1 - 7, 2010

Since joining of IMF program (standby arrangement), the government has raised the retail power tariffs to a total of 36% certainly against the popular will of the people. However there was no option but to accept the conditionalities of the IMF to get out of the balance of payment crisis.

In fact the government has had to brush aside all the subsidies on the power sector which were given to support the industrial consumers as well as the general masses in view of the poor income level in the country. However, when you borrow from any one you have no choice but to go according to the wishes of the lenders.

The power tariffs were increased on the grounds of narrowing the gap between generation cost and power tariff from 38-40% at the peak of the crisis to 21% at present. Most recent tariff hikes have been as per schedule (4.5% on Oct-09 and 12% in Jan-10) while the government has committed to another 8-10% tariff hike in the third quarter of the current financial year 2010.

Though the economic managers have succeeded in narrowing down the spread between cost of generation and power tariffs facing over 40 percent power theft both in Wapda and Kesc systems primarily due to high cost of power which is beyond the reach of the average income groups, the sharp rise in general prices as well as hike in cost of production was yet another implication of increasing power tariffs.

Meanwhile the short supply of fuel is also attributed to power shortage as the independent power producers (IPPs) especially the Kot Addu Power Company (Kapco) are raising their voice for insufficient supply of fuel required for power generation. It is however learnt that Wapda which purchases electricity from IPPs is likely to impose Liquidated Damages (LD) against Kapco for running the plant below capacity.

It will not be out of place to mention that since Wapda is insisting for imposing liquidated damages on Kapco which is the largest independent power producing company in the country the power crisis may take an ugly shape due to strained mutual relations; Hubco yet another major power producer is also not happy over surfacing of the tax issue after almost a decade.

Informed sources said that the rift between government and IPPs was feared to be intensified in case Wapda remained adamant on penalizing some of the IPPs for not meeting the agreed amount of power supplies.

The IPPs in question have their own point of view on disrupted power generation due to what they said insufficient fuel supplies on the part of the government which is the root cause of shortfall in power supplies, sources added.

Wapda on its part is insisting to impose liquidated damages on Kapco on account of low load factor in the financial year 2009. Notwithstanding Kapco & its legal advisors were of the view that the imposition of liquidated damages by Wapda was not justified, hence the damage claims might lead to a strained relations.

Sources said that Kapco's Power Purchase Agreement (PPA) stipulates that the company would be liable to Wapda for LD if it happens through a fault of its own, while Kapco was unable to meet mandated electricity dispatch. However this could be attributed either to capacity de-rating and inability to meet the capacity test on account of poor maintenance or such fault of the company or forced power outages at any time in which case power supply to Wapda was curtailed.

Contending the damage claims, sources said, Kapco pleads that Wapda's claim is unfounded as the reason Kapco has lower load factor in FY09 (66% vs. less than 70%) in last 4 years was because of limited fuel supply. The fuel supply limitation was only because of Wapda payment delays. Kapco has also taken WPPO (Wapda Power Privatization Organization) on board and both parties have completed an analysis which concluded that Kapco could operate at almost 100% capacity if supplied fuel however the reduction in dispatch was only because of non-availability of fuel. It will be interesting to note that at the time when Wapda is claiming LD from Kapco, the state owned Wapda owes Kapco over Rs27 billion, it is learnt.

Meanwhile Hubco has also expressed concerns on re-surfacing of a decade old tax dispute as the tax penalty was raised in September 1998 where the FBR assessed that Hubco owed Rs1, 896 million to the tax authority as the company "did not withhold tax at the time of issue of shares to sponsors against project costs incurred by them".

The tax claim was raised in the middle of the massive Wapda, GoP, Hubco tariff & cost dispute of the 1990's. However, Hubco has consistently maintained that the tax is not a valid claim.

Meanwhile the inter-corporate debt was cleared by the government to a great extent by issuance of two power bonds. Yet circular debt has started once again to surface. The government had issued two power sector bonds (TFCs) and retired a large chunk of outstanding dues towards power sector companies bringing IPPs receivables from Wapda down from 220-240 days at their peak in Mar-09 to 95-110 days at present.


Although the central bank foresees a silver lining for improvement of the financial strength at present the weakening of rupee presently at Rs86 in the open market and Rs84.6000 and Rs.119.2856 against Dollar and Euro respectively, in inter-bank market are quite expressive of the weakening of the exchange rate.

The State bank however says that exchange rate volatility during first half (July-December 2009) has declined to 2.7% as compared to 10.5% in the corresponding period of the previous year.

During the first half of FY10 the rupee has witnessed a marginal depreciation of 3.4% against the US dollar as compared with a sharp depreciation of 15.7% in the corresponding period of FY09 thus broadly exhibiting stability of the exchange rate with improvement in macroeconomic fundamentals.

It may be pointed out that relative stability in the rupee has emanated from the improved flows in the inter-bank foreign exchange market. In fact, during December 2009, market conditions helped the State bank in completing the transfer of oil payments to the market earlier than planned. Though, this transfer may have caused some volatility in the interim period, the inter-bank market continued to operate smoothly.

