the
government of Pakistan has planned
to initiate. Argentine Ambassador
participated as guest speaker in the
inauguration session of the
Exhibition/Fuelling Pakistan 2010 at
Karachi Expo Centre.
He also expressed his wishes to
facilitate the contacts between the
regulatory institutions of the two main
markets in Condense Natural Gas
(CNG).
He also said that INFLEX, holding a
“zero accidents” record, has entered
a joint venture with Wah Industries
Ltd, and “we expect that the new
company INFLEX-WAH would soon
commence production of CNG
cylinders in Pakistan to supply the
internal and regional markets”.
(Daily Times – October 12, 2010)
Surge in Electricity Prices
from next month
Deputy Chairman Planning
Commission, the man leading the
reforms, unveiled the broader
contours for overhauling the bleeding
Tracking Opportunity & Risk Related Developments
energy sector. The total price
difference has been worked out in the
range of Rs.210-225 B for the CFY.
“The (power sector) business plan
needs to be consistent with the
allocated Rs.30 B subsidy,” he said,
hinting at recovering the remaining
Rs.180 B primarily from consumers.
He, however, was reluctant to share
by how much the tariff would actually
be increased.
“This time, the priority would be on
improving efficiency rather than on
increasing tariffs,” he said. “Change
the culture, learn to provide
uninterrupted services and learn to
pay for services.”
“A 1% tariff increase amounts to
approximately Rs.6.2 b and the
government has to increase the prices
by at least 28 to 30% within a year if
it again fails to turn around the loss-
making power distribution
companies,” said a key official of the
finance ministry who deals with
public sector enterprises.
(The Express Tribune – October 6, 2010)
Generate 5000 MWs for 50 years
A feasibility study of Thar coal
reserves has been completed,
confirming that two billion tons of
coal reserves are available in Block II
alone – a quantity enough to generate
5,000 megawatts of electricity over the
next 50 years. This was disclosed by
Chief Minister Sindh during a press
briefing at the CM House.
“The Economic Coordination
Committee has granted an incentive
package to attract foreign investors to
Thar,” said the chief minister. “The
declaration of the region as a special
economic zone and area of strategic
importance has also been approved.”
Giving details about the incentives,
he explained that the government
would guarantee an internal rate of
return of 20% to firms which will
achieve financial close by 2015 and
investors will be exempt from paying
customs duties on the import of coal
mining and construction machinery
for a period of 30 years.
“Under the federal government’s
incentive package, Thar coalfields
would be declared a project of national
security.”
As part of the package, the
government would not charge levies,
including federal excise duty and
withholding tax, for the first 30 years
in a bid to attract investors.
(The Express Tribune – October 20, 2010)
SUGAR
Withdrawal of 25% regulatory duty
The ECC of the Cabinet decided to
withdraw 25% regulatory duty on
import of raw sugar and allowed
private sector to import the
commodity. The decision to this effect
was taken by the ECC meeting
presided over by Finance Minister.
Briefing media after the meeting,
Secretary Finance said that 1.2 M tons
of sugar shortfall is expected next year.
He said currently 0.6 M tons stock of
sugar is available with the TCP against
1.1 M tons for the same period of last
year and 1.26 M tons more sugar will
arrive from India by next month. He
said that sugar price in the
international market rose by 18%.
(Business Recorder – September 22, 2010)
TCP
The Trading Corporation of Pakistan
has established two LCs worth $243
M for import of 320,000 tons of white
08

refined sugar. Sources told that with
the opening of two LCs it is expected
that first shipment of sugar would
reach Pakistan in mid-September.
TCP had finalised two deals of sugar
import at $724.5 per ton with two
different suppliers on August 2, 2010
for import of 320,000 tons of white
refined sugar. One deal, of 250,000
tons sugar, was finalised with Shanig
Associates Karachi, local agents of
Agrocorp International of Singapore.
The other contract for 70,000 tons was
signed with Meshe International, local
agent of Scuden Middle East Dubai.
(Business Recorder - September 1, 2010)
Loss of Rs.4.7 B – Delay in Sugar import
The office of the Auditor General of
Pakistan has established that the
Trading Corporation of Pakistan
(TCP), tasked with ensuring the
availability of sugar in the market,
delayed a decision on the import of
200,000 tons of sugar before Ramazan
in 2009.
“Non-compliance with (government)
directives indicated that undue favour
was extended to the sugar cartel,
causing a crisis leading to a country-
wide increase in prices and shortfall
in supply,” the AGP concludes in the
investigation.
The ECC of the cabinet had directed
the TCP on February 3, 2009 to import
200,000 tons of refined sugar to cope
with an anticipated shortfall following
a decline in domestic production. The
delay in import pushed sugar prices
to Rs.72 per kg from Rs.36, a 100%
increase.
(The Express Tribune – October 14, 2010)
Major gainers of Pak-EU trade
The new plan of trade assistance by
the European Union (EU) to Pakistan
Tracking Opportunity & Risk Related Developments
will not only give a boost to the textile
and leather sectors but the sugar mills
would be the major gainers too as the
proposed programme will allow duty
free exports of ethanol to the EU
countries. Ethanol is the key greenback
earner for the sugar mills and the
country has been exporting an average
of 250,000 tons ethanol annually and
after the zero-rated regime is
implemented the exports could even
reach 300,000 tons annually.
Commerce Secretary said that the EU
has unilaterally given the trade
assistance programme to Pakistan and
the 30% duties on export of ethanol
from Pakistan has been withdrawn.
“This will give a boost to the sugar
industry and the production at the
distilleries will be enhanced,” he said.
(Daily Times – October 09, 2010)
CEMENT / CONSTRUCTION
/ STEEL
Profitability remains up in 2010
Amid adverse economic conditions
the overall cement sector performance
was sluggish during FY (FY) 2010 –
cement companies continued to
perform well in terms of better
profitability and higher interest
coverage.
Analyst said that despite worse
economic conditions around the globe,
the local cement companies witnessed
well net margins, in this regard Attock
Cement realised highest net margin,
superior interest coverage while the
sector also continued to benefit from
superior quality and brand image
(reflected by higher retention prices
realised by the company compared to
the sector).
The market leader Lucky Cement was
also better off in terms profitability
(13% net margin) while better
performers in the north included
FCCL and DGKC.
However lower prices shrank
revenues, as average cement prices
tumbled during FY10 by 18% year-
on-year – topline of the sector
accordingly recorded a decline of 14%
YoY, amid volumetric growth of 9%
YoY in total dispatches during the
year. “On the cost front, rupee
depreciation of 7% YoY alongside rise
in power tariff and gas prices kept
overall cost under check”, they added.
(Daily Times – October 19, 2010)
Fall in Cement prices
Cement manufacturers have reduced
prices by Rs.25-35 in the north region
because floods have brought the
demand down, a brokerage house
said.
Cement prices had remained around
Rs.325 per 50-kg for last few months.
“Cement prices after peaking at Rs.325
per bag have started to cool down and
are currently hovering around Rs.290-
Rs.300 per bag,” said an analyst at
Topline Securities.
A high official of Attock Cement
confirmed that the price of the
commodity has fallen by about 15%.
Analyst added that manufacturers
might have to reduce the prices further
because demand for cement has fallen
since floods hit the nation. “Prices
may fall further by Rs.15-25 per bag
to Rs.265-275 during the next few
months.”
Cement demand would
remain low for next few months until
reconstruction activities picked up,
said the analyst. Local sales in the first
two months of the fiscal year fell by
15% to 3.2 M tons from 3.8 M tons in
the same period last year.
Exports, which account for more than
32% of total dispatches, declined by
09

20% to 1.6 M tones in July and August
compared with 2 M tons in these two
months of last year.
(The News – September 7, 2010)
DGK Cement profit declines
The after-tax profit of D G Khan
Cement in the year ended June 30,
2010 (FY10) declined to Rs 233.022 M
as compared to Rs. 525.581 M earned
in FY09. The board of directors of the
company in its meeting declared that
the company's EPS declined to Re.0.72
in the period under review against
Rs.1.63 a year back.
According to the financial results the
company's net sales declined to
Rs.16.275 B in FY10 against Rs.18.038
B recorded in FY09. The cost of sales
increased to Rs. 13.569 B against
Rs.12.358 M. The company's profit
before taxation declined to Rs. 358.403
M in FY10 against Rs.776.900 M
earned in FY09.
(Business Recorder – September 18, 2010)
IDA approves $130 M credit
International Development
Association, has approved a credit
worth $130 M in additional financing
for the Pakistan Highway
Rehabilitation Project to continue
revitalising and modernising
Pakistan's highway system.
The project consists of three
components: rehabilitating 514-km of
highways, resurfacing 342-km of
highways, and reconstructing 128-km
of damaged roads that provide vital
access to remote and disaster-prone
communities. Pakistan has about 8.8
M vehicles on the road, growing at
about 10% annually projected to
increase to over 70 M by 2030.
(Business Recorder – September 30, 2010)
Tracking Opportunity & Risk Related Developments
Cement prices increased
Cement manufacturers have raised
cement prices by Rs.55 per bag in two
months which, analysts reckon, may
compel the Competition Commission
of Pakistan (CCP) to intervene, again.
A cement trader, said that quota
fixation for every district and under-
utilization of capacity are the main
reasons for the fresh bullish trend in
cement prices.
"Current trend of cement prices may
have a negative impact on the
government's efforts to build houses
for flood affectees," he said. Cement
manufacturers hope that their sales
will increase by 20% when
reconstruction gets underway.
However, another cement trader said
that cement manufacturers are
operating at 20% capacity and any
increase in cement prices reflects
collusive behaviour.
(Business Recorder – October 20, 2010)
Pakistan’s Cement exports to suffer
Common External Tariff on import of
cement in East Africa is likely to be
increased from 25% to 35% that may
hurt country’s export, industry
sources told.
They said that Saudi cement exports
are coming to the forefront (following
a partial cement export ban removal),
Pakistan cement exports could face
pressure in short-term. Local cement
exporters are likely to substitute
African markets with Far Eastern
markets.
In this regard, unexplored potential
in countries like Sri Lanka and
Myanmar is expected to be the future
growth avenue for local cement
companies.
Analyst said that Lucky’ export
concentration to the Far Eastern
nations is 15% of exports while 5%
DG Khan Cement exports are
dispatched to Sri Lanka.
(Daily Times – October 3, 2010)
Lowest Cement Exports since Dec 08
Cement sales in September 2010 hit a
21-month low, arriving at 2 M tons,
down 22% on yearly basis and the
largest yearly decline since April 2001,
owing to passive domestic demand
following the recent flash floods.
Similarly, on a monthly basis, sales
were down 16% as reduced business
activity in the month of Ramazan also
took its toll. Hence, dispatches for
1QFY11 stood at 6.9 M tons, 18% lower
from the corresponding period last
year.
Analysts expect demand to pick up
post 1HFY11, albeit slowly, with
reversal in the current trend gathering
pace from FY12 and beyond as
reconstruction activities take shape.
Despite the restoration of pricing
consensus among the cement
manufacturers, analysts eyeing a
potential decline of 4% in the
industry’s volumes in FY11. However,
the local sales have witnessed a
bruising start to FY11, down 16% on
yearly basis in the 1Q owing to factors
ranging from the recent flash floods
to poor law and order situation. On a
monthly basis, due to Ramazan, sales
were down seven percent; largely in
line with its 10-year average decline
of 12%.
(Daily Times – October 6, 2010)
Housing Finance to GDP ratio
Pakistan has one of the lowest ratios
10

of housing finance to gross domestic
product (GDP) in the world, according
to a World Bank report on housing
finance for low-income groups in
South Asia.
The report said that in contrast to the
impressive growth in the banking
sector, Pakistan’s housing finance to
GDP ratio is as dismal as some of the
most underdeveloped countries in the
world.
Loans for residential housing and
construction amount to less than 1%
of the GDP in Pakistan. This is in stark
contrast to India where the same ratio
is seven per cent. The housing finance
to GDP ratio is between 50 & 70% in
developed countries.
The report said that housing finance
is out of the reach of low-income
groups and housing finance loans are
extremely expensive. Housing loans
are normally provided to high-income
groups and the share of private
financial institutions is quite low.
(The Express Tribune – October 12, 2010)
Fund released - acquisition of
Bhasha Dam
The government has released an
amount of Rs.700 M for the acquisition
of land for the mega Diamer Bhasha
Dam project as the first installment.
According to the sources of the
Ministry of Water and Power, the
amount has been handed over to
deputy commissioner Diamer so as to
start the land acquisition process.
The ground breaking of WAPDA
offices and colonies is expected next
month, sources added.
Tracking Opportunity & Risk Related Developments
WAPDA chairman, who had recently
visited the Diamer Bhasha Dam site,
said that dam would be the largest
project in the country’s history. It
would store 8.1 M-acre feet (MAF) of
water and generate 4,500 MWs of low-
cost electricity.
In addition to providing water for
agriculture, the project will also
contribute 18 B units of electricity per
annum to the national grid, he added.
(Daily Times – October 15, 2010)
AUTOMOTIVE
Car prices increased
Due to the unprecedented
strengthening of the Yen which is at
a 15 year high against major
currencies, thus making the imported
CKD and even local parts more costly
as most of the raw materials are also
imported, Indus Motor Company, has
marginally increase its car prices with
immediate effect, i.e. prices of all
Corolla variants will be increased by
Rs 25,000 while Altis price will be
increased by Rs 35,000.
Pak Suzuki Motors Co Ltd and Honda
Atlas Car Pakistan Ltd – have also
decided to increase prices from Rs
8,000 to Rs 15,000 on different Suzuki
models, while Honda has increased
prices by Rs 30,000 per unit on all
models of Honda Civic and Rs 35,000
of Honda City effective from
September 18”, said an authorized
dealer.
“Both the companies, however, gave
appreciation of yen against rupee as
a reason for this increase in prices.”
(Business Recorder - September 16/Daily
Times – September 19, 2010)
Sale of Japanese bikes falls
According to figures released by
Pakistan Automotive Manufacturers
Association, sale of Honda bike, which
enjoys big share in rural areas, has
plunged to 40,155 units in August
2010 from 45,021 units in July.
However, the overall sale in July-
August 2010-11 had swelled to 85,176
units from 70,130 units in the same
period of last fiscal. Similarly, Yamaha
sales slightly plunged to 9,588 units
from 10,659 units in July. Suzuki
motorcycle sale to 1,394 units from
1,561 units in July but its overall sale
in July-August rose to 2,955 units from
2,609 units in the same period last
fiscal.
In sharp contrast Habib motorcycle
sales in August 2010 rose to 1,408 units
from 1,224 units in July. Hero bike
sales improved to 3,501 units in
August 2010 from 3,184 units in July.
(Dawn – September 22, 2010)
Cars sale surges by 10pc
The sales of cars and light commercial
vehicles in the country have increased
by 10% during the 1st Q of CFY, data
showed.
The sales during July-September
period increased to 33,496 units
against 30,519 units in the same period
last year, according to the data
released by Pakistan Automotive
Manufacturers Association. Car sales
grew by 6% to 11,663 units in
September.
“This is despite the fact that the
outgoing quarter remained turbulent
for manufacturing concerns as both
security issues and flood devastation
11

restricted their business operations,”
said an analyst at the Topline
Securities.
The 1300cc market leader Indus Motor
posted highest sales growth of 13% in
the outgoing quarter.
(The News – October 13, 2010)
TELECOMMUNICATION
Mobile phone import up
Import of mobile phones mounted by
100% during July this year, as the
demand for low-cost multi-purposed
Chinese handsets continued to grow,
dealers said. Import of mobile phones
has already outnumbered the
country's total import of cellular
phones because they are low-priced
with high communication features,
according to dealers at Karachi's
mobile phone market in Saddar.
The country's import of mobile phones
stood at $39.016 M in July 2010 as
compared to $19.591 M in the same
period of last fiscal year 2009,
depicting an increase of $19.425 M in
July this year, according to official
statistics.
(Business Recorder – September 14, 2010)
E-payments - show rising trend
Electronic payments continued to
show a rising trend as both the
number and value of such transactions
increased in the fourth quarter (April-
June) of the last 2009-10 FY (FY10).
According to SBP’s 4th Quarterly
Report on Retail E-Payments and
Paper Based Instruments released.
The volume and value of E-Payments
transactions in the country during the
4th Q of FY10 reached to 53.4 M and
Tracking Opportunity & Risk Related Developments
Rs 4.8 trillion, respectively showing
an increase of 6.2% in number and
7.7% increase in value, as compared
to 8.4% increase in number and 8.2%
increase in value in the previous
quarter.
(Business Recorder – September 18, 2010)
Injection of over Rs 2.1 B
Abu Dhabi Group has injected over
Rs 2.1 B in the Wateen Telecom
Limited during past few weeks which
is likely to be welcomed warmly by
the general public and stock
exchanges of Pakistan.
For Pakistan, it implies an influx of
US dollars into the country while for
Wateen Telecom it shows
shareholders' confidence in the
company and its management while
supporting the business plan.
(Business Recorder – October 13, 2010)
Telenor Easypaisa transaction
crosses Rs. B
In its initial stages, the mobile banking
in Pakistan has gained tremendous
popularity among customers with
rapid pace as colossal amount of Rs
10 B was transacted through a single
cellular operator in a year.
Telenor Pakistan, the subsidiary of
Norwegian telecom giant, with its
various m-banking services recorded
over 6 M transactions carried under
its brand “EasyPaisa” by the end of
first year.
Company sources revealed the
number of carried transactions has
been increasing over a period of time
that has reached 1 M in a single month
with transacted amount crossed Rs. 2
B benchmark.
(Daily Times – October 15, 2010)
Qubee invests $70m in broadband sector
Qubee is receiving excellent response
from its customers in Lahore and twin
cities of Islamabad and Rawalpindi
where the service has been launched
recently.
Qubee, launched in Karachi early this
year, is the newest entrant in the
WiMAX market of Pakistan with an
initial investment of more than $70 M
and a commitment to bring high speed
fast, reliable and competitively priced
broadband internet to residential and
small business customers across
Pakistan. CEO, Qubee said that Qubee
has been actively involved in
technology up-gradation since its
launch in Pakistan. Qubee committed
to provide the customers amazingly
reliable services.
(The Nation – October 8, 2010)
OTHER INDUSTRIES
'Rico Diq project to fetch $3.2 B FDI'
Tethyan Copper Company Pakistan
plans to operate a world class copper,
gold mine with 2.2 B tons
economically mineable reserves by
deploying a cutting edge technology
at Rico Diq, Chagai, Balochistan as a
joint venture with Government of
Balochistan with initial $3.2 B foreign
direct investment over four years.
"We have submitted a feasibility study
to Balochistan government and having
talks with Provincial government to
conclude an agreement which will
result in take-off for the project in next
four years. Balochistan will get 25%
profit plus royalty and taxes to federal
and provincial governments.
(Business Recorder – September 29, 2010)
12

