September 2010
INDUSTRY RESEARCH &
NBP Industry Newsletter
Tracking Opportunity & Risk Related Developments
FLOODS 2010:
AGRO LOSSES - OVERALL
Crops losses estimated at $2.8 B
Total crop loss in Pakistan from the
flood has been estimated at Rs.244.639
B ($2.8 B) by the Ministry for Food and
Agriculture, says a document of the
Ministry, completed on August 23.
Cotton, a key crop in the country,
suffered production loss of 2.25 M
bales or Rs 71.4
Its estimated crop is now 11.759 M
bales against earlier estimate 14 M
bales. Its sown area was 3.199 M
hectares, out of that 0.588 M hectares
has been damaged. Cotton bale price
is taken at Rs 29,848 per bale. Other
major losses come from rice paddy
which suffered a damage of Rs 56.386
B causing a loss 1.597 M tons from
earlier estimates of 5.949 4.352 M tons.
SEPTEMBER 2010 ISSUE
FLOODS 2010:
Economic & Business Impact
in a Nutshell
Contents:
Agro Losses: Overall
Agro Losses: Wheat
Agro Losses: Cotton
Agro Losses: Livestock
Impact: Textiles
Impact: Economic Growth Rate
Impact: Inflation
Impact: Infrastructural Losses
Impact: Total NPLs
Impact: Key Industries
Textiles (Ginning, Spinning,
Weaving, Knits, Woven Apparel)
Oil (Marketing, Refining, Sourcing)
Power / Energy
(Generation, Distribution)
Sugar
Cement / Construction / Steel
Automotive
Telecommunication
Other Industries
Agriculture
Micro Business & SME
Financial Services
Regulatory
Macro Environment
Table: Risk-Opportunity
Trends
B. Accelerating Global
Risks - Special Excerpts
Global Deflation
Sovereign & US Debt Crises
US Dollar Crises & an
Alternative Reserve Currency
Strategic Divergence – China,
Russia & Turkey
Iran – A new Mid-East war\
in the making
ANALYSIS - IRA
Credit Management Group
Now rice crop is estimated at 4.352 M
tons. Rice paddy was sown on 2.525
1 M hectares and damaged area is 0.678
M hectares. Rice paddy price is taken
at Rs 25,000 per ton.
1 Third major crop is sugarcane, which
3 is likely to suffer a loss of Rs 19.351 B
3
3 from 7.646 M tons. Its estimated
4 production was 54.834 M tons, and
5
6 remainder is now 47.188 M tons. Its
7 sown area was 1.047 M hectares and
7
8 damaged area is 0.146 M hectares.
Sugarcane price is calculated at Rs
8
2500 per ton.
9
Estimates of 13 other crops including
9
pulses, vegetables, fruits and fodder
show loss of Rs 97.502 B and it is sown
6
at 2.8 M hectares and damaged area
6 is 0.588 M hectares. Its total damaged
11 sown area is 1.926 M hectares, while
11 total sown area is 9.57 hectares.
12 (Business Recorder – August 25, 2010)
13
'Floods inflicted Rs 250 billion loss to
14
agriculture sector'
14
Former Federal Minister has said that
15
recent devastating floods across the
15
country have caused damage worth
17
Rs.250 B to the agriculture sector with
maximum losses suffered by the small
18
farmers of around Rs.100 B, while
some facing total annihilation of their
18
crops.
20
22 Talking to newsmen, the former
Minister did not agree with the initial
22
estimate prepared by the Ministry of
23
Food and Agriculture (MinFA) in co-
ordination with the provincial

governments and Azad Jammu and
Kashmir (AJ&K) government.
"This loss is the most serious setback
for the farming community because
most of the small farmers have lost
considerable number of livestock too
as they had limited facility for their
animals", he added. Among the major
cash crops the ministry's report
highlighted that the largest loss of Rs
71.4 B has been occurred by the cotton
crop. He said that cotton was sown
over 3.1 hectares in the current Kharif
season out of which the floods have
destroyed crops at 0.51 M hectares, as
a result the production is expected to
decline by almost 15% to 11.7 M bales
as against the targeted cotton
production of 14 M bales in 2010.
(Business Recorder – August 26, 2010)
Crops on 3.2m hectares destroyed:
UN-FAO chief
The flash floods have destroyed
around 3.2 M hectares of standing
crops in Pakistan, besides killing 1,600
people and affected 15.4 M others, a
senior United Nations official said.
Addressing a press conference, the
Chief of United Nationsí Food and
Agriculture Organisation (UN-FAO),
said that approximately 80% of the
population in the affected areas
depends on agriculture and 3.2 M
hectares of standing crops have been
destroyed.