It may be emphasized that it is very normal for the exchange rate to exhibit healthy volatility in both directions as in the case with other liquid international currencies. Flexibility in the exchange rate is important to insulate real effective exchange rate from any unwarranted misalignment, which in turn, protects the external competitiveness. Current exchange rate does not reflect any misalignment in the real effective exchange rate and does not suggest any unidirectional pressures.

It may be pointed out that transfer of all oil payments to the inter-bank does not adversely impact the overall dollar liquidity in the market. Previously when SBP was supplying dollars to banks for effecting oil payments, SBP subsequently bought back the same dollars from the market to replenish its reserves. Hence, in the current situation when 100% oil payments are done from the market, it does not in any way create additional burden on the market flows.

Nevertheless, shifting of the oil payments to the market could result in higher volatility of the exchange rate in the interim period in accordance with the timing of the flows, but the overall dollar liquidity in the market will remain balanced.

Additionally, the external current account deficit reflects improvement in H1FY10 to $1.8 billion as compared to $7.8 billion in the same period last year. Apart from the improvement in the trade balance, there has been an unprecedented increase in home remittances which is likely to be sustainable on account of the joint Pakistan Remittance Initiative of the Federal Government & the State Bank. Gross foreign exchange reserves are at a comfortable level of $15.2billion with import coverage ratio of seven months.



Syed Qaisar Shareef, Country Manager P&G Pakistan and Aslam Shakir Baloch, Managing Director, LEIDA inaugurated a blood bank in Jam Ghulam Qadir Hospital, which will be the only blood bank operating in the region.

As part of P&G's corporate social commitment efforts, P&Gís Hub Plant donated a blood bank to Jam Ghulam Qadir Hospital which would cater to the medical needs of thousands of residents of the Hub community and allow for socio-economic growth and improvement in health facilities of the region.

Addressing the audience at the occasion, Qaisar Shareef said: "Year after year P&G has not only delivered on its promises, but has surpassed its consumers' expectation with remarkable performance. P&G Pakistan strongly believes that by strengthening current programs, introducing new ones and focusing our expertise and technologies on this critical need, we can improve the future of communities where we operate. P&G Hub Plant's blood bank donation to Jam Ghulam Qadir Hospital is one such example of programs which we have identified to help and improve lives of residents in the Hub community."

Adnan Abdullah, Plant Manager P&G Hub said: "P&G Hub Plant is committed to social development and improvement of health standards in Hub. Each year we reach around 5 million Pakistanis through our community programs in Pakistan and as part of our CSR efforts in the country, P&G Hub Plant is sponsoring the complete refurbishment and donation of equipment to start the Jam Ghulam Qadir Hospital's Blood Bank."

He further highlighted that P&G Hub Plant will continue its commitment to this initiative by holding regular employee blood drives to help sustain the facility.

P&G Hub Plant has partnered with the accredited organization of doctors, the Pakistan Medical Association (PMA) for the establishment of this blood bank.

Pakistan Medical Association has worked very closely with the Jam Ghulam Qadir Hub Hospital team over the past few months in order to determine the specific needs of the hospital to establish a blood bank. In addition to sponsoring equipment and refurbishment of the blood bank, P&G Hub Plant has also invested in the capability development of the Hub Hospital staff through a training organized by PMA. This training is a critical step to build the capability of the hospital staff to set up and operate the blood bank efficiently and effectively.

Chief Guest at the occasion, Aslam Shakir Balooch, MD LIEDA, highlighted the significance of such measures in Hub region and said: "P&G Hub Plant's contribution is the first of its kind in the area and demonstrates the company's commitment and dedication to the social development of Hub people. This blood bank is a very critical intervention, which will help the local community obtain blood in emergency - people have to travel to Karachi for blood. This blood bank will therefore enable the local community to get access to medical help and will help reduce critical health risks while improving living standards in the region."

Dr. Bashir Sasoli, Medical Superintendent at the Hospital said, "In order to address the acute need of a blood bank in the region, Jam Ghulam Qadir Hospital blood bank has been constructed on a fast-track 'design-and-build approach'. The hospital management is thankful to P&G Hub Plant for the donation and refurbishment of the blood bank which will greatly increase the competency of the hospital to address the medical needs of Hub area and its adjoining communities."

P&G Pakistan remains committed to improving the lives of communities where it operates and runs multiple programs, with a wide variety of local and international organizations to help improve life for millions of Pakistanis.

The company's presence in Hub dates back to 1994 when a soap-manufacturing facility sprawling over seven acres of land at Hub was established. Within a short span of only eight years, the plant tripled its soap manufacturing capacity with an investment of $3 million.

In 2004, the company made an additional investment of about half a million US dollars to establish a PuR manufacturing facility with production capacity of 50 million sachets of the water purifier annually. The P&G Hub Plant remains the only plant that produces and exports PuR globally.


The total liquid foreign reserves held by the country stood at $ 15,103.8 million on 23rd January, 2010.

The break-up of the foreign reserves position is as under:-

i) Foreign reserves held by the State Bank of Pakistan: $11,330.1 million
ii) Net foreign reserves held by banks (other than SBP): $ 3,773.7 million
iii) Total liquid foreign reserves: $15,103.8 million