14% decline in fertiliser sales
The floods also hurt the sale of
fertiliser, and cumulative fertiliser
offtake has been down by 14% in 8
months of current calendar year.
According to data released by
National Fertiliser Development
Centre, total fertiliser offtake in
January-August 2010 stood at 4.9 M
tons, down by 14%, compared to 5.7
M tons of last year.
The decrease was primarily down to
a massive decline in August as a result
of the floods. Fertiliser offtake during
August stood at 417,000 tons, down
54% YoY, and 38% MoM. DAP offtake
registered a decline of 53% YoY in
January-August to 425,000 tons. The
decline has been on account of high
DAP price which averaged at Rs.2,520
per bag compared to Rs.1,953 per bag
during the same period of last year.
(Business Recorder – September 29, 2010)
Pakistan starts optic fibre cable export
For the first time Pakistan has started
export of optic fibre cable to
Afghanistan, and African countries.
Chairman of Federal 'B' Area
Association of Trade and Industry
(FBAATI) and Director of Premier
Cables, said that Pakistan exported
almost 1000 km optic fibre cable to
these countries, and more orders were
in pipeline for export.
He said that Pakistan managed to
secure this tender after beating China
and India in quality and price
competition. Pakistan has huge
potential for export of optic fibre cable.
(Business Recorder – September 14, 2010)
New duties on Pakistan plastics
The European Union imposed new
Tracking Opportunity & Risk Related Developments
duties on plastics from Iran, Pakistan
and the United Arab Emirates saying
the three were illegally subsidizing
exports to Europe's growing soft-
drinks market. The decision means
Polyethylene terephthalate from Iran,
Pakistan and the UAE - used for
bottles and food packaging - will face
EU import duties of 139.70 euros
($188.1), 44.02 euros and 42.34 euros
per ton respectively until 2015.
"In view of the magnitude of the
countervailable subsidies found and
in the light of the level of the injury
caused to the (European) Union's
industry, it is considered necessary"
to launch the new tariffs, the EU's
executive Commission said in the EU's
official journal. The duties are valid
for up to 5 years and reflect Europe's
concern that EU industry is falling
behind oil-rich states with competitive
and booming plastics markets.
(Business Recorder – September 30, 2010)
Import 230,000 tons import of different
fertilizers
The government will reportedly
import 230,000 tons of Dye
Ammonium Phosphate (DAP),
TSP/MAP to meet the domestic
demand for the coming Rabi season
2010-11, sources told.
The import of this urea consists of
100000 tons of DAP in December 2010
and further 100000 tons in January
2011 and total import of DAP for Rabi
season is 200 000 tons. Moreover the
government will import 20 thousands
tons of TSP/MAP and 10000 tons of
SOP/MOP in October 2010.
(Daily Times – September 26, 2010)
Urea consumption to shrink 27% in Rabi
season
In the coming Rabi season (October-
March), the overall off take of all types
of urea fertilizer is likely to fall by
2.7% to 4.003 Mtons as compared to
last year consumption of 4.116 M tons.
Official sources claimed the main
reasons behind lower demand for urea
fertilizer was said to be inundation of
a large agricultural area with
floodwater and high price of
phosphate fertilizers prevailing in
both domestic and international
market for the last six months.
The urea consumption is projected at
3.180 M tons against 3.256 M tons of
previous season showing a decrease
of about 2.3%. The offtake of DAP
fertilizer is expected to decrease by
4.3% over last Rabi 2009-10. Offtake
of other phosphate (TSP/MAP)
products may also decrease.
(Daily Times – September 8, 2010)
US Company to invest in Pakistan Cables
Pakistan Cables has announced that
General Cable Corporation, HQs USA,
and a Fortune 500 company, has
committed to invest in Pakistan Cables
by taking up a 25% equity stake in the
company business.
“The General Cable will invest in
Pakistan Cables on long-term basis
after which the paid up capital of
Pakistan Cables will increase to 28 M
shares as compared to 21 M shares
currently”, CEO Pakistan Cables
Corporation said during the signing
ceremony. The investment will be on
the basis of $1 per share, he added.
(Daily Times – September 26, 2010)
$115m for Karachi port project
The Board of Directors of the World
13

Bank has endorsed $115.8 M Karachi
Port Improvement Project.
The financing is an IBRD flexible loan
with fixed-spread, commitment-
linked repayment schedule, level
repayments, and 28 years maturity
including a grace period of 7.5 years.
“Improving the efficiency of Pakistan’s
trade corridors is a key element of the
bank’s support to trade facilitation in
the country,” said WB Country
Director for Pakistan.
(Dawn – September 11, 2010)
Debut of Automated bulk cargo terminal
The first of its kind, fully-automated
grain and fertiliser terminal of the
country at Port Qasim is all set to
welcome its first vessel later this
month, informed CEO of Fauji Akbar
Portia Marine Terminals Limited
(FAP), in an interview.
The terminal is capable of handling 4
M tons of dry bulk cargo per annum,
and with an average discharge rate of
over 1,000 tons per hour, the cargo
handling time at this terminal will be
a third of what it takes today at other
bulk cargo terminals in the country,
he explained.
The total investment of the project is
Rs.10 B, of which Rs.9 B has already
been spent on the terminal facilities.
The financial close of the project was
in July 2008 whereas physical work
started in September-October 2008.
The scale of the project meant that a
consortium would be required to
execute it successfully, he added.
(The Express Tribune – October 17, 2010)
Marble Industry – more than
$150m exports loss
The marble exports incurred a loss of
Tracking Opportunity & Risk Related Developments
more than $150 M in 18 months (April
2009-Sept 2010) due to power outages
and closure of mines, All Pakistan
Marble Mining Processing Industry
and Exporters Association
(APMMPIEA) said.
“The export target set by APMMPIEA
is missing by $10 M every month
while production loss is being
estimated to be Rs.400 M a month”,
chairman BMG APMMPIEA, said.
He said export target given by the
Ministry of Industries and Production
and TDAP for the said period of April
2010 was also missed by $10 M”.
He said during the last 18 months till
September 2010, the industry faced
around 18-hour production loss on
average daily.
“This translated into a heavy loss to
the developing export oriented
industry to the tune of $21 M in July-
September 2010,” he lamented.
(Daily Times – October 3, 2010)
Fertiliser subsidy to continue
The government will continue giving
subsidy to the fertiliser sector in the
post flood scenario. This was decided
at a meeting presided over by Minister
for Industries and Production. The
meeting was convened to discuss
national fertiliser strategy.
"Fertiliser sector will continue (to
function) in the post flood scenario
since countrywide agriculture
productivity depends upon access and
affordability of agriculture inputs,"
said a press release. The meeting also
assured that gas curtailment to the
sector would end as soon as gas
situation improves.
(Business Recorder – October 8, 2010)
AGRICULTURE
310,000 small businesses affected
by Floods
Small and Medium Enterprises
Development Authority has estimated
that around 310,000 small businesses
were affected by the devastating
floods across the country, majority of
which were subsistence enterprises
with less than 10 employees and an
annual turnover below Rs 500, 000.
SMEDA CEO revealed this in a
meeting held to discuss rehabilitative
steps required to counter post-flood
recovery challenges facing the nation
amid the worst natural disaster and
rehabilitation of small and medium
enterprises.
He said the economic impact of the
floods has yet to be fully quantified
though it is evident that agriculture
sector has been hit hardest. Many of
these ventures were established with
less than Rs 1,500,000 investment,
relying on loans from relatives and
the accumulated life savings of these
entrepreneurs.
(Business Recorder – September 18, 2010)
Agriculture may need 2 years for recovery
Pakistan’s agriculture industry, a pillar
of the economy, could take up to two
years to start recovering from
devastating summer floods, the ADB
said.
The ADB and the World Bank are
assessing the damage caused by one
of Pakistan’s worst natural disasters,
which destroyed 1.3 M hectares of
crops just before the harvest of key
products such as rice, maize and
sugarcane.
14

“Once the country gets back on its
feet, it will be able to meet part of
those agricultural import needs that
will happen over the next two years,”
DG of ADB’s private sector operations,
told.
“We are thinking within that time
horizon we should be able to see the
agriculture sector coming back,” he
told.
Agriculture is Pakistan’s second
largest sector, accounting for over 21%
of gross domestic product. Nearly 62%
of the population depends on
agriculture for their livelihoods.
(Dawn – September 20, 2010)
Kick - starting agricultural activity
The SBP has received input from
banks on what needs to be done to
facilitate flood-hit growers across the
country, particularly in the Rabi
sowing season. This would provide a
basis for an immediate agricultural
revival package that the central bank
may announce shortly.
The Agriculture Finance Committee
comprising representatives from NBP,
HBL, Faysal Bank, UBL, Askari Bank
and ZTBL has submitted its report.
Now, the newly-appointed SBP
Governor is expected to announce a
set of guidelines for concessional
agricultural financing in flood-hit
areas.
Bankers say the SBP is devising a
concessional agricultural refinance
scheme for banks to ensure availability
of adequate financing to flood-affected
farmers at single–digit interest rates.
Banks will have to extend larger
amounts of crop loans at cheaper rates
Tracking Opportunity & Risk Related Developments
to reactivate agricultural activity. But
bankers say they will also have to
build a mechanism for heavier
disbursement of development loans
to enable flood-hit farmers to buy
agricultural implements and inputs
and to repair damaged water courses.
Banks provide farm loans to about 1.4
M growers or one fifth of an estimated
seven M potential borrowers. “Most
of small and medium-sized growers
have no access to agricultural loans
and they borrow from informal
sources,” said the head of an
agricultural credit of a large local bank.
Farmers estimate cumulative annual
demand for crop and agricultural
development loans at Rs.2000 B
whereas banks’ lending remains
below Rs.300 B. “Filling in this gap is
a long-term policy issue. Banks should
focus now on additional demand for
agricultural loans created after the
floods, said a central banker. Initial
estimate of this additional demand is
Rs.250 B. Final estimate would emerge
once the SBP and the federal and
provincial governments come up with
precise calculations.”
(Dawn – September 20, 2010)
Bumper wheat crop likely
Pakistan is likely to produce another
bumper wheat crop during the
upcoming Rabi crop season, officials
at Ministry of Food and Agriculture
said. Officials said that due to
favorable weather conditions Pakistan
is in a position to produce about 25
M tons of wheat as compared to 23.86
M tons last year.
Officials maintained last year, farmers
in barani areas managed to produce
only 0.8 M tons of wheat, whereas
these areas have the capacity to
produce over 2 M tons. They said that
this year due to soil's better moisture
level wheat production in barani areas
is expected to reach 2.5 M tons, while
the wheat production in canal
irrigated areas would be around 23
M tons.
(Business Recorder – October 16, 2010)
500,000 animals perished
Initial estimates of the provinces
revealed that the ongoing colossal
deluge about 500,000 animals
including buffaloes, sheep, goat,
camels, horses, mules, donkeys, etc
are died during the recent colossal
deluge, sources told.
The damages to total livestock became
1% if the 0.50 M was compared the
total livestock population 160
Mfigures as per 2006 census was to
be relied, ratio of the died animals
became just one percent, the sources
maintained. Even these figures were
yet to be confirmed as decided in a
recent meeting in ministry of livestock.
The provincial governments were in
the process of re-assessment and it
would take a little more time before
their final figures are tabulated.
(Daily Times – September 3, 2010)
1 M acres of forest land destroyed
About 1 Macres of forest land has been
destroyed by floods in the four
provinces and Azad Kashmir,
according to a report "Preliminary
Assessment of 2010 flood impacts in
Pakistan" conducted by Pakistan
Agricultural Research Council
(PARC). According to the report
available with Business Recorder, a
total of 973684.55 acres of forest land
15

was damaged by the current
devastating floods triggered by
monsoon rains across the country.
The highest loss was recorded in
Sindh where about 494559.78 acres of
forest land was destroyed, followed
by Punjab where the recorded loss
was 430887.25 acres, Khyber
Pakhtunkhwa 46034.827 acres and
Azad Kashmir 2202.7 acres. Forest
land in about 41 districts across the
country has been adversely affected
by floods, with the heaviest loss in
Punjab with 18 affected districts and
an 11.38% of the total provincial land
area; followed by Sindh where 14
districts with a %age of 14.85 were
damaged by the floods. In Khyber
Pakhtunkhwa (KP) forests in 9
districts accounting for 3.8% of total
land area was destroyed while forests
in 2 districts of Kashmir suffered
damages.
(Business Recorder – September 8, 2010)
Damage to 3.6 M hectares
of outstanding crop
Pakistan’s next wheat harvest is at
risk after floods destroyed more than
0.5 Mtons of seed stocks in Asia’s
third-largest wheat producer, the
United Nations’ food agency said.
Pakistan’s worst floods in decades
have damaged 3.6 M hectares of
standing maize, rice, cotton and sugar
cane, the Food and Agriculture
Organisation said in a statement, citing
early estimates.
“Unless people get seeds over the next
few weeks they will not be able to
plant wheat for a year,” Chief of
FAO’s Emergency Operations, Asia,
Near East, Europe and Special
Emergencies, said.
Tracking Opportunity & Risk Related Developments
The FAO said it had completed
procurement for the provision of seeds
to 200,000 farming families and
needed additional funding to be able
to provide seeds for twice that
number. “Food aid alone will not be
enough. If the next wheat crop is not
salvaged, the food security of millions
will be at risk,” Chief of FAO’s said.
An estimated 1.2 M livestock and 6 M
poultry were lost in the flooding and
over one M buffalo, cattle, sheep and
goats owned by households in the
flooded areas would starve if animal
feed is not provided urgently, the FAO
said.
(The Express Tribune – September 1, 2010)
Immense Losses to agriculture sector
The scale of losses to the agriculture
sector in the country caused by the
floods is unprecedented and further
unfolding, says Food & Agriculture
Organisation (FAO).
Across the country, millions of people
have lost their entire means to sustain
themselves in the immediate and
longer term owing to the
destruction/damage of standing crops
and means of agricultural production
(e.g. seed stocks, irrigation, livestock,
farmland). The latest cumulative
estimates are as follows: –
The Agriculture Cluster rapid damage
assessments, completed in half of all
the flood-affected districts, found that
1.3 M hectares of standing crops have
been damaged – countrywide damage
to millions of hectares of cultivatable
land, including standing crops (e.g.
rice, maize, cotton, sugar cane,
orchards and vegetables) appears
likely – loss of 0.5-0.6 M tons of wheat
stock needed for the wheat planting
season – death of 1.2 M large and
small animals, and 6 M poultry
(Department of Livestock).
Response to needs in the agriculture
sector cannot be underestimated nor
delayed. FAO is currently focusing
on two time-sensitive challenges: (i)
meeting the upcoming wheat planting
season and (ii) saving livestock. (i)
Wheat planting season. If wheat seeds,
fertilizers and farming tools are not
provided rapidly, many farmers will
miss this year’s wheat planting season,
beginning in September/October, and
may not be able to harvest wheat
again until spring 2012.
Extensive water-logging, silt deposits
and damage to irrigation structures
mean that work must start now to
clear and prepare the soil for planting
and to repair water systems for
upcoming planting seasons.
This planting season is vital as wheat
is Pakistan’s main staple crop,
accounts for two-thirds of national
cereal production (planted on 9.05 M
hectares in 2009, yielding 24.05 M
tons) and provides 60% of the
carbohydrate and protein requirement
for an average Pakistani.
(Daily Times – September 4, 2010)
Rs.75 B loss to cotton crop
The estimated loss to the cotton crop
in recent flash floods in Punjab and
Sindh stands at more than Rs.75 B,
according to Pakistan Cotton Ginners
Association.
“The cotton crop in terms of value
faced more than 30% of the total losses
16

to major crops in the recent
devastating floods,” PCGA Patron-
in-Chief said.
He said the flood affected around
600,000 hectares cotton sowing areas
across the country. Cotton crop had
been sown on 3.4 M hectares, out of
which 0.6 M hectares had been
destroyed.
He said the country lost about 2.5 M
bales to 12.5 M bales against the
production target of 14.5 M bales in
crop season 2010-11.
(Daily Times – September 7, 2010)
Rs. 5 B Livestock losses in KP
Livestock losses have reached almost
Rs.5 B in Khyber-Pakhtunkhwa (K-P)
due to the havoc wreaked by the
recent floods, according to data
compiled by the Pakistan Dairy
Association.
Cows, buffaloes, goats and sheep
worth at least Rs.4.86 B have either
died or been otherwise affected by the
deluge, PDA data informed.
Findings have highlighted that at least
140,946 livestock have been killed by
the floods while another 437,237
animals have been affected, the official
spokesperson of the association told.
Officials stressed that the numbers are
likely to rise even further, as the
figures released are based on initial
reports.
Poultry losses have exceeded Rs.345
M, according to the initial surveys
conducted. These include deaths of
more than 369,261 domestic poultry
Tracking Opportunity & Risk Related Developments
and 220,890 commercial poultry.
Additionally Rs.40.2 M in poultry
feed, Rs.5.05 M in feed concentrate
and Rs.50.07 M in fodders have been
lost.
Approximately 6,000 hectares of land
valued at Rs.48.75 m used for
cultivating fodder and animal feed
has also been destroyed. The PDA has
estimated that indirect losses to the
sector stand at Rs.1.762 B.
(The Express Tribune – September 1, 2010)
Tractors sale to hurt
The worst-ever flood in the history of
the country has almost devastated the
basic infrastructure of the country and
is still engulfing agricultural lands
mostly in Punjab and Sindh. A severe
jolt by this flood has also given a
deathblow to the national economy.
Along with this, the water still floating
in cultivated areas will also hurt the
tractor sales in second half of the fiscal
year 2010.
Industry experts said that tractor
sales would likely to decline by 25%
in the month of September. And this
trend would keep on at least in the
short run.
It is to be noted that to enhance agri
activities government announced
many incentives directly related to
agriculture sector like removal of sales
tax on tractors and Benazir Tractor
Scheme. Both these measures
provided impetus for additional
tractor demand due to lower prices
and accessibility to lower income
persons. With all these initiatives,
tractor sales have witnessed an
increase of 11 percent to 38k units in
1H2010. Among two listed tractor
assemblers, highest volumetric growth
was witnessed in Millat Tractors, up
by 13% followed by Al-Ghazi, which
showed an increase of 9%.
Hence, with higher volumetric sales
and better margins, the cumulative
earnings of both the companies stood
higher by 27% during 1H2010. Millat
Tractor, which enjoyed 56% market
share, witnessed volumetric growth
of 13% during 1H2010. The company
was able to sell 21k units compared
to 18.4k units in same period last year.
Hence net revenues for the company
improved by 20% to Rs.11.7bn
compared to Rs.9.8bn last year.
(The Nation – September 8, 2010)
Palm-oil imports may drop
Pakistan, the world’s third-biggest
importer of palm oil, may buy 10%
less of the commodity in October and
November than in July after the
country’s worst- ever floods destroyed
villages, a traders’ group said.
Our imports may decline after floods
washed away our selling points and
imports in July were 147,666 tons,
according to the Federal Bureau of
Statistics.
Palm oil has advanced 18% from near
an 8 months low on July 7, driven by
festival demand in Asia. Futures for
November delivery declined 1.1% to
2,644 ringgit ($850) trading break in
Kuala Lumpur. Prices jumped 1.8%
to 2,674 ringgit, the highest level since
Aug 16.
(Daily Times – September 14, 2010)
17