“But we are only half way through
the flood, which depends on the rains
in the next two to three weeks,” he
added.
(The News – August 26, 2010)
Khyber Pakhtunkhwa: major crop losses
The Food and Agriculture
Organisation of the United Nations
has released a damage assessment
report of the agriculture sector in
Khyber-Pakhtunkhwa.
Tracking Opportunity & Risk Related Developments
The report reveals that up to 71% of
the rice crop has been lost to the
floods. Out of the total of 76,564 acres
of land used for rice cultivation, 54,665
acres were simply washed away.
Furthermore, the flood wreaked havoc
on maize plantations as well, with 45
per cent of the total crop lost in the
province and 226,902 acres of
farmland damaged.
In all 3.2 million hectares of
agricultural land has been damaged
or destroyed. In a province where 80%
of the population depends on
agriculture as their only means of
livelihood, economic hardships are
getting worse by the day. 59% of the
vegetable produce has been lost and
19,144 acres of farmland used for
vegetable cultivation affected.
Also 26% of the sugarcane crop and
57,098 acres of plantation land, 14%
of fruit orchards and 11,419 acres of
orchard land, and 4% of the tobacco
crop and 967 acres of land were also
destroyed.
(The Express Tribune – August 31, 2010)
Sindh: major crop losses
Three major crops-sugarcane, cotton
and rice-have been badly hit by the
recent floods as the standing crops on
some 1.4 M acres have been badly
damaged in Sindh, it is learnt. The
field staff of Agriculture Department
has submitted a district-wise crop
damage report after conducting
survey of all 23 districts of the
province to find out the agricultural
loss to the standing Kharif crops in
the province by flash floods, sources
told.
According to the report, total 160,190
acres have been badly damaged so far
in district Khairpur, 207,027 acres in
Ghotki, Sukkur (57,823 acres),
Naushehro Feroz (113, 000 acres),
Shaheed Benazir Abad (65,000 acres),
Jacobabad (157,006 acres), Kashmore-
Kandhkot (156,114 acres), Shikarpur
(215,586 acres), Larkana (74, 133 acres),
Qamber-Shahdadkot (162, 557 acres),
Sanghar (15, 572 acres), Mirpurkhas (
32,473 acres), Umerkot (24, 281 acre),
Dadu (73, 520 acres), Jamshoro (18,
876 acres), Hyderabad (161 acres),
Matiyari (59, 072 acres), Badin (13, 677
acres), Thatta 7, 187 acres) and 113
acres land in district Karachi.
Further break-up of the crops showed
that cotton crop on at least 58,095 acres
in district Khairpur was affected, 156,
855 acres in Ghotki, 38, 275 acres in
Naushehro Feroz, 30, 500 in Shaheed
Benazir Abad, 13, 298 acres in
Sanghar, 9,760 acres in Mirpurkhas,
4, 859 acres in Umerkot, 18, 000 acres
in Dadu, 13,255 acres in Jamshoro, 40
acres in Hyderabad, 38,648 acres in
Matiyari, 2,727 acres in Tando
Mohammad Khan, 3,521 acres in
Badin, 27 acres in Thatta and 15 acres
in Karachi.
At least 32,528 acres of rice crop was
damaged in Khairpur district, 25,724
acres in Ghotki, 8,058 acres in Sukkur,
1,300 acres in Naushehro Feroz,
157,008 acres in Jacobabad, 156,114
acres in Kashmore-Kandhkot, 215,586
acres in Shikarpur, 74,133 acres in
Larkana, 162,557 acres in Qamber-
Shahdadkot, 12,000 acres in Dadu, 409
acres in Jamshoro and only 3 acres in
Hyderabad district, the report said.
Some 47,928 acres sugarcane crop has
been damaged by flood in Khairpur
district, 5, 894 acres in Ghotki, 1, 549
acres in Sukkur, 18,000 in Naushehro
Feroz, 20,000 acres in Shaheed Benazir
Abad, 17,000 acres in Dadu, 750 acres
in Matiyari, 4,350 acres in Tando
02

Mohammad Khan and 2,140 acres in
Thatta district, it added.
(Business Recorder – August 26, 2010)
AGRO LOSSES: WHEAT
0.675 M tons of wheat stocks damaged
by floods
The floods have damaged up to
675,000 tons wheat lying under open
sky, Agriculture Ministry officials said.
They said that according to initial
estimates Pakistan has sustained loss
of $20.25 M by the flood. Sources said
that the flood had damaged different
crops sown on 1.72 M hectares.