Rabi season 2010-11 - Country may face
15% water shortage
With 50 M acre feet (MAF) floodwater
gone into the sea due to flaw in the
water storage mechanism, the Indus
River System Authority said that the
country might confront a 15% water
shortage during the upcoming Rabi
season 2010-11 for agriculture
purposes as only 34.5 MAF water
would be available.
This was revealed during the IRSA
technical committee’s meeting at the
authority’s office under the
chairmanship of IRSA Chairman to
review the water availability for Rabi
season 2010-11.
The sources said that during the next
crop season, which will start from next
month (October), Indus zone might
face up to 20% water shortage, while
River Chenab and Jehlum will
probably deal with 5% water shortage.
(Daily Times – September 25, 2010)
Rice exports up by 43%
Pakistan’s rice exports have registered
an increase of 42.55% during
July/August this year amid robust
demand in the international markets,
experts said.
Provisional statistics of export receipts
released by the SBP show that the rice
exports soared to $360.74 M during
the 1st 2 months of FY 2010/11. The
export in the same months last year
remained $253 M.
(The News – September 22, 2010)
Surge in Seafood exports
The seafood exports from the country
Tracking Opportunity & Risk Related Developments
surged by 82.25% during the 1st 2
months of the CY against the same
period last year, according to the data
released by the Federal Bureau of
Statistics.
The fish and fish preparations during
July-August (2010/11) were recorded
at $29.700 M against the exports of
$16.296 M during July-August
(2009/10), it said.
Exports of seafood during August
witnessed 55.95% increase over the
same month last year. Exports in
August were recorded at $15.010 M
against the exports of $9,625 during
August 2009.
According to the data, seafood exports
during July stood at $14.690 and in
August it increased by 1.18%.
(The News – September 30, 2010)
SBP launched concessional financing
The SBP has launched a concessional
financing and guarantee scheme,
under which an amount of Rs.500 M
has been allocated to encourage
farmers to sow canola in the flood
affected areas of the country for the
current Rabi season.
According to a circular (SMEFD
Circular No 15) issued – under the
scheme, financing will be provided at
affordable/concessional markup rates
through banks.
(Daily Times – October 6, 2010)
Palm oil imports seen steady
Pakistan may buy up to 170,000 tons
of palm oil a month in the October-
December quarter, a leading industry
official said, as traders earn profits on
current stocks in a bull-run global
market.
Pakistan made large palm oil
purchases in September. Imports from
Malaysia alone stood at 203,044 tons.
“When the market is on a bull-run,
everybody is making margins on the
current stocks, so they are buying,”
vice chairman of the Pakistan Edible
Oil Refiners Association, said.
“Buying will not be as good as in
September but I think it will remain
between 150,000-170,000 tons a month
in the October-December quarter.”
He expected overall buying for 2010
to be 10% higher as compared to 2009,
when Pakistan imported about 3 M
tons of palm oil, attributing the
rise to a possible change in the
consumption pattern.
(The Nation – October 15, 2010)
Canada to support Pakistan in
Agriculture sector
Canadian Government announced
further support in agriculture sector
for those affected by the recent floods
in Pakistan.
Minister of International Cooperation
Canada, in a news release issued here
said the contribution responds to
agricultural recovery needs by
providing seeds, fertilizers, and tools
and by supporting the rehabilitation
of land and livestock sector in
Pakistan.
“Today, Canada is providing urgently
needed agricultural support to make
sure that farmers can recover and
18

plant on their land in time for the
critical wheat season currently
underway. Our help will also prevent
further loss of livestock that is critical
to the well-being of farmers in the
flooded regions.”
A total of $11.5 M will be provided
by CIDA from the Pakistan Flood
Relief Fund to the UN Food and
Agriculture Organisation ($6 M), Save
the Children Canada ($3.5 M), and
Development and Peace ($2 M),
allowing these organizations to help
meet the humanitarian and early
recovery needs associated with the
agricultural sector for the current Rabi
wheat season.
With today’s announcement, the
government of Canada’s response to
the flood relief efforts in Pakistan now
totals $52 M. Previous financial
contributions were for the provision
of emergency food, water, sanitation,
shelter, relief supplies, health services,
protection, and coordination and
logistics and for the restoration of links
to communities cut off by the flooding.
(Daily Times – October 17, 2010)
Production cost of paddy rises
Production cost of Paddy (IRRI) in
Sindh has increased by 21% to Rs.595
per 40 kg in 2010-11 compared with
Rs.490/40 kg last year, sources told.
To safeguard the interest of rice
producers, the government has
announced intervention prices for
‘super basmati’, ‘basmati’ and ‘IRRI’
across the country.
Normally, if the actual market price
is unfavorable for growers – the
Tracking Opportunity & Risk Related Developments
government decides to
intervention prices.
The recent intervention prices were
established by Agriculture Policy
Institute (API) – a sub-ordinate
department of ministry of food and
agriculture, the sources maintained.
(Daily Times – October 19, 2010)
MICRO BUSINESS & SME
SME Cash Management Services
Standard Chartered and Oasis Travel,
signed an agreement for Small and
Medium Enterprises (SME) Cash
Management services. Through this
arrangement Standard Chartered will
provide a comprehensive payments
and collections solution.
The payments solution will be made
available through the banks electronic
banking platform, Straight2Bank.
Standard Chartered SME banking was
established as a dedicated business in
Pakistan with an aim to meet unique
needs of its customers. The Bank's
SME Banking comprises team of
qualified professionals who design
and structure financial solutions that
fulfil customers' requirements.
In line with the Bank's SME Banking
platform, Cash Management is one of
the focus areas, which has been
extended to SME customers to help
them manage their cash flows through
electronic channels, which are
synchronized with their Enterprise
Resource Planning (ERP) systems.
(Business Recorder – September 15, 2010)
40% of small borrowers are affected
Recent floods have adversely affected
set four out of ten borrowers of a small
loan which will lead to the writing off
of almost 11% of the microfinance
institutions’ balance sheets.
These estimates have been provided
by the Pakistan Microfinance
Network, an umbrella organization
for all the microfinance institutions.
The network has sought a bailout
package from the government and
international donors to restore the
livelihood of 733,000 borrowers and
save another 4,000 jobs in the
microfinance sector.
“The sector employs 11,000 people
and 4,000 of these will have to be laid
off if the government does not rescue
the sector,” said CEO of the Pakistan
Microfinance Network. He said that
out of Rs.25 B, Rs.8 B of microfinance
loans were disbursed in those areas
which have been adversely affected
by the floods.
“Preliminary estimates show that
recent floods have affected 733,000
clients and will result in a write-off of
Rs.2.7 B worth of loans,” said the
Chairman of Pakistan Microfinance
Network. He said at least Rs.5.1 B is
required to offset the impact of the
written-off loans and to give new
loans to affected individuals.
He also said that the floods damaged
87 offices of microfinance institutions
that will cost Rs.250 M to revamp.
MFIs extend loans on comparatively
higher interest rates to clients without
collateral. MFIs’ clients have reached
1.97 M and the lending portfolio has
reached Rs.25 B.
19

As much as 55% of small loans have
been extended to borrowers from rural
areas. About forty-one per cent has
been disbursed in the agriculture
sector and around a third given out
in the trade sector. The average loan
size is $147 or Rs.2,680 and the average
interest rate is 25%.
The damage assessment in the
microfinance sector is based on the
estimates of the State Bank of Pakistan
(SBP), the federal government and the
World Bank.
(The Express Tribune – September 21, 2010)
Reviving SME businesses
The Small and Medium Enterprises
Development Authority, recently
proposed to the government fiscal
measures for helping smaller
enterprises hit by the recent floods.
The suggested package envisages
grants and/or interest-free loans to
the flood-hit small businesses for
rehabilitation. “Our support package
basically comprises two
recommendations,” CEO of Smeda
told.
“We have proposed to the
government to create a special fund
– Credit Markup Sharing Fund – for
totally or partially subsidizing bank
loans to the flood-hit businesses as
well as to seek foreign donations for
providing grants to the affected
enterprises,” he said.
The suggested package has been given
to the federal industries ministry for
getting the government’s approval.
(Dawn – October 11, 2010)
Tracking Opportunity & Risk Related Developments
Holland offers 60% of funding
Netherlands has offered up to 60% of
funding to Pakistani projects (SMEs)
having a maximum cost of 1.5 M
Euros (Rs.176.61 M). The offer was
renewed by Head of Economic Affairs
of Embassy of Netherlands, while
talking to the members and Senior
Vice President of MCCI,
The officials informed MCCI office-
bearers that the Private Sector
Investment (PSI) programme of
Netherland government, open in
Pakistan since 2005 with an annual
budget of 70 M Euros, is aimed at
alleviating poverty and strengthening
private sector investment.
They said that the funding, available
under 40-60 arrangement, is subject
to certain evaluation to be conducted
by Holland government officials.
Under this programme, they apprised,
one project in sports wear in Pakistan
has already been completed, three
projects in chemical industry and
dairy sector are underway, while three
are under consideration.
The total funding of 1.5 M Euros
allows spending on hardware
(equipment, machinery), Training of
people and Project management. Real
estate and operational costs excluded.
The funds are released during the
project, after achieving predefined
results.
(Business Recorder – October 11, 2010)
FINANCIAL SERVICES
Downgraded: ratings of largest banks
Outlook on long-term local currency
deposits and the financial strength of
savings of five Pakistani banks has
been changed from ‘stable’ to
‘negative’ by Moody’s Investors
Service.
The long-term outlook of ABL,HBL,
MCB, NBP and UBL has been down-
graded to negative.
Simultaneously, the ratings agency
has affirmed that the foreign currency
deposit ratings of ‘B3/Not-Prime’
assigned to these banks.
“Non-performing loans are expected
to increase, especially those extended
to small and medium enterprises and
to the agriculture sector,” commented
Research Head at InvestCap.
“The profitability of banks will be
affected going forward,” he summed
up.
(The Express Tribune – September 3, 2010)
NPLs estimate - SBP
The flood has changed the trend of
NPLs as most of the NPLs are being
reported from agriculture sector which
may hurt the government’s as well as
State Bank’s move to persuade banks
for greater participation for the
recovery of agriculture sector.
The SBP in an early estimate had said
that NPLs could surge by another
Rs.50 B due to flood. So far the
reported default in the agriculture
sector has reached about Rs.28 B while
the total NPLs caused by the flood
was around Rs.42 B. A senior banker
of large a bank said banks could not
afford to face further losses as the
increasing load of NPLs has already
reached to optimum point.
20

The NPLs of banking sector witnessed
rapid increase especially in the last
two years as it jumped by 137% with
an addition of Rs.266 B to a total of
Rs.460 B.
(Dawn – October 3, 2010)
9% rise in non-life
insurance sector profits
The net profit of the listed non-life
insurance companies increased by 9%,
to Rs.475 M, in the half-year period
ended on June 30, 2010, as compared
to Rs.434 M in the corresponding
period of last year. Analysts said that
despite a 27% decline in the
underwriting results, the listed non-
insurance sector posted a decent
growth in the bottom line.
"This increase is primarily attributable
to higher dividend income and lower
provision for impairment during the
first half of 2010 and low general and
administration expenses", analyst at
JS Global Capital, said. The investment
income increased by 23% and the
general and administration expenses
reduced by 2% in the 1st half of 2010
over the same period last year, he said.
(Business Recorder – October 5, 2010)
Bank services for all
Around 70% of the population of
Pakistan with currently no access to
banking facilities will have financial
services by 2015 through Easypaisa.
President and CEO of Tameer Bank
said this while chairing the discussion
on Financial Inclusion at the United
Nations Private Sector Forum on
Millennium Development Goals held
recently at the UN Headquarters, said
a statement issued.
Tracking Opportunity & Risk Related Developments
He said that more than 2.7 B people
in the world have no access to any
formal financial services and if the
financial inclusion goals are to be
achieved, the solution has to be
transformational not transitional.
(The News – September 29, 2010)
Merger
MCB Asset Management and Arif
Habib Investments would be merged
subject to all regulatory approvals and
compliance. A MoU was signed in
this regard by MCB Bank and Arif
Habib Securities recently. The joint
entity is expected to become the
largest private sector asset
management company.
As independent entities MCB AMC
and Arif Habib Investments manage
approximately Rs.31 B (approximately
$370 M) between them. Both
companies are rated amongst the best
managed companies in the country,
and demonstrated visible strength
during the severe liquidity crunch and
credit crunch of 2008.
The merger is likely to provide the
new entity the requisite critical mass
to broaden the reach, which may serve
as an agent of positive change and a
much-awaited good omen for the
industry. It will bring together rich
experience and skill of the two groups
in the financial sector. MCB Bank's
1100 branches network in the country
would provide wider reach to the
various products being offered by the
two asset management companies.
(Business Recorder – September 9, 2010)
Citibank accepts Bankislami’s offer
Bankislami announced that its offer
to buy Citibank Pakistan’s house
financing portfolio had been accepted.
The acquisition will have to wait for
regulatory approval by the SBP,
Bankislami said in a notice to the
Karachi Stock Exchange. This
acquisition will be in line with the
principles of shariah, claimed the
bank. “Our Shariah Board has given
green signal to the deal,” a senior
Bankislami official, who did not want
to be named, said. “The deal was
delayed because the board took time
to ensure that the acquisition meets
Islamic banking laws.”
The size of the Citibank’s housing
portfolio is close to Rs.1.1 B. There are
415 customers, who will now switch
to Islamic mode of banking. The
amount at which the acquisition will
take place has not been disclosed.
(The News – October 12, 2010)
Engro launches Rupiya certificates
Engro Corporation announced the
launch of Rupiya Certificates with an
aim to target retail investors and
gather funds to meet expansion
requirements of its fertiliser and food
businesses.
The asset-backed issue of TFCs will
be for a period of 3 years offering a
return of 14.5% p.a., which Engro
believes is a good attraction for people
who usually invest in long-term
National Savings Certificates.
The total size of the TFCs, which will
be available at 11 banks and TCS
outlets from Friday with a minimum
investment of Rs.25,000, is Rs.4 B. Of
the total, the initial offer is worth Rs.2
21

B with a green shoe option of another
Rs.2 B.
(The Express Tribune – October 15, 2010)
Islamic banks grasp 6.1% market share
Islamic banking institutions have
improved their market share in the
country’s banking industry despite
prevailing of a depressive economic
situation.
The SBP in its recent report noted that
Islamic banking continued to flourish
and increased its share in banking
system to 6.1% at the end of June 2010
from 5.1% in June 2009.
The Islamic banking witnessed a
double digit growth in assets during
the 2nd Q (May-June) 2010 despite
the fact that a couple of Islamic banks
went through consolidation phase
affecting the Islamic banking
activities,” said the report.
(Dawn – October 11, 2010)
Banking industry’s asset base grown
Pakistan’s banking industry witnessed
a 5.4% growth in its asset base to
Rs.6,782 B during April-June quarter
of the 2009-2010 FY (FY10) compared
with a contraction of 1.4% in the
January-March quarter of FY10.
According to SBP’s Quarterly
Performance Review of the Banking
System for the quarter ended on June
30, 2010, the increase in asset base of
the banking system, which was well
supported by growth in deposits,
mainly occurred in banks’ balances,
interbank lending, government papers
and public sector commodity finance.
Banking industry’s deposits rose to
Tracking Opportunity & Risk Related Developments
Rs 5,128 B in April-June quarter
compared with overall deposits of
Rs.4,774 B in January-March quarter
of FY10.
The Report pointed out that the
banking system witnessed a letup in
the inflow of fresh non-performing
loans (NPLs) during the quarter under
review that has been a leading
challenge for the last two years or so.
The NPLs of banks registered a
marginal growth of 0.6 % to Rs.460 B
in April-June 2010 quarter (Rs.457 B
in March-10) as compared to last two
years’ average quarterly growth of
9.7%. Due to contained increase in
NPLs, which was adequately covered
by loan loss provisioning, the
provision coverage ratio of NPLs
improved to 73.2% (70.9% in March-
10) and net NPLs to Loans ratio
declined to 3.8 % (4.2% in March-10).
(Daily Times – October 7, 2010)
REGULATORY
Infrastructure project finance
The SBP issued revised guidelines for
Infrastructure Project Finance to
facilitate banks and development
finance institutions (DFIs) in
providing financing solutions to
infrastructure projects in the country.
According to a Circular issued by SBP,
banks/DFIs have been advised to use
the guidelines for developing products
for financing to infrastructure sectors
according to their policy and
operational and market requirements,
subject to compliance with relevant
SBP regulations. Guidelines broadly
cover areas such as Credit Appraisal
(G-1), Collateral Arrangements,
Security Package and Project
Insurance (G-2) besides Regulatory
Compliance (G-3).
(Business Recorder – September 7, 2010)
New guidelines issued by State Bank
Revised guidelines for infrastructure
project financing for banks and
development financial institutions
(DFIs) have been issued by the SBP.
This was revealed in a circular issued
by the SBP. The guidelines cover areas
such as credit appraisal, collateral
arrangements, security packages,
project insurance and regulatory
compliance.
The salient features of the revised
guidelines include the requirement
for establishing a mechanism for
generating feasibility reports and
assessing risk mitigation means in the
development, construction, start-up
and operation stages of the project,
etc.
(The Express Tribune - September 7, 2010)
Markup rate subsidy
SBP directed all banks and DFIs to
ensure fiscal relief to rehabilitate the
economic life in Khyber
Pakhtunkhwa, FATA and PATA,
payment of markup rate subsidy on
business loans to textile sector for the
period from January 1, 2010 to June
30, 2010.
Referring to SMEFD circular 11 July
1, 2010 regarding the subject SBP said
in this connection it is advised that
the federal government has included
the entire textile sector of Khyber
22

Pakhtunkhwa in Prime Minister’s
fiscal relief package for FATA/PATA/
Khyber Pakhtunkhwa.
(Daily Times – September 1, 2010)
Guidelines to comply -
Anti-Harassment Law
The SBP has issued instructions to all
the banks to comply with the
‘Protection Against Harassment of
Women at Work Place Act 2010’
displaying the Code of Conduct
within their premises.
The banks are also directed to form
specific committees to address these
complaints and ensure conducive
environment for working women.
(Daily Times – September 8, 2010)
Issue of capital rules
The Securities and Exchange
Commission of Pakistan has reviewed
and amended the Companies (Issue
of Capital) Rules, 1996. The
amendments are being notified in the
official gazette to solicit public opinion
as required under sub-section (1) of
Section 506 of the Companies
Ordinance, 1984 (the Ordinance).
(Dawn – September 9, 2010)
More risk mitigating measures added
The Securities and Exchange
Commission of Pakistan has approved
the concept of Margin Trading System
(MTS) with additional risk mitigating
measures. The SECP has approved
the concept of the MTS in a meeting
held at the commission.
In this regard, the SECP has also
decided to amend the draft Securities
(Margin Financing, Securities Lending
Tracking Opportunity & Risk Related Developments
and Borrowing and Pledging) Rules,
2010. The draft Securities (Margin
Financing, Securities Lending and
Borrowing and Pledging) Rules, 2010
would be amended to allow the
concept of Margin Trading System.
The SECP would also incorporate the
viewpoint of the stakeholders to
incorporate viable proposals to ensure
protection to the investors and
minimise risk to the market.
(Business Recorder – September 16, 2010)
Banks-DFIs to use only recognized
ECAIs solicited ratings
The SBP has said that banks/DFIs
would be allowed to use only solicited
ratings assigned by recognized
external credit assessment institutions
(ECAIs) for the purpose of capital
adequacy with immediate effect.
These ratings must fulfil all
requirements, and all ratings used
should be publicly disclosed by the
ECAIs along with its history. The
rating agency should have
reviewed/assigned the rating within
previous 15 months. In addition,
banks/DFIs should have mechanism
to monitor changes in ratings
(upgrade, downgrade and
withdrawals) for accurate Capital
Adequacy Ratio reporting, according
to BSD Circular No 5 of October 5,
2010.
(Business Recorder – October 6, 2010)
Rate of Refinance up
The SBP revised the refinance rate
under the Export Finance Scheme,
increasing it by 50 bps to 9% per
annum. The previous refinance rate
was 8.5%. The new rate will take effect
from October 1.
In a circular issued the SBP said that
banks can charge a maximum margin
of 1% on financing facilities provided
to exporters.
(The Express Tribune – October 1, 2010)
MACRO ENVIRONMENT
SBP projects 2-3% growth
The SBP has predicted 2-3% GDP
growth in the CFY despite severe
flood losses. The target set in the
budget was 4.5%.
The bank’s annual report for 2009-10
issued said there was a noticeable
improvement in macroeconomic
indicators during FY10 with the
economy growing at 4.1%, compared
to 1.2% in the preceding year.
It projected an average annual
inflation in FY11 at 13.5-14.5% and
fiscal and current account deficits at
5-6% and 3-4% of the GDP.
The report said the impact of floods
had strengthened inflationary
expectations and the August CPI
showed a 15.6% y-o-y rise in its food
component. A 10.7% growth in
subsidies and losses of public sector
enterprises was particularly
disappointing, it said.
“In FY10, these expenditures, as a
percentage of GDP, were almost equal
to the combined total for health and
education,” it said, adding that this
was by no means an acceptable
situation.
The report said the total public debt
and liabilities had substantially
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increased from 68.7% of GDP in FY09
to 69.5%.
It projected that workers’ remittances
were likely to stay between $9.5 B and
$10.5 B, while exports and imports
were likely to be $20 B to $21 B and
$34 B to $35 B, respectively.
(Dawn – October 26, 2010)
CA deficit widens by 48%
Current account deficit of the country
rose sharply by 48% during the 1st 2
months of the new fiscal, reflecting
poor performance of economy on
external front while signaling a red
alert for the ailing economy. The SBP
reported that external deficit during
July-August of the CFY reached $944
M against $635 M during the
corresponding period of last year.
The last FY was much better for
Pakistan as external deficit fell by 63%
to $3.495 B against the deficit of $9.261
B in the FY 2008-09.
(Dawn – September 21, 2010)
Fiscal deficit reaches 6.3pc in FY10
Pakistan’s fiscal deficit for the FY 2009-
10 (July-June) is reported to have
soared by 6.3 % of GDP, compared
to 5.2% in FY 2008-09 and higher than
the revised FY10 fiscal deficit target
of 5.1%. The fiscal deficit has reached
a record Rs.930 B or Rs.14,668 B of
GDP during July-June FY10.
The higher growth in the
government’s fiscal deficit is attributed
to low tax revenues, high current
expenditures and shortfalls in
projected external financing. Similarly,
the government’s heavy budgetary
Tracking Opportunity & Risk Related Developments
borrowing by the banking sources to
meet inflation-hit public expenditures
also swelled the size of fiscal deficit
to a great extent in FY10.
The Ministry of Finance reported that
the government has collected total
revenues of Rs.2.8 trillion, showing
14.2% increase while expenditure
recorded at Rs.3.8 trillion with 20.5%
surge during the entire course of FY10.
(The Nation – September 1, 2010)
IMF: Inflation 13.5%, GDP < 2.75%
Inflation in Pakistan is expected to
accelerate to 13.5% this year as
massive summer floods push up
prices for food and other staples, the
IMF said in its country report.
Prior to the disaster, the IMF had
projected average inflation for the
current 2010/11 FY at 11.5%, slightly
below the 11.7% seen last year.
“The economic outlook has
deteriorated sharply as a result of the
floods,” the IMF said, adding that
GDP growth was unlikely to exceed
2.75% this FY year.
The government earlier had targeted
GDP growth of 4.5% this year,
whereas the IMF expected it at 4.25%.
(Dawn – September 22, 2010)
Trade gap widens
Pakistan’s trade deficit widened by a
robust 22.27% in 1st 3 months of the
CFY to a larger than expected $3.850
B against $3.148 B last year mainly
due to rising furnace oil imports used
in power generation.
The trade gap ballooned as imports
rose at a faster clip than exports during
the months (July-Sept) under review
after a slight narrowing in deficit in
previous months.
The rise in deficit appears to go up
during next months as the country
will start to import more oil and food
items for bridging the domestic
shortfall in power and farm produce.
Official figures released here on Friday
by the federal bureau of statistics (FBS)
showed that import bill increased by
19.02% to $9.029 B in July-Sept, 2010
against $7.586 B last year.
Exports grew by 16.7% to $5.179 B in
the 1st Q of 2010 against $4.437 billion
last year.
(Dawn – October 11, 2010)
Economy hit by flood
In 2010, Asian export recovery has
been largely driven by intra-regional
trade with the US and Europe, making
limited contributions, analyst said.
US and Europe were directly
responsible for less than 15% of Asian
economies’ export growth in H1-2010
(with the exception of China and the
Philippines).
In Pakistan, floods have hit economy
hard, with losses estimated at $4 B
(2% of GDP). The heavy floods in the
Indus River resulting from monsoon
rains have caused widespread damage
to the economy, economist of
Standard Chartered Bank Pakistan
said.
He said nearly 20 Mpeople have been
displaced, making this one of the
worst natural disasters in history.
24

Nearly 1.25 M houses have been
completely destroyed, leaving most
of the affected households without
shelter. Losses to the economy are
estimated at close to $4 B (2% of GDP),
he maintained. The country expects a
significant slowdown in GDP growth
in FY11 (ends June 2011) and lower
growth forecast to 2.5% from 4.5%,
this would follow growth of 4.1% in
FY10. It is expected FY11 inflation to
jump sharply to 15%, versus earlier
forecast of 12%, depending on the
extent of the damage and the
measures taken by the government to
reconstruct and rebuild the affected
areas, he added.
However, the details will be known
only after the completion of a damage
assessment report jointly initiated by
the World Bank and the Asian
Development Bank (ADB), due in
October.
Agriculture analyst said the floods
have caused widespread damage to
the standing crop, the backbone of the
economy, with nearly 30% of
cultivable land destroyed by the
flooding.
The Ministry of Food, Agriculture and
Livestock estimates losses to the
agriculture sector at $ 2.8 B, and
another $ 450 M in losses in the
livestock sector, he informed.
Damages: The floods have damaged
public infrastructure, with road links
cut off, power stations shut down,
and gas and petroleum supplies
suspended. More than 2,500 schools,
175 health centres and 1,000 water-
supply facilities have been damaged,
according to the National Disaster
Tracking Opportunity & Risk Related Developments
Management Agency. The National
Highway Authority estimates nearly
1,000 bridges and more than 400 km
of road infrastructure have been
destroyed, severely hampering supply
of essential food commodities to
villages and towns. The power
infrastructure has also been badly
damaged, with supply of 1,500MW
disrupted due to damage to power
plants, exacerbating the existing
energy crisis and further stalling
growth. IMF role: Relations with the
IMF hit a roadblock in June 2010, after
the government missed key
performance targets in areas including
the fiscal deficit, borrowing from the
central bank and implementation of
the value added tax (VAT).
(Daily Times – September 9, 2010)
Flood losses at $9.5 B
A preliminary Damage Need
Assessment (DNA) report prepared
by the World Bank and Asian
Development Bank says that Pakistan
suffered a loss of about $9.5 B (over
Rs800 B) in recent floods, in terms of
damaged crops, infrastructure and
public and private property in the
four provinces and Fata.
According to the report, Sindh
suffered the maximum damage
amounting to around Rs350 billion,
followed by Punjab Rs.253 B, Khyber
Pakhtunkhwa Rs.103 B, Balochistan
Rs.55 B and Fata Rs.5 B.
Individuals, it said, suffered losses of
crops and livestock to the tune of
Rs.428 B.
Sources in the planning commission
said the report had only highlighted
the damage caused by floods, but the
reconstruction of infrastructure again
and compensation to be paid to people
who had lost their sources of
livelihood would cast between $25 B
to $30 B.
(Dawn – October 13, 2010)
Rs.446.8 B losses to Sindh
Sindh has suffered Rs.446.8 B loss on
account of damage to various sectors
of the economy, and the bad news is
that it might not be able to even plant
the 'Rabbi' crops in standing water.
"The situation is that water is not
receding in the affected areas of the
province, and might remain in the
cropping areas for quite some time"
said by advisor to Sindh chief minister
for planning and development.
"We will not be able to plant rabbi
crops because the water which
reached the province after causing
devastation in Khyber Pakhtoonkhwa
and Punjab is not receding at the
normal pace as the slope of fields is
not towards the sea". He said that the
government has to take decision for
import of essential commodities to
avert their shortage due to losses to
crops by the floods.
He said that over 7274 villages and 43
towns have been inundated, over 2.2
M acres of cropland is under water,
while over 300 rice and other mills
have so far been damaged.
Initial estimates suggest that total loss
in the province by flood was Rs.4 46.88
B with Rs.122.1 B in agriculture sector
on account of damage to crops over
3,000,000 tons. Livestock sector
suffered a loss of Rs.11.l4 B on account
25

of 200,000 animals; irrigation Rs.52 B;
and Rs.37.5 B following destruction
8,000 km roads.
Total loss to the housing sector was
Rs.134.3 B because of damage to
1,021,000 houses; while in health sector
the loss was estimated at Rs.2.6 B, as
100 health centres have been
damaged. Total loss to the education
on account of damage to 4,600 units
was estimated at Rs.26.9, Rs.40 B to
municipal infrastructure as 43 towns
have been affected with a loss of Rs.10
B to government buildings.
(Business Recorder – September 8, 2010)
18% rise in services sector deficit posted
Services trade deficit posted an
increase of 18% during the 1st 2
months of the CFY mainly due to high
imports followed by rising payments
on account of transportation, travel
and government services. The SBP
said that the country's services sector
trade deficit was gradually rising
and overall imports and deficit are
on surge.
Services sector posted a deficit of $567
M in July-August of CFY as compared
to $481 M in corresponding period of
last FY, depicting an increase of
17.87% or $86 M. Export of Services
trade mounted by 5% or $27 M to $589
M in 1st 2 months of CFY relative to
$562 M in same period of last FY.
Similarly, imports under services
sector registered an increase of 11%
due to high payments on account of
transportation, travel services,
insurance, technical fee, royalties and
government sector. Services sector
imports stood at $1.156 B in July-
Tracking Opportunity & Risk Related Developments
August of FY 2010-11 as compared to
$1.043 B in corresponding period of
FY 2009-10, depicting an increase of
$113 M. Economists said that
increasing deficit and imports of
services sector is a matter concern,
and policy makers should take some
steps to check the reason of poor
performance of this sector.
(Business Recorder – September 26, 2010)
Rise in food items export
The flood-hit and food starved
Pakistan exported 29% more food
items during the last few months,
compared to the same period of
last year.
The information showed that Pakistan
exported food items worth $547 M
during the two months against $425
M during the corresponding period
of last year.
(Dawn – September 23, 2010)
40.1% decline in foreign investment
The SBP said that foreign investment
posted a decrease of $138.4 M, or
40.1%, to $267 M during July-August
of CFY against $405.4 M in same
period of last FY.
According to SBP major decline took
place in FDI, with a drop of 50.2%, or
$173.1 M, to $171.4 M as compared to
$344.5.15 M in the corresponding
period of last FY 2010. However,
portfolio investment, mainly in stocks,
registered a surge of 57.1% or $34.7
M. Portfolio investment mounted to
$95.6 M in 1st 2 months of CFY against
$60.9 M in same period of last fiscal
year.
(Business Recorder – September 18, 2010)
Asian Development
Outlook 2010 Update
The impact on Pakistan’s economic
prospects of the massive flooding that
began in early August 2010 is difficult
to quantify, however, the economic
impact will be heavily negative in the
short-run, due to extensive damage
and reallocation of resources to cater
to urgent needs.
Developing Asia’s robust recovery
from the global crisis is gaining further
momentum, the ADB says in its
annual flagship economic publication
Asian Development Outlook (ADO)
2010 Update released.
The ADO Update on Pakistan said
that the picture should also be a little
clearer when an international donors’
conference is held in late November.
Losses in crops and livestock, damage
to infrastructure, and limited
economic activity in a large part of
the country will dampen growth
prospects in virtually every sector,
such that tepid gross domestic product
(GDP) growth of 2.5% is expected in
FY 2011. Nevertheless, reconstruction
and rehabilitation activities will
subsequently have a positive impact
on the GDP.
As the major transportation arteries
of the country have been severely
damaged, shortages of goods and
services—even with rapidly ramped-
up imports—are expected to put
substantial upward pressure on prices.
Moreover, the likelihood of delayed
sowing of crops in the upcoming
season and, potentially, in the
following season will create shortages
of food and other commodities while
26

undermining farmers’ incomes.
Inflation, for the most part induced
by supply-side constraints, is expected
to be higher than the eight percent
forecast in April’s ADO 2010 Update.
This update projects average inflation
in FY 2011 at 13%. The SBP in its
monetary policy for FY 2011 projected
inflation at 11 to 12% (higher than the
federal government target of 9.5%).
Also, while the central bank will find
it difficult to fully implement its earlier
monetary stance in the present
circumstances, it will need to make
substantial efforts to keep demand for
credit from exacerbating inflation
pressures. Pressures on the current
account will also intensify in FY 2011.
Still, workers’ remittances, which
increased by 13.2% in July to August
2010, over the same period the
previous year, are expected to remain
strong. If substantial grant aid is
provided for relief, the deterioration
in the current account deficit may be
limited to 4.3% of the GDP.
Flood-related expenditure will also
alter the fiscal outcome, relative to the
budget posted for FY 2011, widening
the fiscal deficit from the targeted 4%.
In this context, it will be even more
important to address trends that were
troublesome for the FY 2010 outturn.
Revenue measures are more urgent
in view of the massive reconstruction
requirements, as are improvements
in revenue administration and
collection.
The budget for FY 2011 also called for
an aggressive 45% reduction in total
subsidies, including a 67% reduction
in allocations to cover electricity tariff
Tracking Opportunity & Risk Related Developments
differentials. These lower subsidies
would require efficiency measures
that produce saving equivalent to the
30–40% increase in tariffs that would
otherwise be required to meet cost
recovery. Flood-related damage and
social safety net requirements will
necessarily impact the expected deficit
for FY 2011. Specific tax measures
included in the FY 2011 budget, which
could lift tax revenue by 20%, include
a 1% increase in the goods and services
tax to 17%; reforms to that tax from
October 1, 2010 to improve revenue.
Additional revenue measures are
being formulated to generate revenue
for relief and reconstruction. The FY
2011 budget targets a rise in federal
government public sector
development spending of about one
third relative to the FY 2010 outturn,
taking outlays up from 3.5% of the
GDP to 4.4% in FY 2011. Moreover,
investment spending was reprioritized
to secure more timely completion
of key ongoing projects in the
areas of transportation, hydropower,
and water.
External support in response to flood-
related damage will contribute to
higher increases in development
spending with the magnitude of the
increase for FY2011, among other
factors, to be determined also by the
absorptive capacity of the economy.
(Daily Times – September 29, 2010)
Discount rate raised
The SBP once again increased the
policy interest rate by 50 bps, because
of fears of higher government
borrowing and inflation and lower
economic growth and revenue during
the CFY.
According to a Monetary Policy
Statement issued, the SBP increased
the discount rate to 13.5%.
The statement said the recent
catastrophic floods had serious
implications for macroeconomic
stability and growth prospects.
“Highly provisional estimates suggest
that economic growth for FY11 could
come down to 2.5% from an earlier
target of 4.5%,” the SBP said.
(Dawn – September 30, 2010)
Export target linked with cotton bales
import
Sources in All Pakistan Textile Mills
Association said that the country
would face a shortfall of 4 to 4.5 M
bales of cotton in the current fiscal
year, therefore the Government and
textile stakeholders should import
cotton bales in time, otherwise it
would not be possible to achieve the
annual textile export target set for the
year 2010-11.
The Government has fixed the annual
textile export target at $ 14b for the
CFY 2010-11 under the 5 years textile
policy. The textile export showed a
healthy growth of 23pc in the first
month (July) of the current fiscal year,
as it was recorded at $986 M in July
2010 against $802 M in the same
month of 2009.
(The Nation – September 4, 2010)
Export to Malaysia increased
Pakistan's exports to Malaysia
recorded a healthy increase of 81%
with exports of RM 352 M in the 1st
6 months of this year as compared to
27

RM 194 M in the corresponding period
of 2009 with rice and onion being the
biggest contributors.
According to the latest data obtained
from Malaysian Trade Development
Authority (MARTRADE) by Pakistan
High Commission in Kuala Lumpur,
the rice made up more than half of
the total exports with an export of RM
188 M compared to RM 46 M of last
year registered a robust growth
of 307%.
(Business Recorder – September 22, 2010)
Pakistan falls 22 places to 123
The World Economic Forum has
revised downward the Pakistan’s
global competitiveness ranking from
101 in the world to 123rd place among
139 nations.
According to Global Competitiveness
Report, Pakistan’s score dropped from
3.58 in 2009 to 3.50 this year. While
this is a relatively modest decrease in
numeric terms, it was sufficient to
move Pakistan from 101st to 123rd
place among 139 nations ranked by
the WEF.
Switzerland retains the top overall
ranking in the Global Competitiveness
Report of 2010-2011. The USA fell two
places to the 4th position, overtaken
by Sweden (2nd) and Singapore (3rd).
(Daily Times – September 10, 2010)
Pakistan’s economic freedom
ranking falls
The level of economic freedom in
Pakistan dropped as its index ranking
deteriorated to the 118th place from
the 110th last year among 141
countries, says a new study released.
Tracking Opportunity & Risk Related Developments
According to the Economic Freedom
of the World: 2010 Annual Report,
released by the Alternate Solutions
Institute, Pakistan’s score declined
this year to 5.80 from 5.95 in 2009.
Of the 123 countries with economic
freedom rankings dating back to 1980,
88 (71.5%) saw their rankings
decrease, while only 35 (28.5%)
recorded increase, says the report.
Hong Kong maintains the highest
level of economic freedom worldwide
with a score of 9.05 out of 10.
(Dawn – September 21, 2010)
GST to cause price hike of 15-17%
The withdrawal of exemptions under
the proposed reformed general sales
tax (RGST) early next month is
estimated to increase prices of over
122 major categories, including food
items, by 15-17%, depending on the
tax rate to be decided by the federal
government, and yield about
Rs.150 B in additional revenue to
the exchequer.
A senior official told Dawn that
preliminary estimates suggest that
about 22 categories in the food group
and agriculture, which were
currently exempted from general
sales tax, would be brought under the
RGST net.
(Dawn – September 30, 2010)
Services exports up 4.91pc
Pakistan’s export earnings in services
trade have slightly augmented by
4.91% to $589 M during the 1st 2
months (July-August) of CFY
compared to $561 M in the same
period of last year.
According to provisional statistics on
services trade released by SBP,
services exports saw an increase of
$28 M in the overall volume of trade
services exports largely on account of
improvement in receipts under
government services and higher
proceeds from transportation business
during the period under review.
In the same way, exports of services
on month-on-month basis, stood at
$305.2 M from $313.1 M in the
reported months of prevailing FY.
(The Nation – September 22, 2010)
Release of $200m by ADB
The Asian Development Bank has
released the 2nd tranche worth $200
M of its “second generation of capital
market reforms programme” early
this month to the Ministry of
Economic Affairs and Statistics of
Pakistan after the bank found status
of covenants of the first tranche
satisfactory, the bank said in a
document.
According to details issued by the
ADB, the reform programme
envisaged a $400 M funding to
support a second generation of capital
market reforms, building on key
achievements made under the capital
market development programme
(CMDP) and financial (non-bank)
markets and governance programme
(FMGP).
(The News – September 14, 2010)
Trade finance programme
The Asian Development Bank has
decided to stop or abandon
problematic projects and divert up to
28

$1.5 B from these sources to launching
rehabilitation projects in flood-affected
areas.
The Manila-based donor agency
informed government officials of its
decision. According to sources, the
bank has handed over a list of around
30 projects to the government, which
are either slow-moving or problematic
and could be shelved for a better
cause.
(The Express Tribune – September 20, 2010)
Decline in foreign investment
Net foreign investment posted a
decline of 28% during the 1st Q of the
CFY, mainly due to low portfolio
investment. The central bank said that
net foreign investment comprising
foreign direct investment (FDI) and
portfolio investment had continuously
weakened and net foreign investment
registered a decline of $181 M during
the 1st 3 months (July-Sep) of FY
2010-11.
With current decline, net foreign
investment decreased to $455.1 M
during the 1st Q of the CFY as
compared to $636.1 M in the same
period of last FY 2009. According to
statistics, FDI posted a decrease of
9.5%, while major decline was in
portfolio investment, which stood at
67.5% during the period.
(Business Recorder – October 16, 2010)
Corporate sector profitability
The corporate sector profitability
continued to register an upward trend,
rising by an impressive 34% in the
2nd Q of 2010, compared to the
corresponding period last year.
Tracking Opportunity & Risk Related Developments
According to a research report of a
team of analysts at JS Global Capital
Limited the total profitability of the
sample companies of the corporate
sector has increased to Rs.60.132 B in
the 2nd Q (April-June) of 2010, as
compared to Rs.44.741 B recorded in
the corresponding period last year.
The E&P sector led the sector's
earnings growth with a higher than
expected growth of 49% on yearly
basis in its profitability.
Auto sector's positive momentum
continued in the 2nd Q of 2010, as its
profits jumped 76% on yearly basis.
Textile analysis indicates notable
earnings growth in the 2nd Q of 2010
for the textile sector at large.
Fertiliser sector performed admirably
during the 2nd Q of 2010 on the back
of higher urea and DAP prices.
Analyzing the banking sector's
profitability based on sample of 9
banks, shown a 24% y-o-y growth in
the 2nd Q of CY.
Refinery sector profits experienced a
slight breather as GRMs during the
second quarter of 2010 recovered
slightly.
Despite the fact that KAPCO's
profitability fell 8% in the 2nd Q of
2010, the power sector considering
our sample, which includes KAPCO
and HUBCO, registered a y-o-y
growth of 14%.
Despite robust furnace oil sales,
inventory losses and higher tax
expense negatively affected oil
marketing companies' performance,
recording a negative earnings growth
of 24% during the 2nd Q of 2010.
PTCL's profitability fell to 26% during
the 2nd Q of 2010 deteriorated mainly
owing to exceptionally high marketing
expenses incurred.
Lower cement prices due to
disagreement in on pricing amongst
manufacturers led to the downfall of
the cement companies during the 2nd
Q of 2010.
(Business Recorder – October 2, 2010)
Zero rated Export
The government will not impose any
tax on any exportable good, said
Federal Board of Revenue Chairman.
He said that with a view to promote
exports and encourage exporters in
this regard no tax would be imposed
on any export good.
“Exporters should keep this in mind
that all export will remain always
zero-rated and there should be no
confusion in this regard,” he said.
(The Nation – October 6, 2010)
IDB approves $772.3 M
Islamic Development Bank has
approved financing of new
development projects worth $772.3 M
for its member states including
Pakistan – and $90-M leasing for Uch
II power expansion project. The
financing was endorsed at the bank’s
Board of Executive Directors meeting
chaired by IDB President.
The financing includes $167.2 M for
Reconstruction & Upgrading of M39
29

road in Surkhandarya region –
Uzbekistan, $136 M plus $10 M (under
terms and conditions of Jeddah
Declaration) plus $6 M Loan plus $45
M T.A. grant for Integrated
Community Driven Development
Phase-II Project – Indonesia, $140 M
for Padma Multipurpose Bridge
Project – Bangladesh, $80 M for
Algadarif Water Supply Project –
Sudan, $25.73 M plus $6.91 M
installment sale plus $3.40 M loan for
Development, Quality Improvement
of Semarang State University Project
- Indonesia., $15.13 M plus $13.64 M
installment sale for Construction and
Equipping of new Dental Care Project
- Turkmenistan.
(Daily Times – October 7, 2010)
Remittances up 13.5%
Remittances sent home by overseas
Pakistanis continued to show a rising
trend as an amount of $2.646 B was
received in the first quarter (July-
September) of the CFY, showing an
increase of $314.8 M or 13.5% over the
same period last FY.
The monthly average remittances for
the July-September 2010 period comes
to $882.10 M as compared to $777.17
M during the same corresponding
period of the last FY, registering an
increase of 13.5%.
In September 2010, an amount of
$922.06 M was sent home by overseas
Pakistanis, up 14.38% or $115.94 M,
as compared with $806.12 M received
in the same month last year.
(Business Recorder – October 12, 2010)
LSM up 3.05 % in CFY
Large Scale Manufacturing was up
Tracking Opportunity & Risk Related Developments
3.05% in the 1st month of CFY,
signaling the improving conditions in
this key sector of the economy.
The growth was seen in all the three
– OCAC, Ministry of Industries &
Provincial Bureau of Statistics –
indexes of LSM, which indicated an
across-the-board recovery in this
sector.
During the month of July 2010-11,
OCAC index posted 5.87%, which
otherwise remained under stress
throughout the past fiscal when it
recorded big falls in its production.
Ministry of Industries index registered
a 1.46% growth and provincial BoS
index was up 5.01%, Federal Bureau
of Statistics reported.
The breakup of different sectors shows
that in petroleum sector, motor spirits
production rose 11.49% high-speed
diesel 8.23% diesel oil 24.09%
lubricating oil 9.56% and solvent
naphtha 41.86%. The production of
jet fuel oil decreased 7.06% kerosene
oil 20.27% furnace oil 1.77% LPG
6.64% etc.
In Food group, vegetable oil
production moved up 2.40% cooking
oil 20.36% wheat & grain milling
6.05% starch & its products 17.18%.
The production of blended tea was
down 8.26 percent.
In automobile sector, production of
tractors was higher by 15.66%
trucks 14.29% jeeps & cars 45.09%
LCVs 29.12% and motorcycles
12.61%. The production of buses was
down 41.67%.
In electronics goods, production of
TV sets was up 26.31% refrigerators
38.05% whereas production of deep
freezers and air conditioners was
down 18.29% and 32.05% respectively.
Production of paper & board was
higher by 22.82% soda ash 12.83% and
pig iron 1.39%. Production of cement
was down 4.69% coke 18.63% and
glass plates & sheets 13.04%.
Production of cotton yarn and cotton
cloth dropped 12.94% and 3.09%
respectively.
(Daily Times – October 1, 2010)
Major trade boost
Jeans, slippers and truffles will be
among 900 M euros ($1.3 B) in
Pakistani goods allowed into the
European Union duty-free from next
year under EU plans for trade
assistance to the flood-hit country.
The scheme, unveiled will suspend
tariffs on 75 types of Pakistani-made
goods which account for about 27%
of exports to the EU, boosting sales
by about 100 M euros.
The move is meant to help Pakistan
recover from devastating floods and
maintain political stability. In parallel,
Islamabad has agreed to take back
illegal migrants returned by EU states.
Most of the trade concessions will be
on textile exports, though there will
be no tariff cuts on Pakistan's main
product - bed linen - because of EU
industry opposition.
"This proposal will offer a real boost
to Pakistan's economic recovery, while
at the same time taking into account
sensitivities of EU industries," EU
trade chief told reporters. The plan
30

foresees suspending tariffs for up to
three years, and will include
monitoring to ensure exporters from
other states do not try to smuggle their
wares into Europe via Pakistan to
avoid duties.
It must be approved by EU
governments, the European
Parliament and members of the World
Trade Organisation, including India,
Sri Lanka and Bangladesh, which
compete with Pakistan for textile sales
to Europe. EU officials said they hope
for full approval by January.
(Business Recorder – October 8, 2010)
NCEL grows 654% in Q1
Trading volumes at National
Commodity Exchange Limited
(NCEL) show a growth of 654% in the
1st Q of FY 2010-11, chairman NCEL
said.
During the first quarter (July-Sept) of
FY 2010-11 NCEL’s total traded
volume increased to Rs.51.76 B.
Total volume in the corresponding
quarter of last year was Rs.6.87 B and
in the previous quarter (Apr-June
2010), it was Rs.31.74 B. “This
represents a growth of 654% and 63%
respectively”, he said.
During September 2010, total volume
was more than Rs.25 B and average
daily volume was more than Rs.1 B –
each of them with record highs, he
added.
(Daily Times – October 09, 2010)
Over $100B flew out
The local capital and money markets
Tracking Opportunity & Risk Related Developments
have witnessed above $100 B capital
outflow from the country in the 1st
half of current calendar year 2010
amid fragile economy and lack of
investment opportunities.
Sources told that the phenomenon of
flight of capital has once again
appeared on the economic scene of
the country mainly because of
exchange rate depreciation, slowdown
in FDI, high external debt and political
instability, and reluctance of domestic
and foreign investors to invest into
the equity and real estate markets.
Sources said despite record-high
remittances and large foreign
exchange aid flow, the investors seem
unwilling to invest here and they have
been transferring their assets and
capital to foreign countries since the
beginning of this year. After Dubai,
Malaysia and Kuwait the said amount
of foreign exchange is being
transferred to Bangladesh, Canada
and Indonesia through various
channels.
Currently, these countries are new
destinations and safe heavens for the
investors due to providing many
initiatives and exemptions for the
investors with regard to investment
and regulatory environment.
(The Nation – October 13, 2010)
Pakistan, US sign $831 M partnership
agreement
US and Pakistan signed a five-year
partnership agreement under which
$831 M will be utilised on various
programmes in key sectors. While
addressing the signing ceremony,
Ambassador, US Co-ordinator for
Economic and Development
Assistance said that the agreement
was an important element in the
implementation of the Kerry-Lugar-
Berman Bill.
The allocation of $831 M is part of the
more than $1 B in development
assistance funds which US will
provide to USAID programmes in
Pakistan this year. "We will implement
our assistance in the most open,
transparent and accountable manner,
so that the people of Pakistan and of
the US know where the money is
going," said Ambassador.
The total amount of $831 M for this
agreement is divided as follows: Social
Sector Health $130,425,000; Education
$179,454,711; Economic Growth,
Economic Opportunity $144,000,762;
Agriculture $56,493,820; Energy
$44,825,000; Stabilization and
Humanitarian Assistance FATA
$111,264,712; and KPK $65,957,156.
(Business Recorder – October 1, 2010)
Investment of Rs.2 B
The British Oxygen, a noted
multinational group manufacturing
industrial and medical gases all over
the world including India,
Bangladesh, Singapore and Hong
Kong, has started construction in
Sunder Industrial Estate (SIE) on a
five-acre plot recently allotted to them.
This group is investing over Rs.2 B,
generating the employment
opportunities to nearly 2,000 workers.
31
 Tracking Opportunity & Risk Related Developments

This was stated by a spokesperson of Table: RISK & OPPORTUNITY TRENDS

Punjab Industrial Estates talking to a (Based on Current Developments)
group of Journalists here. It is SECTOR RISK OPPORTUNITY
worthwhile to mention that this
Textile
multinational company has over 53000
employees world over. The Oil
spokesperson added that this
multinational group would deal in Power / Energy
industrial gases, healthcare and Sugar
welding products. Through its core
business, (industrial gases), it will Cement / Construction / Steel
meet the significant and emerging Automotive
needs in the metal processing,
manufacturing / fabrication, Telecommunication
construction, chemicals and defense,
Other Industries
health care petro chemicals industries
etc. Agriculture
(The Nation – October 9, 2010)
Micro Business & SME
Export financing declined Financial Services

Financing under Export Finance Regulatory

Scheme for export promotion
witnessed a decline of Rs.12 B in the
first half of 2010, from its peak of
Rs.198 B in December 2009 to Rs.186
B at the end of June, 2010. The rising
mark-up rate of EFS may be a major
reason of decline in financing as the
following the directives of IMF to
rationalize the mark-up rates under
the EFS, SBP is gradually increasing
the mark up rates.
According to SBP, during the quarter
under review, the EFS outstanding
amount declined to Rs.186 B as on
June 30, 2010 as compared to Rs.193
B in March 2010. At the end of June
2010, EFS witnessed a decline of some
4%, or Rs.7.8 B, as compared to
preceding quarter, but grew by 5%
when compared to the same quarter
of last year 2009, in which outstanding
amount was Rs.177 B.
(Business Recorder – October 13, 2010)
Macro Environment
* Up Down
September trade deficit at $1.16 B
Pakistan's trade deficit widened to
$1.16 B in September from $911 M in
September last year, the Federal
Bureau of Statistics said. Exports stood
at $1.61 B in September this year,
against $1.50 B a year ago. Imports
were worth $2.78 B, compared with
$2.41 B in September last year.
The country's trade deficit for the first
three-months of the 2010/11 FY was
$3.85 B compared with $3.14 B in the
year-ago period.
(Business Recorder – October 10, 2010)
Increase in Services exports
Exports of services sector grew by
No Change
4.87% during the 1st 2 months of the
CFY against the same period of last
year. Overall services exports were
recorded at $589.089 M in July-August
(2010-11) against exports of $561.745
M during July-August (2009-10), data
provided by Federal Bureau of
Statistics reveals.
On the other hand, service imports
into the country also grew by 10.83
percent by going up from $1.043
billion in July-August (2009-10) to
$1.156 B during the same the 1st 2
months of CY, the data revealed. The
services trade deficit during the period
under review increased by 17.78%
when compared to the deficit of the
corresponding period of last year.
(Daily Times – October 20, 2010)

32

ACCELERATING GLOBAL
RISKS – SPECIAL
EXCERPTS
We continue to be in the midst of an
unprecedented global, financial and
economic, crises. Many are, however,
prone to contend that the “crises”
ended sometime in 2009. It didn’t.
And there is ample proof, and
support, in favor of this perspective.
The much orchestrated “recovery”,
courtesy of unprecedented bailouts,
has waned. The appetite for massive
new sovereign debt for the next set of
bailouts is fast reaching a breaking
point. Point in case is the specter of
the recent Greek default. As a result
there is widespread, and
unprecedented, uncertainty and
nervousness in the global marketplace.
The global economy is highly
unlikely to return to a sustainable
path of normalcy anytime soon. And
that too is likely to happen once the
next set of crises that are in the works
have run their course and resulted in
a global deflation (and in some places
stagflation) of historical proportions.
This is Economics 101 and the writing
is on all the walls. Yet most forecasters
seem to lose sight of this rather
obvious reality. Simon Johnson, the
ex Chief Economist for IMF offers an
insightful explanation: most (global)
economists aren’t forecasters any
longer; they’re market makers and
confidence builders. The pied pipers,
if you will.
There is growing evidence, and
analytics, in support of the case that
the worst is yet to come, economically
Tracking Opportunity & Risk Related Developments
and geo-politically, and set off global
domino triggered by the next acute
financial crises, that would
fundamentally start to alter the
global power equations, create
economic and political strife and lead
to radically new geo-political
realities.
So keeping in mind the gravity, and
uniqueness, of the current global
situation, a case is being made, in
this month’s Tracker, based on new
extracts from a wide array of credible
and reputable publications, for the
key developing scenarios that were
highlighted as key risks in our
Outlook 2009-10 (of August 2009).
These developing scenarios have been
clubbed under the following heads:
• (Prospects of) Global
Deflation,
• (Outlook for a) US-sovereign
debt crises
• US Dollar-Euro crises & the
rise of an alternative reserve
currency (Consequent or
Concurrent to the Debt
Crises)
• Rapid strategic divergence
primarily between US on the
one hand, and China, Russia,
(followed by Turkey, Japan,
Brazil) on the other hand
• A new US driven mid-east
war targeting Iran
• The “Af-Pak” theater and the
US/NATO “end game”
All of these scenarios are work-in
process and have deep and profound
implications for Pakistan, its
economy and the whole array of
industries. Suffice to say that within
these scenarios are embedded
considerable threats as well as
enormous opportunities for growth and
strengthening.
GLOBAL DEFLATION
IMF ADMITS THAT THE WEST IS
STUCK IN NEAR DEPRESSION
Telegraph, By Ambrose Evans-Pritchard
October 3, 2010
If you strip away the political
correctness, Chapter Three of the
IMF's World Economic Outlook
more or less condemns Southern
Europe to death by slow suffocation
and leaves little doubt that fiscal
tightening will trap North Europe,
Britain and America in slump for a
long time.
TRAPPED IN THE SPIRAL OF BASEL
III. TIGHTENING THE NOOSE ON
CREDIT SPELLS DISASTER
Global Research, by Dr. Ellen Brown
September 18, 2010
…Two years after the 2008 bailout,
the economy continues to struggle
with a lack of credit, the hallmark
33

of recessions and depressions. Credit
is issued by banks and is the source
of virtually all money today. When
credit is not available, there is
insufficient money to buy goods or
pay salaries, so workers get laid off
and businesses shut down, in a vicious
spiral of debt and depression. …We
are still trapped in that spiral today,
despite massive “quantitative
easing” (essentially money-printing)
by the Federal Reserve. The money
supply has continued to shrink in
2010 at an alarming rate. In an article
in The Financial Times titled “US
Money Supply Plunges at 1930s Pace
as Obama Eyes Fresh Stimulus,”
Ambrose Evans-Pritchard quoted
Professor Tim Congdon from
International Monetary Research, who
warned: “The plunge in M3 [the
largest measure of the money supply]
has no precedent since the Great
Depression. The dominant reason
for this is that regulators across the
world are pressing banks to raise
capital asset ratios and to shrink their
risk assets. This is why the US is not
recovering properly.”
Juan Jose Toribio, former executive
director at the IMF and now dean of
IESE Business School in Madrid, said
the (new Basel) rules could hamper
the fragile recovery. “‘These are
regulations and burdens on bank
results that only make sense in times
of monetary and credit expansion,’ he
said.”
FED MULLS TRILLION-DOLLAR
POLICY QUESTION
CNBC - September 20, 2010
How much of a boost to the U.S.
recovery could another trillion
Tracking Opportunity & Risk Related Developments
dollars or two buy? That's a tricky
question for the Federal Reserve…At
the Fed's August meeting it decided
to reinvest maturing mortgage-debt
in Treasuries to keep its balance
sheet steady, a move many analysts
saw as a precursor to more
easing….Some policymakers worry
that more easing could fuel market
imbalances or sow the seeds of sky-
high inflation ahead. There is also
the risk that the Fed spooks investors.
WHY MOST ECONOMISTS ARE NOT
HOPEFUL ABOUT "QUANTITATIVE
EASING,"
Slate, By Annie Lowrey
October 20, 2010
The U.S. economy's biggest problem,
businesses and policymakers agree,
is widespread lack of demand. If only
people and companies would buy
more stuff, the theory goes—a car, an
office park, a forklift—then the stores
and companies that make and sell that
stuff would hire more workers, who
would then spend more money, and
just like that (or almost)—economic
growth….So the Fed is turning to a
policy known as "quantitative
easing." Essentially, the Fed is using
its license to print money. On Nov.
3, the markets expect the Fed to
announce that it has decided to create
somewhere between $500 billion and
$1.2 trillion that it will then spend to
help goose economic growth. Rather
than buying space in office parks or
forklifts, though, the Fed—which
purchases only government-backed
assets, like bonds—will probably
pick up long-term Treasury debt. The
strategy has been termed "QE2"
because it is the second time the Fed
has used this arcane monetary policy
tool….The problem is that the
strategy is indirect. The Fed cannot
just buy up goods and services, so it
is trying to convince investors to invest
and banks to lend more, creating more
economic activity. And many
prominent economists, ranging from
the wonks at the libertarian Cato
Institute to liberal Nobel-winner Joe
Stiglitz, are skeptical. Even Fed
Chairman Ben Bernanke sounds
uncertain. "Monetary policymaking
in an era of low inflation has not
proved to be entirely straightforward,"
he sighed in a speech earlier this
month.
WHY NO AMOUNT OF STIMULUS
MONEY WILL BE ENOUGH
Salon, By Robert Reich,
September 21, 2010
Consumers are 70 percent of the
economy, and they're in no rush to
spend. Fiscal policy is deadlocked.
So, apparently, is monetary
policy….Every indicator suggests
third-quarter growth will be as slow
if not slower than in the second
quarter. Consumer confidence is
down. Retail sales are down.
Housing sales are down. Commercial
real estate is in trouble. A growth
rate of 1.6 percent means even higher
unemployment ahead. Maybe we’re
not in a double-dip but we might as
well be in one. Growth this slow is
the equivalent of heading downward
relative to the growth needed to get
us out of the hole we’re in….
34

Ultimately, even if fiscal and monetary
policy weren’t deadlocked, we’d still
face the same conundrum. Say the
White House and Ben Bernanke got
everything they wanted to boost the
economy. At some point these boosts
would have to end and the economy
would have to be able to run on its
own. But it can’t run on its own
because consumers have reached the
end of their ropes. After three decades
of flat wages during which almost all
the gains of growth have gone to the
very top, the middle class no longer
has the buying power to keep the
economy going….Anyone who
thinks China will get us out of this
fix and make up for the shortfall in
demand is blind to reality.
CENTRAL BANKS EMBRACE RISKY
CURRENCY GAMBIT
Barron’s (WSJ), By Randall W. Forsyth
September 17, 2010
First, interest rates were slashed by
central banks in reaction to the credit
crisis of 2008. Then, they ballooned
their balance sheets with massive
bond purchases in what
euphemistically was called
"quantitative easing." Now, with
short-term interest rates in most
Tracking Opportunity & Risk Related Developments
economies at or near zero percent,
central banks have run out of basis
points, the main weapon in their
arsenal. Moreover, their QE has had
far less than the expected impact.
Having run out of conventional
options of lowering short-term interest
rates and getting less from their
relatively unconventional tool of
buying bonds to bring down long-
term rates, central bankers are
utilizing their next option—currency
intervention….Having the world's
reserve currency gives the U.S. the
advantage in this race to the bottom.
But the destruction of the world's
reserve currency threatens to end the
Era of Globalization… US: 86.5% (including GSE
SOVEREIGN & US DEBT
CRISES
SHOULD US GOVERNMENT DEBT BE
RATED JUNK?
Fortune, By Daryl G. Jones,
September 3, 2010
…Typically, a bond receives junk
status due to its increased risk of
default, and therefore pays higher
yields to the owners of the bonds to
make up for the risk. In general, the
owner of a bond is subject to many
risks: interest rate risk, inflationary
risks, currency risk, duration risk, and
so forth. In this instance, as it relates
to the United States, we are actually
most concerned with the risk related
to future repayment. Specifically, with
projected deficits for at least the next
fifty years, will the United States be
able to repay its debt and, if so, on
what terms?
The most newsworthy nation to
currently be rated junk status is
Greece….the key ratios from which
we use to analyze a nation appear
very similar between the United States
and Greece, despite their divergent
credit ratings. Specifically, the key
ratios are: debt as percentage of GDP,
deficit as a percentage of GDP, and
debt as a percentage of revenue. We've
outlined a comparative analysis
between a typical junk-rated sovereign
issues, in this case Greece, and the
United States.
DEFICIT AS % OF GDP:
US: 10.4%, Greece: 13.6%.
DEBT AS % OF GDP:
debt: 121.6%), Greece: 115.1%.
DEBT AS % OF REVENUE:
US: 358.1%, Greece: 312.2%.
On two of the ratios, the United States
appears to do better than Greece,
which is certainly a positive, but if we
include the debt of government
sponsored entities, or GSEs, the United
States actually has a worse ratio than
Greece…Specifically, is it expected
that the nation will be running future
deficits, which require incremental
debt funding? If so, our policymakers
may have to implement policies
designed to narrow this funding gap,
typically known as austerity
measures….(however) United States
has been running a deficit for 22
straight months. When normalizing
for TARP, which we consider a 1-time
expenditure, spending for the
first 10 months of the government's
fiscal year is up an astonishing 10.4%.
Despite this, the U.S. government
has not taken any aggressive
austerity measures to attempt
35

to narrow the current and projected
deficits. In contrast, most European
nations have taken aggressive actions
on both the revenue -- increasing taxes
-- and cost sides -- reducing
government expenditures -- to get
their fiscal houses in order….The
result of the actions in Europe are that,
in theory, future deficits should shrink
and debt balances eventually decline.
In contrast, under our current course,
U.S. deficits will expand for decades.
So, should U.S. government debt be
downgraded to junk status? If we
simply look at the ratios and the
future outlook, the answer is quite
obvious. (Yes)
CHINA'S CREDIT RATING AGENCY
DAGONG DOWNGRADES U.S. DEBT
RATING
The Washington Times, By James A. Bacon
September 2, 2010
The big three credit-rating agencies
that totally missed the meltdown of
the subprime mortgage market -
Moody's, Standard & Poor's and Fitch
- still give the United States a AAA
credit rating. But there's a newcomer
in the credit-rating game - Dagong
Global Credit Rating - which has a
Tracking Opportunity & Risk Related Developments
very different view of the strength of
U.S. finances.
Beijing-headquartered Dagong, the
dominant credit agency in China, is
pushing into international markets.
This summer, it rated the sovereign
debt of 50 nations making up 90
percent of the world's economy. While
Americans still tend to regard U.S.
Treasuries as the "safest investment
in the world," Dagong gave our debt
a mere AA - lower than that of 11
other countries (including China,
which it awarded an AA+). To add
insult to injury, the firm declared the
U.S. outlook to be "negative."
Dagong has set off something of a
hissy fit in the credit-rating world.
"The Western rating agencies are
politicized and highly ideological,
and they do not adhere to objective
standards," Chairman Guan
Jianzhong told the Financial Times
in July. The company also accused
U.S. agencies, which share an
oligopoly enforced by government
fiat, of contributing to the 2007-08
financial crisis by applying the
coveted AAA rating to loads of junk
subprime mortgage debt.
…We can debate forever whether the
U.S. agencies employ more analytical
rigor in the rating of their sovereign
debt than Dagong, but let's be clear
about one thing: Dagong is not a
chump outfit. The company boasts of
more than 500 employees, including
more than 200 analysts with master's
degrees or doctorates and 50 with
postdoctorates. The Chinese finance
ministry has directed the company to
"participate in the construction
of [the] Asian bond market." If for no
other reason, Dagong's appraisal of
U.S. debt is worth heeding because it
influences the thinking of the Chinese
government and those in charge of
investing surplus Chinese capital. As
long as China remains the No. 1 owner
of U.S. Treasury securities, the
opinions of the Chinese matter -
whether we like them or not.
VOLCKER: "THE FINANCIAL SYSTEM
IS BROKEN"
Global Research,
October 3, 2010
Paul Volcker (ex Federal Reserve
Chairman) spoke at the Chicago
Federal Reserve Bank on September
23rd, as part of a symposium co-
sponsored by the IMF. He said: “The
financial system is broken. We could
use that term in late 2008, and I think
it’s fair to still use the term
unfortunately. We know that parts of
it are absolutely broken, like the
mortgage market which only happens
to be the most important part of our
capital markets [and has] become a
subsidiary of the U.S. government.”
Volcker is right that the mortgage
market has become a subsidiary
36

of Uncle Sam. And it is ironic that
government-owned GSEs Freddie and
Fannie are shareholders of MERS -
one of the main sources of mortgage
fraud in the country. …Volcker also
said: “I don't think anyone doubts that
the underlying problem in the markets
is the too big to fail syndrome, and
the bailouts...”
BANKS FACE A TWO-FRONT WAR
ON MORTGAGES, FORECLOSURES
Bloomberg, By John Gittelsohn and Jody Shenn
Oct 21, 2010
Shoddy mortgage lending has led
bankers into a two-front war, pitting
them against U.S. homeowners
challenging the right to foreclose and
mortgage-bond investors demanding
refunds that could approach $200
billion. While federal regulators and
state attorneys general have focused
on flawed foreclosures, a bigger
threat may be the cost to buy back
faulty loans that banks bundled into
securities….The biggest risks for
banks may be loans packaged into
mortgage-backed securities during
the housing bubble, of which $1.3
trillion remain. The aggrieved
bondholders include government-
controlled firms Fannie Mae and
Freddie Mac, bond insurers and
private investors….“It’s troubling that
the people who caused the problem
have walked away and left everybody
else to fight over who gets stuck with
the tab,” Eggert said in a telephone
interview. “It’s like a massive game
of dine and dash.”
Tracking Opportunity & Risk Related Developments
BANKS CLUELESS ON
FORECLOSURE MESS SEVERITY
Bloomberg, By Jonathan Weil
October 20, 2010
The biggest U.S. mortgage lenders
and servicers say they’re putting the
foreclosure mess behind them, and
that it never was a major problem.
The reality is these companies are so
big and unmanageable, the people in
charge of running them have no way
to know if that is true. One thing that
remains unknowable is how many
flawed home- mortgage records and
foreclosure proceedings are out there
waiting to be unearthed. Dozens of
federal and state agencies are
investigating. It’s anyone’s guess what
they might turn up….The banks have
only themselves to blame for the fix
they’re in. Three years ago, as the
subprime mortgage crisis began to
spiral, one of the lessons the public
should have learned is that the
leaders of these companies often
have no idea what’s going on inside
them. We may be witnessing the
same phenomenon again. There’s no
excuse this time for anyone to be
surprised.
BASEL III: THE GLOBAL BANKS AT
THE EDGE OF THE PRECIPICE.
Global Research, by Matthias Chang
September 20, 2010
The global Too Big To Fail banks are
so precarious that literally anything
can trigger a collapse in the coming
months. Reading the commentaries
on Basel III posted to various
renowned websites and financial
publications, but they missed (or
deliberately misled) the underlying
message of the proposals, the
implementation of which will be
delayed till 2017 and some till 2019.
Basel III is pure spin and its timing
was to assuage the deep-seated fears
that there are no solutions in sight
to save the fiat money system and
fractional reserve banking.
The major global banks are all under-
capitalized and this was all too
apparent when Lehman Bros.
collapsed. Banks were borrowing so
much and so recklessly to play at the
global casino that when the bets went
sour, they were staring at a black-hole
in the trillions. In fact the banks are
all insolvent. The problem was
compounded when the central
bankers…turned a blind eye to how
bankers defined what constituted
“capital” so as to circumvent the need
to maintain the capital ratio.…If the
banks were at all adequately
capitalized and the central bankers
were prevented from manipulations,
there would not be any need for
Basel III regulations….The simple
truth is that as long as the derivative
casino is still running and banks are
allowed to continue their off balance
sheet activities, nothing will be
resolved. How can the ultimate
capital requirement of 8 percent be
adequate when leverage under Basel
III is still allowed at the astronomical
rate of 33:1?....and it is a no brainer to
conclude that the banking crisis (if we
are lucky) may be “resolved” by 2015
but it is most likely that it can be only
resolved by 2017/2018 . This is an
express admission that all banks
would require such a long transition
37

period to comply with the new
requirements! The stark reality is that
the Too Big To Fail Banks do not
have the ability and or the means to
raise capital at this critical juncture.
To use an analogy, the banking patient
will be in Intensive Care until 2017,
which is rather optimistic for the
projection implies that the patient may
be able to recover. It is my view that
Basel III is pure spin and is intended
to convey the impression that the
central bankers and regulators have
things under control.
…At this moment, I cannot give a
precise time-line as to how long the
FED and the global central banks
can prolong the confidence game,
hoodwinking the public and
sovereign creditors that all is well.
When confidence in banks
evaporates for whatever reasons, the
consequences will be ugly and there
will be massive social upheavals
across the globe. The first indication
that the game is up is when US
treasuries are increasingly purchased
by the FED to make up for the
shortfalls by foreign creditors and to
finance the ballooning US deficits.
All of a sudden, some entities may
start to get real nervous and unload
the treasuries, and the FED steps in
to shore up treasuries. Then, the
tipping point is reached and all hell
breaks loose!
...Time Line? Between now and
anytime in 2011.At the latest, 2012.
Tracking Opportunity & Risk Related Developments
EURO WILL UNRAVEL, AND SOON
American Enterprise Institute, By Desmond
Lachman, September 2010
The outbreak of a sovereign-debt
crisis in the euro zone’s peripheral
economies has been among the more
important developments in the global
economy in 2010. Sadly, this crisis
will likely intensify in the months
ahead as markets increasingly focus
on the intractable solvency and
competitiveness issues confronting
countries like Greece, Portugal, Spain,
and Ireland. Such intensification will
affect Europe's already-troubled
banking system, seriously threatening
both the European and the global
economic recovery.
…European policymakers fully
understand that a default in any
peripheral eurozone country would
likely trigger contagion to the other
peripheral members. They also
understand that a series of defaults
in the eurozone's periphery would
have devastating consequences for
the European banking system. After
all, the combined sovereign debt of
Greece, Spain, Portugal, and
Ireland is around US$2 trillion, and
a major part of that debt sits on the
European banks' balance sheets. The
Bank for International Settlements
estimates that the French banks are
particularly exposed to the troubles
in the peripheral countries, since they
have lent the equivalent of 37 percent
of France's GDP to those countries.
….The eurozone's sovereign-debt
crisis casts a pall over today's already-
fragile global economic outlook, since
the recessions of the European
peripheral countries will likely deepen
considerably in the year ahead as they
attempt to undertake major fiscal
adjustment programs without the
benefit of currency depreciations. Such
deepening will undermine their public
finances by eroding their tax bases
and will raise questions about their
ability to service their sovereign debt,
which in turn will call into question
the health of the European banking
system. The more immediate threat
to the continuation of the eurozone in
its present form is the possible loss of
political willingness in Europe's
periphery to continue hewing to IMF-
style austerity measures. At some
point, as the recession deepens and
unemployment rises with no end in
sight, serious questions may arise in
the periphery as to whether these
countries would not be better served
by restructuring their debt and
exiting the euro. This is essentially
what happened in Argentina in 2001
after several years of painful and not
very fruitful austerity measures.
There is little reason to expect a
38

different outcome in the eurozone's
peripheral countries, whose
economic imbalances are far greater
than Argentina's were.
US CURRENCY CRISES -
DOLLAR CRISES - AN
ALTERNATIVE RESERVE
CURRENCY
(Consequent or Concurrent to the Debt Crises)
CHINA FEARS DEPRECIATION OF
$2.45 TRILLION OF RESERVES STILL
HEAVY IN DOLLARS
Telegraph, By Angela Monaghan
September 3, 2010
The Chinese Government holds the
largest stockpile of currency reserves
at $2.45 trillion (£1.59 trillion), with
65pc held in dollars, 26pc in euros,
5pc in pounds, and 3pc in yen. The
report was published in official
newspaper the China Securities
Journal and confirmed analysts'
estimates that about two-thirds of the
reserves are invested in dollars. Until
now the allocation of China's foreign
exchange reserves was considered a
state secret.
Separately Hu Xiaolian, a vice
governor with the People's Bank of
China, warned that depreciation was
a risk for the foreign exchange
reserves held by developing
countries. "Once a reserve currency's
value becomes unstable, there will
be quite large depreciation risks for
assets," she wrote in an article that
appeared in the latest issue of
China Finance, a central bank
magazine. "The outbreak and
spread of the global financial crisis
has highlighted the inherent
Tracking Opportunity & Risk Related Developments
deficiencies and systemic risks in the
current international currency
system," she said. "A diversified
international currency system will
be more conducive to international
economic and financial stability,"
she added, calling for greater cross-
border use of the yuan.
China has signalled a shift away from
dollar assets in recent months, in a
bid to diversify. It has sharply
increased its net purchases of Japanese
debt, and has raised its holdings of
South Korean bonds.
AMERICA CANNOT WIN THE
CURRENCY WARS ALONE
Financial Times, By Arvind Subramanian
October 20 2010
How ironic that the world’s reserve
currency issuer (the US) and its long-
term rival to that status (China) are
competing to nearly debauch their
own currencies? America’s behaviour
– more effect than intent – takes the
form of quantitative easing. China’s
takes the form of not letting its
currency strengthen (which makes
the recent monetary tightening
deflationary for others).
….US unilateralism runs into two
difficulties, internal and external.
Domestically, America is divided.
At a time of high unemployment,
labour groups seek strong action
against the undervalued renminbi.
But US companies are ambivalent
because capital is mobile and
can escape the effects of the
undervaluation.
The external problem is China’s
possible retaliation. Chinese threats
of dumping US Treasury bonds are
perhaps overstated. Why would they
take action that would result in the
very outcome – dollar decline – that
China has worked to avoid? But other
retaliatory options could hurt. China
could leverage its economic status as
a large buyer of goods and services
(commercial and defense) to hurt
American businesses and jobs. It could
withhold co-operation on North Korea
and Iran.
Multilateralism – with a more
prominent role for emerging market
countries – is essential now to prevent
competitive currency debauchery by
China and the US from blowing up
the system.
YUAN WILL BECOME RESERVE
CURRENCY, HONG KONG
EXCHANGE HEAD SAYS
Bloomberg News
September 20, 2010
China’s yuan will gradually become
a reserve currency….Charles Li, the
chief executive officer of Hong Kong’s
stock exchange, said in a commentary
on the exchange’s website today.
39

SWIMMING AGAINST THE MASTER
CURRENCY CURRENT
Sydney Morning Herald , by Barry
Eichengreen, professor of economics at the
University of California, Berkeley.
October 19, 2010
THE competition for reserve-currency
status is conventionally portrayed as
a winner-take-all game, where there
is room for just one full-fledged
international currency. The only
question is, which one?....the US
dollar, euro, and yuan will share the
roles of invoicing currency, settlement
currency, and reserve currency in
coming years. To be sure, all three
currencies have their critics.
Willingness to hold the US dollar may
be undercut by concern with
America's twin fiscal and external
deficits. Uncertainty about whether
the European Union will hold together
could limit the use of the euro. And,
although China is aggressively
promoting international use of the
yuan in trade settlements, it has a
way to go before its currency is
attractive as a vehicle for foreign
investment and holding reserves.
CHINESE YUAN: NEXT WORLD
RESERVE CURRENCY?
The Daily Reckoning, by Chuck Butler
October 10, 2010
….China was gaining a wider
acceptance of their currency and
removing the dollar from trading
agreements… Well, Ty showed me a
story from The Wall Street Journal
about how Turkey and China had
signed a trade agreement that would,
from now on, only use their currencies
in the trade, thus excluding the
Tracking Opportunity & Risk Related Developments
dollar. Let’s see now… China has
signed up almost all of Asia, Belarus,
Argentina, Brazil and now Turkey… by securing resources and access to
All of these countries only use their
currencies in trade, and no longer
need dollars…Let me make certain
that you understand what’s
happening, folks… The Chinese are
taking steps to become the next
reserve currency… And when that
happens, things here in the US will
change drastically… Just ask anyone
who lived in the UK after WWII, when
the sterling was no longer the world’s
reserve currency… Don’t blame the
Chinese, either… The Chinese are
only doing this to protect themselves
from all their exposure to the dollar.
The US has brought this on with all
its deficit spending. And you could
sprinkle in protectionism measures
and a host of other things that have
built up against the dollar in the past
decade, like bubbles, corporate
scandals, etc.
STRATEGIC DIVERGENCE
- US VS CHINA / RUSSIA /
OTHERS
CHINA AS A SUPERPOWER
Korea Times, By Joschka Fischer Germany’s
foreign minister and vice chancellor from 1998
until 2005.
October 4, 2010
Given its rapid and successful
development, there can be no doubt
that the People’s Republic of China
will become one of the dominant
global powers (soon). Indeed, despite
the massive problems that the country
is confronting, it could even emerge
as the global power. … In foreign-
policy terms, China will attempt to
protect its domestic transformation
foreign markets.
CHINA IN THE DRIVER'S SEAT
The Nation, Robert Dreyfuss
September 2, 2010
"We have to recognize that China is
the first real economic competitor
that has ever threatened America's
standing as the global economic
superpower." Few would argue that
the rise of China has world-altering
significance….Along with China's
growing economic power comes an
inevitable corollary: China's eventual
emergence as a political and military
power wielding its influence from
East Asia to the Pacific, the Indian
Ocean, the Middle East, Africa and
beyond. …“America has to adjust."
But America doesn't adjust well. It's
hard to imagine a US politician
making the case that Washington
should pull back from its
overextended posture in Asia and the
Pacific or cede an expanded presence
to China. Only this summer, the
Obama administration started
laying bricks in a Great Wall of
Containment around China by
mending ties with a brutal Indonesian
special forces unit and taking sides
against China in a potentially
dangerous dispute over Beijing's
claim to a string of islands in the
South China Sea. "It would be
disastrous for progressives to provide
fodder for the military-industrial
complex by demonizing China," says
Michael Klare, author of Rising
Powers, Shrinking Planet. "There are
40

very powerful interests in
Washington who want to set us on a
path of confrontation."
In particular, the issue of Taiwan is
a flash point, and if relations
between Beijing and Washington
spiral downward, a conflagration
between the two nuclear powers
could erupt over the Chinese island.
…"It isn't just China's rise, which is
tectonic, but it's our own financial,
political and cultural collapse that is
cause for even more consternation,"
says Orville Schell. "We need to find
ways to accommodate China, and to
influence it. And it's not a foregone
conclusion that it will be easy, or
even peaceable."
CHINA EXPANDS NUKE PLANS,
LEAVES INDIA IN SHADE
Hindustan Times
September 21, 2010
China’s largest nuclear power
company, which revealed plans to
build a one-gigawatt nuclear power
plant in Pakistan on Monday, has set
targets to invest $117.6 billion in
nuclear projects by 2020. …CNNC is
completing a second civilian nuclear
reactor in Pakistan’s Chashma and
plans to build two more. A news
report quoted CNNC vice president
Qiu Jiangang saying that ‘both sides
are in discussions over CNNC
exporting a one-gigawatt nuclear plant
to Pakistan’. China’s civilian nuclear
investments in Pakistan have raised
strategic concerns in the US and
India.
Tracking Opportunity & Risk Related Developments
ATOM BODY SHOULD ADDRESS
CHINA-PAKISTAN DEAL--U.S.
Reuters,
September 22, 2010
China-Pakistan nuclear ties worry U.S., India.
China may not seek approval of Nuclear
Suppliers Group
A senior U.S. official suggested on
Wednesday the 46-nation Nuclear
Suppliers Group (NSG) should
address Chinese plans to build two
new reactors in Pakistan, one of the
few countries outside a global anti-
nuclear weapons pact. The comments
by Thomas D'Agostino, U.S. Under
Secretary for Nuclear Security, came
a day after China indicated it may
see no need to seek approval from
the NSG, some of whose members
have voiced qualms about the plan
to build two new reactors at
Pakistan's Chasma nuclear energy
complex.
China's Foreign Ministry said on
Tuesday Beijing had invited the IAEA
to "exercise safeguards and oversight
of this project."
REJUVENATING US-INDIA
STRATEGIC PARTNERSHIP
Times of India, by Richard Fontaine,
Oct 22, 2010
In 1998, then-Prime Minister Atal
Bihari Vajpayee asserted that India
and the United States were "natural
allies in the quest for a better future
for the world in the 21st century".
Twelve years later, despite an array
of promising advances over the past
decade, the relationship between
Washington and New Delhi is falling
short of its full potential. President
Barack Obama's upcoming trip to
India provides an opportunity
to jumpstart progress toward
defining a true US-India strategic
partnership…
TURKEY AND RUSSIA DEFY
AMERICA'S IMPERIAL DESIGN IN
THE MIDDLE EAST AND CENTRAL
ASIA
Al-Ahram Weekly, Eric Walberg
October 1, 2010
The new Ottomans and the new
Byzantines are poised for an intercept
as the US stumbles in the current
Great Game. The neocon plan to
transform the Middle East and
Central Asia into a pliant client of
the US empire and its only-
democracy-in-the-Middle-East is
now facing a very different playing
field. Not only are the wars against
the Palestinians, Afghans and Iraqis
floundering, but they have set in
motion unforeseen moves by all the
regional players.
The empire faces a resurgent Turkey,
…As part of a dynamic diplomatic
outreach under the Justice and
Development Party (AKP), Turkey re-
established the Caliphate era visa-free
tradition with Albania, Jordan,
Lebanon, Libya and Syria last year.
In February Turkish Culture and
Tourism Minister Ertugrul Gunay
offered to do likewise with Egypt.
There is “a great new plan of creating
a Middle East Union as a regional
equivalent of the European Union”
with Turkey, fresh from a
resounding constitutional
referendum win by the AKP, writes
Israel Shamir.
41

Turkey also established a strategic
partnership with Russia during the
past two years, with a visa-free
regime and ambitious trade and
investment plans (denominated in
rubles and lira), including the
construction of new pipelines and
nuclear energy facilities.
In a delicious irony, invasions by the
US and Israel in the Middle East and
Eurasia have not cowed the countries
affected, but emboldened them to
work together, creating the basis for
a new alignment of forces, including
Russia, Turkey, Syria and Iran….This
is the natural regional geopolitical
logic, not the artificial one imposed
over the past 150 years by the British
and now US empires….Turkey's bold
move with Brazil to defuse the West's
stand-off with Iran caught the
world's imagination in May. Its
defiance of Israel after the Israeli
attack on the Peace Flotilla trying to
break the siege of Gaza in June made
it the darling of the Arab world.
TURKEY-CHINA MILITARY DRILL
REVEALS DEEPENING TIES,
WIDENING REACH
World Politics Review, by Mehmet Ozkan
22 Oct 2010
The news that Turkey and China had
organized a joint military exercise at
the huge Konya airbase in Turkey's
central Anatolian region last month
came as a surprise to many. … What
explains such a dramatic
improvement in relations between
Turkey and China? And how should
this military exercise be understood
Tracking Opportunity & Risk Related Developments
in the context of the current shifts
taking place in global power
politics?...ties between the two
countries have been deepening since
former Chinese President Jiang
Zemin's visit to Turkey in April 2000
opened a new chapter in bilateral
relations. At that time, the two
countries signed several agreements
(and)… Since then, Turkey has never
officially supported the Uighur
separatist movement, which has
historically been the main obstacle in
Turkey-China relations….
IS RUSSIA PLAYING THE "CHINA
CARD"?
Asia Times, By M K Bhadrakumar
October 2, 2010
…What emerges is that the trajectory
of Russia-China cooperation is
beginning to substantially impact on
the Western countries' core interests,
and the latter cannot but aspire to
try to deflect it. The US reset with
Russia already has an unobtrusive
objective of incrementally eroding the
Russia-China strategic understanding
so as to isolate China, especially in
Central Asia and Afghanistan.
How Russia and China safeguard
their growing strategic partnership
from Western pressures will become
clearer in the coming period. But
safeguard it they will. For Russia,
strengthening its partnership with
China gains it more strategic space,
since it concurrently acquires the
leverage to compel the West to
negotiate with it. Looking at it
another way, the growing strategic
partnership with China enhances
Russia's capacity to withstand
Western pressures.
….This brings us to the threshold of
a tantalizing prospect: is the great
game over Caspian oil withering
away? How relevant are US-Russia
energy rivalries with the appearance
of China in the equation as an energy
guzzler that can keep buying all that
Russia can supply? This is a new ball
game, so to speak, where from the
US angle the great game is no longer
about driving a wedge between
Russia and Western Europe. Instead,
it will be about offering incentives
to Russia to hold it back from
diversifying away from Western
energy markets towards China.
What all this adds up to is that Russia
is practicing its own version of a reset
with the US, just as the latter has
been doing with Russia. Medvedev's
visit to China underlines
emphatically that Moscow will be
loath to allow the Russia-China
strategic partnership to be eroded by
its reset with the US. With this in
mind, there is immense geopolitical
significance to the fact that Russia
has appeared by China's side over
the current tensions in the Asia-
Pacific region involving Japan.
CHINA: ENERGY SUPERPOWER
Asia Times
By Michael T Klare
Michael T Klare is a professor of peace
and world security studies at Hampshire
College and the author, most recently, of
Rising Powers, Shrinking Planet. His
previous book, Blood and Oil, was made
42

into a documentary film and is available
at www.bloodandoilmovie.com. To catch
Klare discussing China's energy
superpowerdom on Timothy MacBain's
latest TomCast audio interview, click here
or, to download it to your iPod, here.
If you want to know which way the
global wind is blowing (or the sun
shining or the coal burning), watch
China. That's the news for our energy
future and for the future of great-
power politics on planet Earth.
Washington is already watching -
with anxiety.
Rarely has a simple press interview
said more about the global power
shifts taking place in our world. On
July 20, the chief economist of the
International Energy Agency (IEA),
Fatih Birol, told the Wall Street Journal
that China had overtaken the United
States to become the world's number
one energy consumer. … by
becoming the world's leading energy
consumer, China will also become
an ever more dominant international
actor and so set the pace in shaping
our global future.
Because energy is tied to so many
aspects of the global economy, and
because doubts are growing about
the future availability of oil and other
vital fuels, the decisions China
makes regarding its energy portfolio
will have far-reaching consequences.
At present, China obtains most of its
imported oil from Saudi Arabia, Iran,
Angola, Oman, Sudan, Kuwait,
Russia, Kazakhstan, Libya, and
Venezuela. Eager to ensure the
Tracking Opportunity & Risk Related Developments
reliability of the oil flow from these
countries, Beijing has established close
ties with their leaders, in some cases
providing them with significant
economic and military assistance. This
is exactly the path once taken by
Washington - and with some of the
same countries.
China's state-controlled energy firms
have also forged "strategic
partnerships" with counterpart
enterprises in these countries and in
some cases acquired the right to
develop major oil deposits as well.
Especially striking has been the way
Beijing has sought to undercut US
influence in Saudi Arabia and with
other crucial Persian Gulf oil
producers.
In 2009, China for the first time
imported more Saudi oil than the
US, a geopolitical shift of great
significance given the history of US-
Saudi relations. Although not
competing with Washington when it
comes to military aid, Beijing has been
dispatching its top leaders to woo
Riyadh, promising to support Saudi
aspirations without employing the
human rights or pro-democracy
rhetoric usually associated with
American foreign policy.
At this point, only one thing is clear:
the greater China's reliance on
imported petroleum, the greater the
risk of friction and conflict with the
United States… rightful place.
CHINA MAKES ITS NORTH KOREA
MOVE
Asia Times, Peter Lee
September 2, 2010
A long handshake between President
Hu Jintao and Kim Jong-il in Jilin
province explicitly placed China's
Korean Peninsula eggs in the North's
basket. The idea that Beijing will
acquiesce to the collapse of the
Pyongyang regime and reunification
under the aegis of South Korea is a
discounted commodity. China called
South Korea's bluff - and the United
States is ill-equipped to respond. -
RISING CHINA TESTS THE WATERS
Asia Times, Abraham M Denmark and Daniel
M Kliman
Aug 19, '10
Beijing views the South China Sea as
a leading indicator of how the
international community will respond
to China's growing power and
assertiveness. An anemic international
reaction will embolden Beijing, not
only in the South China Sea, but
elsewhere as well. The United States
should insist on open access. -
DEEP REASONS FOR CHINA AND US
TO BRISTLE
Asia Times, Jingdong Yuan
Aug 19, '10
Bristling over territorial disputes in
the South China Sea fits American
concerns that China is deliberately
nudging the US out of East Asia at a
time it is trying to reassert its
primacy. Tensions are also high on
most fronts associated with China's
attempt to reclaim what it sees as its
WHILE U.S. IS DISTRACTED, CHINA
DEVELOPS SEA POWER
Washington Post, By Robert D. Kaplan
September 26, 2010
The greatest geopolitical development
43

that has occurred largely beneath the
radar of our Middle East-focused
media over the past decade has been
the rise of Chinese sea power...China
has the world's second-largest naval
service, after only the United
States…China's 66 submarines
constitute roughly twice as many
warships as the entire British Royal
Navy…If our economy remains
wobbly while China's continues to
rise this will have repercussions for
each nation's sea power. And with 90
percent of commercial goods
worldwide still transported by ship,
sea control is critical.
The geographical heart of America's
hard-power competition with China
will be the South China Sea, through
which passes a third of all commercial
maritime traffic worldwide and half
of the hydrocarbons destined for
Japan, the Korean Peninsula and
northeastern China. That sea grants
Beijing access to the Indian Ocean via
the Strait of Malacca, and thus to the
entire arc of Islam, from East Africa
to Southeast Asia. The United States
and others consider the South China
Sea an international waterway; China
considers it a "core interest."…China
seeks domination of the South China
Sea to be the dominant power in
much of the Eastern Hemisphere.
We underestimate the importance of
what is occurring between China and
Taiwan, at the northern end of the
South China Sea….China is quietly
incorporating Taiwan into its
dominion. Once it becomes clear, a
few years hence, that the United States
Tracking Opportunity & Risk Related Developments
cannot credibly defend Taiwan, China saying, "China pays a great deal of
will be able to redirect its naval attention to relations with Myanmar.
energies..to the second island chain Consolidating and developing Sino-
(Guam) and in the opposite direction, Myanmar cooperation and
to the Indian Ocean. To wit, China is friendship is our unswerving policy.
building a blue water navy, even as No matter how the international
situation changes, this policy will not
it is helping to fund and construct
alter."
ports in Burma, Sri Lanka,
Bangladesh and Pakistan.…these
WHEN NORTH KOREA FALLS . . .
harbors will be visited by Chinese Washington Post, by Fareed Zakaria
warships and will provide October 18, 2010
warehousing for Chinese consumer
goods destined for the Middle East. The most important lesson to have
China is building a far-flung trading come out of the financial crisis is to
network, ultimately to worry about "black swans." These
be protected by its warships… are, in Nassim Nicholas Taleb's
formulation, events that are unlikely
America's preoccupation with the but with the potential to cause major
disruption. In geopolitics there is
Middle East suits China perfectly. We
one such event that should have us
are paying in blood and treasure to
all thinking hard -- the collapse of
stabilize Afghanistan while China is
North Korea….When North Korea
building transport and pipeline
collapses, it is easy to imagine chaos
networks throughout Central Asia on the Korean peninsula that triggers
that will ultimately reach Kabul and a series of reactions from Beijing and
the trillion dollars' worth of minerals Washington that are competing and
lying underground.… hostile. Forget genteel rows over the
yuan's value -- this is what could
CHINA, MYANMAR REAFFIRM produce serious geopolitical
STRATEGIC VOWS instability.
Asia Times, By Clifford McCoy
16 Sep, 10 IRAN - A NEW MID-
EAST WAR IN
Myanmar leader Senior General Than THE MAKING
Shwe's visit to China last week won
public support from Beijing for his
government's planned national
elections on November 7. With that
backing, Myanmar's generals can now
proceed unconcerned by Western
criticism of the election process or the
results….In an apparent snub to
international opinion, Hu was quoted
on state television on September 8
44

WOULD A BEATEN OBAMA ATTACK
IRAN?
Stratfor/Real Clear Politics, by George
Friedman
October 26, 2010
We are a week away from the 2010
U.S. midterm elections. The outcome
is already locked in. Whether the
Republicans take the House or the
Senate is close to immaterial….The
Democrats will lose their ability to
impose cloture in the Senate and
thereby shut off debate. Whether they
lose the House or not, the Democrats
will lose the ability to pass legislation
at the will of the House Democratic
leadership. The large majority held
by the Democrats will be gone, and
party discipline will not be strong
enough (it never is) to prevent some
defections. Should the Republicans
win an overwhelming victory in both
houses next week, they will still not
have the votes to override presidential
vetoes.
When we consider the difficulties
President Barack Obama had passing
his health care legislation, even with
powerful majorities in both houses, it
is clear that he will not be able to push
through any significant legislation
without Republican agreement. The
result will either be gridlock or a
very different legislative agenda than
we have seen in the first two years.
…Given his low approval ratings,
Obama appears vulnerable and the
Republican nomination has become
extremely valuable. For his part,
Obama does not have much time to
lose in reshaping his presidency.
With the Iowa caucuses about 15
Tracking Opportunity & Risk Related Developments
months away and the Republicans
holding momentum, the president
will have to begin his campaign.
Obama now has two options in terms
of domestic strategy. The first is to
continue to press his agenda,
knowing that it will be voted down.
If the domestic situation improves, he
takes credit for it. If it doesn't, he runs
against Republican partisanship. The
second option is to abandon his
agenda, cooperate with the
Republicans and re-establish his
image as a centrist. Both have political
advantages and disadvantages and
present an important strategic decision
for Obama to make. Obama also has
a third option, which is to shift his
focus from domestic policy to foreign
policy. The founders created a system
in which the president is inherently
weak in domestic policy and able to
take action only when his position
in Congress is extremely strong. This
was how the founders sought to avoid
the tyranny of narrow majorities. At
the same time, they made the
president quite powerful in foreign
policy regardless
Congress…Historically, when the
president has been weak
domestically, one option he has had
is to appear powerful by focusing on
foreign policy.
…The international environment
allows him to take a much more
assertive stance than he has over the
past two years. The war in
Afghanistan is reaching a delicate
negotiating state as reports of
ongoing talks circulate. The Iraq war
is far from stable, with 50,000 U.S.
troops still there, and the Iranian
issue wide open.
Israeli-Palestinian talks are also
faltering, and there are a host of other
foreign issues, ranging from China's
increasing assertiveness to Russia's
resurgent power to the ongoing
decline in military power of
America's European allies. There are
a range of issues that need to be
addressed at the presidential level,
many of which would resonate with
at least some voters and allow Obama
to be presidential in spite of weak
political support.
There are two problems with Obama
becoming a foreign policy president.
The first is that the country is focused
on the economy and on domestic
issues. If he focuses on foreign policy
and the U.S. economy does not
improve by 2012, it will cost him the
election….The second problem is that
his presidency and campaign have
been based on the general principle
of accommodation rather than
confrontation in foreign affairs, with
the sole exception of
Afghanistan…where he was
of
assertive is unlikely to yield a major
foreign policy success, unless that
success is a negotiated settlement
with the Taliban. A negotiated
settlement will be portrayed by the
Republicans as capitulation rather
than triumph….Interestingly, if
Obama's goal is to appear strong on
national security while regaining the
center, Afghanistan offers the least
attractive venue. His choices are
negotiation, which would reinforce
his image as an accommodationist
in foreign policy, or continued war,
which is not particularly new
territory.
45

He could deploy even more forces
into Afghanistan, but then would
risk looking like Lyndon Johnson in
1967, hurling troops at the enemy
without a clear plan. He could, of
course, create a massive crisis with
Pakistan, but it would be extremely
unlikely that such an effort would
end well, given the situation in
Afghanistan. Foreign policy
presidents need to be successful.
There is little to be done in Iraq at the
moment except delay the withdrawal
of forces, which adds little to his
political position… Obama could
attempt to force an Israeli-Palestinian
settlement, but that would require
Hamas to change its position, which
is unlikely…The problem with Israel
and the Palestinians is that peace talks
have a nasty tendency to end in
chaos. The European, Russian and
Chinese situations are of great
importance, but they are not
conducive to dramatic acts.
The Iranian Option: This leaves the
obvious choice: Iran. Iran is the one
issue on which the president could
galvanize public opinion. The
Republicans have portrayed Obama
as weak on combating militant
Islamism. Many of the Democrats
see Iran as a repressive violator of
human rights, particularly after the
crackdown on the Green Movement.
The Arabian Peninsula, particularly
Saudi Arabia, is afraid of Iran and
wants the United States to do
something more than provide $60
billion-worth of weapons over the
next 10 years. The Israelis, obviously,
are hostile. The Europeans are hostile
to Iran but want to avoid escalation,
Tracking Opportunity & Risk Related Developments
unless it ends quickly and
successfully and without a
disruption of oil supplies. The
Russians like the Iranians are a thorn
in the American side, as are the
Chinese, but neither would have
much choice should the United States
deal with Iran quickly and
effectively. Moreover, the situation
in Iraq would improve if Iran were
to be neutralized, and the psychology
in Afghanistan could also shift.
If Obama were to use foreign policy
to enhance his political standing
through decisive action, and achieve
some positive results in relations
with foreign governments, the one
place he could do it would be Iran.
The issue is what he might have to do
and what the risks would be. Nothing
could, after all, hurt him more than
an aggressive stance against Iran that
failed to achieve its goals or turned
into a military disaster for the United
States.
So far, Obama's policy toward Iran
has been to incrementally increase
sanctions by building a weak coalition
and allow the sanctions to create shifts
in Iran's domestic political situation.
The idea is to weaken President
Mahmoud Ahmadinejad and
strengthen his enemies, who are
assumed to be more moderate and
less inclined to pursue nuclear
weapons. Obama has avoided overt
military action against Iran, so a
confrontation with Iran would require
a deliberate shift in the U.S. stance,
which would require a justification.
The most obvious justification would
be to claim that Iran is about to
construct a nuclear device. Whether
or not this is true would be immaterial.
First, no one would be in a position
to challenge the claim, and, second,
Obama's credibility in making the
assertion would be much greater than
George W. Bush's, given that Obama
does not have the 2003 weapons-of-
mass-destruction debacle to deal with
and has the advantage of not having
made such a claim before. Coming
from Obama, the claim would confirm
the views of the Republicans, while
the Democrats would be hard-pressed
to challenge him. In the face of this
assertion, Obama would be forced to
take action. He could appear reluctant
to his base, decisive to the rest. The
Republicans could not easily attack
him. Nor would the claim be a lie.
Defining what it means to almost
possess nuclear weapons is nearly a
metaphysical discussion. It requires
merely a shift in definitions and
assumptions. This is a cynical scenario,
but it can be aligned with reasonable
concerns.
… destroying Iran's nuclear capability
does not involve a one-day raid, nor
is Iran without the ability to retaliate.
Its nuclear facilities are in a number
of places and Iran has had years to
harden those facilities. Destroying the
facilities might take an extended air
campaign and might even require the
use of special operations units to
verify battle damage and complete
the mission. In addition, military
action against Iran's naval forces
would be needed to protect the
oil routes through the Persian Gulf
from small boat swarms and mines,
anti-ship missile launchers would
have to be attacked and Iranian
air force and air defenses taken
46

out. This would not solve the problem
of the rest of Iran's conventional forces,
which would represent a threat to the
region, so these forces would have to
be attacked and reduced as well.
An attack on Iran would not be an
invasion, nor would it be a short war.
Like Yugoslavia in 1999, it would be
an extended air war lasting an
unknown number of months. … If
the campaign were successful, the
Iranian regime would be stronger
politically, at least for a while, but
eviscerated militarily. A successful
campaign would ease the U.S.
withdrawal from Iraq, calm the
Saudis and demonstrate to the
Europeans American capability and
will. It would also cause the Russians
and Chinese to become very
thoughtful.
A campaign against Iran would have
its risks. Iran could launch a terrorist
campaign and attempt to close the
Strait of Hormuz, sending the global
economy into a deep recession on
soaring oil prices. It could also create
a civil war in Iraq. U.S. intelligence
could have missed the fact that the
Iranians already have a deliverable
nuclear weapon. All of these are
possible risks, and, according to
STRATFOR's thinking, the risks
outweigh the rewards.
…I am arguing the following. First,
Obama will be paralyzed on
domestic policies by this election.
He can craft a re-election campaign
blaming the Republicans for gridlock.
This has its advantages and
disadvantages; the Republicans,
Tracking Opportunity & Risk Related Developments
charging that he refused to adjust to
the electorate's wishes, can blame him
for the gridlock. It can go either way.
The other option for Obama is to look
for triumph in foreign policy where
he has a weak hand. The only
obvious way to achieve success that
would have a positive effect on the
U.S. strategic position is to attack
Iran. Such an attack would have
substantial advantages and very real
dangers. It could change the
dynamics of the Middle East and it
could be a military failure.
….given the domestic gridlock that
appears to be in the offing, a shift to
a foreign policy emphasis makes
sense, Obama needs to be seen as an
effective commander in chief and
Iran is the logical target.
AN IRAN CONFLICT IS DRAWING
CLOSER
The Guardian, Simon Tisdall
21 October 2010
Mahmoud Ahmadinejad’s
provocative posturing in Lebanon last
week showed Iran is unlikely to
change its ways. The US is quietly
ratcheting up economic and financial
pressure on Iran amid signs that talks
about Tehran's suspect nuclear
program could resume next month.
These two developments may be
connected. But neither sanctions nor
diplomacy can wholly obviate the
dreaded possibility of military
confrontation unless something
fundamental changes soon at the
heart of Iran's fundamentalist
regime.….there is little or no evidence
so far that Iran's top leadership is
willing, or can be forced, to
fundamentally change its ways.
Ahmadinejad's provocative posturing
in Lebanon last week made that plain
enough. And so the dread juggernaut
of direct, physical confrontation rolls
ever closer.
ISRAEL: NO CHOICE BUT TO
ATTACK IRAN
Israel Today, Ryan Jones
September 21, 2010
Israeli officials are becoming
increasingly frustrated by the
international community’s foot-
dragging regarding Iran’s defiant
nuclear program. Sanctions are having
almost no impact, and there is no
credible threat of force. For most
Israelis, it seems the world has
accepted a nuclear-armed Iran as a
foregone conclusion.
Speaking at a counter-terrorism
conference at the Interdisciplinary
Center in Herzliya on Sunday, former
Mossad chief Danny Yatom
(said)…“If the modern air forces led
by the United States mobilize their
capabilities it is possible, if not to
completely remove the threat, at least
to delay it for years to come,”…But
Europe and the Obama
Administration have signaled they
have absolutely no intention of using
force to stop Iran, and so Israel must
retain the right to self-defense.
“Figure out for yourselves what that
means,” Yatom told his audience.
In an interview with Fox News on
Monday, Israeli Defense Minister
Ehud Barak warned US President
Barack Obama that history will judge
his administration largely on
47

whether or not Iran went nuclear on
his watch. Barak said that it would be
no more than a year or two before
Iran fields a nuclear weapon, and
depending on what is in all those
secret underground facilities Iran is
building, it could be much sooner.
THE “AF-PAK” THEATER –
THE END GAME
THE U.S.’S DISORGANIZED
RETREAT: OUT OF IRAQ,
AFGHANISTAN — AND THE REST OF
THE WORLD.
National Review, Conrad Black
October 21, 2010
…The U.S. is conducting a more or
less orderly retreat, unpunctuated
with military disasters, and the
American people will not miss their
65-year total immersion in the world
any more than the world will be
heartbroken to be less dominated by
the Americans. But it all has the
appearance and feel of a default
position, of unplanned, almost
inadvertent, feckless retreat, not a
serious plan of systematically
handing over security matters to
carefully prepared indigenous forces.
Sensible, strategic withdrawals can be
elegant (de Gaulle’s from Algeria, the
U.S. from the Philippines),
disorganized (Britain’s from India and
Palestine, the USSR’s from Poland),
or disastrous (Napoleon’s from
Russia).
GET TOUGH ON PAKISTAN
New York Times, By Zalmay Khalilzad,
Zalmay Khalilzad, was the ambassador to
Afghanistan, Iraq and the United Nations
during the Bush administration.
October 19, 2010
Tracking Opportunity & Risk Related Developments
In the region and in the wider war
against terrorism, Pakistan has long
played a vital positive part — and a
troublingly negative one. With
Pakistani civilian and military leaders
meeting with Obama administration
officials this week in Washington —
and with The Times report on
Tuesday that Afghan and Taliban
leaders are holding direct, high-level
talks to end the war — cutting
through this Gordian knot has
become more urgent and more
difficult than ever before.
…Pakistan gives not only sanctuary
but also support to the Afghan
Taliban…What’s more, Pakistani
military leaders believe that our
current surge will be the last push
before we begin a face-saving troop
drawdown next July. They are
confident that if they continue to
frustrate our military and political
strategy — even actively impede
reconciliation between Kabul and
Taliban groups willing to make
peace — pro-Pakistani forces will
have the upper hand in Afghanistan
after the United States departs.
…To induce quicker and more
significant changes, Washington
must offer Islamabad a stark choice
between positive incentives and
negative consequences. The United
States should demand that Pakistan
shut down all sanctuaries and
military support programs for
insurgents or else we will carry out
operations against those insurgent
havens, with or without Pakistani
consent. Arguments that such
pressure would cause Pakistan to
disintegrate are overstated. Pakistan’s
institutions, particularly the country’s
security organs, are sufficiently strong
to preclude such an outcome.
Nonetheless, this aggressive
approach would require the United
States to think through a series of
likely Pakistani responses. To deal
with an interruption of our supply
lines to Afghanistan, for example,
we must stockpile supplies and start
bringing in more material through the
northern supply routes and via air.
At the same time, we should present
clear, significant incentives. In
exchange for demonstrable Pakistani
cooperation, the United States should
offer to mediate disputes between
Pakistan and Afghanistan; help
establish a trade corridor from
Pakistan into Central Asia; and
ensure that Pakistan’s adversaries do
not use Afghanistan’s territory to
support insurgents in Pakistani
Baluchistan.
…Without inducing a change in
Pakistan’s posture, the United States
will have to choose between fighting
a longer and bloodier war in
Afghanistan than is necessary, at the
cost of many young American lives
and many billions of dollars, or
accepting a major setback in
Afghanistan and in the surrounding
region. Both are undesirable options.
US ENDGAME IN AFGHANISTAN:
THE EVIL OF THREE LESSERS
Al-Jazeerah, by Eric Walberg
September 20, 2010
48

The US has three choices at this
point: the easy one is to just pull out
and leave the Taliban to disarm the
Western-created warlord militias and
to work with the less odious
members of the Karzai regime to
create a viable regime in a peaceful,
if very poor and devastated country.
Its second option is to let the regional
governments take over in stabilizing
the current regime. This, however,
would require a revolution in US
thinking: mend fences between it and
Iran. Iran has offered to help do this.
It holds the fate of this US endgame
in its hands. Its third option is a lame
compromise between the above.
Council for Foreign Relations
President Richard Haass suggests
partitioning Afghanistan, handing
over Pashtun areas to the Taliban and
arming the other ethnic groups to
defend themselves.…US is finally
talking to the Taliban commanders,
including Sirajuddin Haqqani,
mediated by Pakistan and the Saudis,
offering to cede control of the south
to the Taliban while keeping control
of the north. This is a recipe for
unending civil war too horrible to
contemplate.
NATO EXPANDS AFGHAN WAR
INTO PAKISTAN
Global Research, By Rick Rozoff
September 28, 2010
…NATO will continue to launch
lethal attacks inside Pakistan against
whichever targets it sees fit and will
proffer neither warnings nor
apologies. The U.S. will continue
Tracking Opportunity & Risk Related Developments
to escalate attacks with Hellfire
missiles against whomever it
chooses, however inaccurate,
anecdotal and self-interested the
reports upon which they are based
prove to be.….Forty years ago
Obama's predecessor Richard Nixon
began his speech announcing the
expansion of the Vietnam War into
Cambodia…He claimed that "enemy
sanctuaries" in Cambodia "endanger
the lives of Americans who are in
Vietnam," and "if this enemy effort
succeeds, Cambodia would become a
vast enemy staging area and a
springboard for attacks on South
Vietnam…The course he ordered was
to "go to the heart of the trouble. And
that means cleaning out major North
Vietnamese and Vietcong occupied
territories…The practical application
of the policy was that "attacks are
being launched this week to clean out
major enemy sanctuaries on the
Cambodian-Vietnam border." In
language that has been heard again
lately in Washington and Brussels -
with nothing but the place names
changed - Nixon claimed: "We take
this action not for the purpose of
expanding the war into Cambodia,
but for the purpose of ending the war
in Vietnam...."
Washington indeed expanded the
Vietnam War into Cambodia, with
what disastrous effects the world is
fully aware, and soon thereafter
departed Southeast Asia in defeat,
leaving vast stretches of Vietnam and
Cambodia in ruins. Afghanistan and
Pakistan will not fare any better.
CHINA: CHECKMATING INDIA IN
AFGHANISTAN
Indian Defense Review, By B Raman
September 27th, 2010
China has shown interest in the
construction of two railway lines—-
one in Pakistan via the Gilgit-Baltistan
region and the other in Afghanistan.
While the railway line through Gilgit-
Baltistan, ultimately extending up to
Gwadar on the Mekran coast, will
meet the external trade requirements
of Chinese-controlled Xinjiang and
other regions of Western China, the
proposed line in Afghanistan will
meet the requirements of a copper
mine which China is developing in
the Aynak area in Afghanistan.
…The total value of the Chinese
investment in the copper mine alone
will be almost three times the total
value of the Indian investments in all
projects in Afghanistan….Indian role
in Afghanistan—yes, but. Chinese role
in Afghanistan—yes, absolutely. That
is the policy of the Obama
Administration. The Chinese policy
in Afghanistan has two objectives—
-to enhance its strategic presence and
influence and to checkmate the
Indian strategic presence and
influence. The US support for the
Chinese policy will be to the
detriment of India.
CHANGING FACE OF RUSSIA-
PAKISTAN TIES
The Hindu, Vladimir Radyuhin
September 9, 2010
India will have to learn to live with
the new Russian-Pakistani
49

bonhomie, just as Russia has taken
India's entanglement with the U.S.
in its stride….In another
breakthrough for Pakistan, Mr.
Medvedev in Sochi gave the green
signal for an inaugural meeting of the
Russian-Pakistani Inter-Governmental
Commission on Trade and Economic
and Scientific-Technological
Cooperation in Islamabad this month.
The two countries agreed to set up
the joint commission 10 years ago but
Moscow has, till now, blocked its
launch….The Sochi summit also
dimmed India's hopes of gaining a
strategic foothold in Tajikistan. India
and Russia had planned to jointly use
the Ayni airfield, which India helped
to renovate, but Indian presence there
looks doubtful now in the context of
the emerging Russia-Afghanistan-
Pakistan-Tajikistan axis.
PAKISTAN'S FLOODS: BROADER
IMPLICATIONS
International Institute for Strategic Studies
(IISS), September 2010.
(Floods) have also exposed with yet
greater clarity Pakistan's political and
institutional shortcomings. The effects
and implications will extend beyond
the 12% of the Pakistani population
who have been directly affected by
the floods and will impinge upon the
policy objectives of the US-led
coalition engaged in Afghanistan….It
is also possible that the political
shock induced by the floods and a
successful reconstruction effort
entailing abundant job opportunities
will stimulate new thinking and
bring about hitherto-elusive
beneficial structural change
Tracking Opportunity & Risk Related Developments
in Pakistan. But this can by no means
be taken for granted.
'WE NEED TO MAKE CLEAR . . .
THE CANCER IS IN PAKISTAN'
Washington Post, By Bob Woodward
September 29, 2010
…Fears about Pakistan had been
driving President Obama's national
security team for more than a year.
Obama had said toward the start of
his fall 2009 Afghanistan-Pakistan
strategy review that the more pressing
U.S. interests were really in Pakistan,
a nuclear power with a fragile civilian
government, a dominant military and
an intelligence service that sponsored
terrorist groups….If, God forbid, the
SUV had blown up in Times Square,
Jones told Zardari, we wouldn't be
having this conversation. Should a
future attempt be successful, Obama
would be forced to do things that
Pakistan would not like. "No one will
be able to stop the response and
consequences," the security adviser
said. "This is not a threat, just a
statement of political fact." Jones did
not give specifics about what he
meant. The Obama administration
had a "retribution" plan, one of the
most sensitive and secretive of all
military contingencies. The plan
called for bombing about 150
identified terrorist camps in a brutal,
punishing attack inside Pakistan.
No, both Jones and Panetta said.
There might be no way to save the
strategic partnership. Underscoring
Jones's point, Panetta said, "If that
happens, all bets are off." Afterward,
the Americans met privately with
Gen. Ashfaq Kayani, chief of the
Pakistani army and the most powerful
figure in the country….Kayani would
not budge much. He had other
concerns….The United States was
getting nowhere fast with these guys.
They were talking with Zardari, who
could deliver nothing. Kayani had the
power to deliver, but he refused to do
much. Nobody could tell him
otherwise. The bottom line was
depressing: This had been a
charade….Jones said he was alarmed
that success in Afghanistan was tied
to what the Pakistanis would or
would not do.
GENERALS IN PAKISTAN PUSH FOR
A SHAKE-UP OF GOVERNMENT
New York Times, By Jane Perlez
September 28, 2010
The Pakistani military, angered by the
inept handling of the country’s
devastating floods and alarmed by a
collapse of the economy, is pushing
for a shake-up of the elected
government…The military,
preoccupied by a war against militants
and reluctant to assume direct
responsibility for the economic crisis,
has made clear it is not eager to take
over the government, as it has many
times before, military officials and
politicians said.
HOW PAKISTAN CAN END THE
AFGHAN WAR
September 28, 2010
Stratfor, By George Friedman
…Pakistan is an American ally which
the United States needs, both to
balance growing Chinese influence
in and partnership with Pakistan,
50

and to contain India. Pakistan needs
the United States for the same reason.
Meanwhile, the Taliban wants to run
Afghanistan. The United States has
no strong national interest in how
Afghanistan is run so long as it does
not support and espouse
transnational jihadism. But it needs
its withdrawal to take place in a
manner that strengthens its influence
rather than weakens it, and Pakistan
can provide the cover for turning a
retreat into a negotiated settlement.
Pakistan has every reason to play
this role. It needs the United States
over the long term to balance against
India. It must have a stable or
relatively stable Afghanistan to secure
its western frontier. It needs an end
to U.S. forays into Pakistan that are
destabilizing the regime. And playing
this role would enhance Pakistan's
status in the Islamic world, something
the United States could benefit from,
too. We suspect that all sides are
moving toward this end.
The United States isn't going to
defeat the Taliban. The original goal
of the war is irrelevant, and the
current goal is rather difficult to take
seriously. Even a victory, whatever
that would look like, would make
little difference in the fight against
transnational jihad, but a defeat could
harm U.S. interests. Therefore, the
United States needs a withdrawal
that is not a defeat. Such a strategic
shift is not without profound
political complexity and difficulties.
INDIA'S MAOIST INSURGENCY
International Institute for
Strategic Studies (IISS)
September 2010
Tracking Opportunity & Risk Related Developments
India's long-running Maoist
insurgency has increased in intensity
in recent months.…Prime Minister
Manmohan Singh has described the
rebellion as 'India's gravest security
threat’. His government, under strong
pressure to act decisively against the
Maoists, has pledged that 'the
problem of left-wing extremism
[will] be overcome in the next three
years'. However, this is an ambitious
goal.
According to Chidambaram, the
Dantewada massacre was a 'wake-up
call' that emphasized the urgency of
addressing the Maoist insurgency.
However, few measures have been
put in place that will enable the
government to fulfil its pledge to
overcome the problem of left-wing
extremism within three years.
INDIA'S UNFOLDING INTIFADA IN
KASHMIR
The Hindu, M. K. Bhadrakumar
September 20, 2010
The Intifada unfolding in the Valley
has diverse moorings. The political
reality is that Pakistan has escalated
its rhetoric on Kashmir….Most
important, the U.S.-Pakistan axis is
pivotal for the U.S. regional strategies
in Central Asia and in a not-too-
distant future Mr. Kayani will seek
his pound of flesh on Kashmir. The
Intifada unfolding in the Valley has
diverse moorings and the killing of
innocents may well turn out to be a
sideshow in the 20-year deadly game
that is far from played out.
The political reality is that Pakistan
has escalated its rhetoric on Kashmir.
The government's invitation to China
to invest in the development of J&K
indeed underscores our growing
sense of awareness. We need to
carefully measure the timeline
available to normalise the J&K
situation. A regime change in Srinagar
is not the priority today. Politicising
the crisis will be a most irresponsible
thing to do.
KASHMIR: THINKING THE
UNTHINKABLE (INDIA SHOULD
GIVE KASHMIR TO PAKISTAN)
The Hindu, Dr. Vithal Rajan
October 9, 2010
Could Indian withdrawal from Kashmir
initiate the Dulles nightmare of a
domino effect?
Back in the bad old days of the Cold
War, the heaviest of the backroom
hawks of the Pentagon, Herman Kahn,
coined the phrase ‘thinking the
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 Tracking Opportunity & Risk Related Developments

unthinkable,' meaning strategies for
wiping out the Soviet Union with
nukes. Luckily for all of us, Ronald
Reagan had a better idea; the same
result could be achieved by an
undeclared economic war and arms
race that would force the communists
to scratch themselves out of the
tournament.
Can we use similar hardline
approaches to review the Kashmir
imbroglio? The first question to ask
is, do Indians need Kashmir? By
Indians, we mean the ordinary aam-
janta of the poor, and the struggling
middle classes. The answer clearly is
a resounding ‘No'! There are no
‘resources' of any kind from Kashmir,
the supply of which is crucial for
our well-being. The American people
are dependent on oil from the
Middle East, and that is the real
reason for their hegemonic control
over the region. Indians have no
such reason to retain control of
Kashmir.
themselves ‘Indians,' and wish all
Indians to go to the devil, perhaps
unjustly, but that is the end result of
poor governance, high-handedness,
cruelty, and a bankrupt diplomatic
policy.
Could Indian withdrawal from
Kashmir initiate the Dulles
nightmare of a domino effect, with
all Indian Muslims rising up as one
man to demand more partitions?
While few Indian Muslims have any
reason to thank the Indian state for
the non-benign neglect they have
received over 60 years, they are
spread thinly everywhere and new
partitions are a geographical
impracticality. Would withdrawal
increase militancy? Most probably,
because discontent against corrupt,
elitist, and non-democratic rule is
widespread, not only among
Muslims but across a wide section
of the poor and middle-classes.
Hanging on to the great economic
resource drain of Kashmir will only
Indian rulers have yet to realize they
are no longer in charge of ‘the jewel
in the crown.' Indians are not the
leaders of Asia — the Chinese are.
If India wishes to be considered a good
second to China, it should not fritter
away its resources on nuclear
weapons, aircraft carriers, or
Commonwealth Games. India should
use its scarce resources where they
are most needed, to help people raise
themselves out of poverty.
Would not letting Kashmir go give
the palm to Pakistan, India's inveterate
enemy? On the contrary, it might
catastrophically weaken its real
enemy…Whatever the final shape of
the outcome, India must be proactive
in demanding an immediate
international settlement of a problem
created by Nehru.
ECONOMIC IMPLICATIONS
OF US CONGRESSIONAL
ELECTIONS (NOV 2010)

If Indian troops are out of Kashmir,
would it jeopardise the security of
Indians? Not really. The mountainous
barrier between the Kashmir Valley
and India is a better defensive line to
guard than the present long untenable
frontier of the Line of Control. Should
we be there in Kashmir against all
odds out of moral obligation, because
the people of the Valley are
dependent on our protection? ‘No',
is the answer once again, because the
people there do not consider
worsen the situation. The government
must cauterise the Kashmir wound,
tighten military spending, and strictly
prevent any more human rights
abuses, to regain if possible, modern
standards of governance.
Let us ask another hard question.
What will be lost along with
Kashmir? An unreal and bloated
sense of self-importance. It has taken
Great Britain 60 years to realize it is
no longer the centre of an empire.

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