"However, the exact quantity of the
commodity destroyed would be
assessed after completion of
countrywide survey," they added.
Wheat stocks soared this year after a
bumper crop of 23.86 M tons in
2009/10, as well as carryover stock of
4.2 M tons from the previous year
when Pakistan produced 24 M tons.
Food ministry officials are of the view
that Pakistan is still in a position to
export over 2 M tons of wheat and
can earn valuable foreign exchange,
which could be utilised in the
development of the agriculture sector.
(Business Recorder – August 25, 2010)
Government defers plans to export wheat
The government has deferred plans
to export its surplus wheat, the
minister for food and agriculture said
on Monday, after devastating floods
washed away grain stocks and raised
concerns about the next crop.
Pakistan, Asia’s third-largest wheat
producer, said in April it would export
2 M tons of wheat after a bumper crop
of 23.86 M tons in 2009-10, and a
carryover of 4.2 M tons from the
Tracking Opportunity & Risk Related Developments
previous crop. But it held back exports
because of low prices in the
international market until a recent
rally.
“When the next crop is sown then we
will have an idea of how big the
surplus is and then we will make a
decision,” Food Minister told a news
conference.
(The Express Tribune – August 31, 2010)
AGRO LOSSES: COTTON
40% decrease in cotton output feared
Federal Textile Minister has feared
30% to 40% decrease in cotton
production due to recent floods in the
country. Addressing to the textile
exporters at Pakistan Textile Exporters
Association. He said that country was
facing one of the worst floods, which
has ruined the national economy in
addition to inflicting colossal loss to
the infrastructure.
He also assured that stuck up funds
of Rs.45 B of exporters in the heads of
sales tax, special Excise Duty, Rebate
and Drawback would be released very
soon.
(Business Recorder – August 15, 2010)
Country may miss cotton production
target by 2.25 M bales
Pakistan may miss the cotton
production target by about 2.25 M
bales due to devastation caused by
the floods. At present, production of
11.75 M cotton bales is expected
against the set target of 14 M bales for
the year 2010/11, officials at Ministry
of Food and Agriculture said. Cotton
was sown on 3.199 M hectares, out of
which cultivated area of 0.588 M
hectares has been damaged.
The worst hit cotton growing areas
are districts Layya, Rajanpur, D G
Khan, Bhakkar and Muzafargarah in
Punjab, and Mirpur Khas, Matyari,
Sukkur, Khairpur and Hyderabad
districts in Sindh.
According to officials in Minfa during
2010/11 Pakistani textile sector will
be facing acute shortage of the
commodity and it will have to import
about 2 to 3 M bales of cotton. They
said that farm production of Pakistan,
which is Asia's third largest grower
of wheat and the fourth biggest
producer of cotton, may decline by 20
to 30 percent because of this damage.
(Business Recorder – August 29, 2010)
AGRO LOSSES: LIVESTOCK
Animal meat prices to surge 30%
The animal meat rates are expected
to surge by 30% in the coming days
as the ongoing widespread floods in
the country have perished around 10
M livestock.
“The current crisis like situation faced
by the livestock sector can be
overcome only if the government puts
a stop to the rampant smuggling and
export of animals to gulf states, cancel
all export licenses and allows import
of 3 M small and large sized animals
to cater to the domestic requirements,”
this was stated by Meat Merchant
Association (MMA) General Secretary
while briefing representatives of print
and the electronic media at the Karachi
Press Club about the prevailing
situation related to the acute shortage
of livestock.
While presenting a break-up of
annihilation of livestock in the
country, he claimed that Sindh was
the worst affected area as in interior
Sindh only some 5 M animals were
03

either killed or swept away by the
rising tides while the rest of the 5 M
in different parts of the country.
(Daily Times – August 25, 2010)
Livestock vanish in floods
More than 1 M domestic animals have
perished in the recent floods in Punjab
and Sindh, a spokesman of Pakistan
Tanners Association said. He said
around 85% were cows and buffaloes
and among them around 40,000 were
Australian animals. He said in those
areas in Sindh and Punjab where
floodwater is receding, the carcasses
were lying and delay in disposal of
dead animals would cause spread of
epidemics. He said PTA is also
working on the livestock damage as
this is the major source of raw material
to the leather industry in the country.
(Daily Times – August 7, 2010)
Floods a fatal blow to livestock sector in
Sindh
Pakistan is the 4th biggest milk
producer in the world and the
contribution of livestock in overall
agriculture output is 51.8pc and in
GDP 21.8pc. The value of livestock is
6.1pc more than the combined value
of all major and minor crops.
The total livestock population in Sindh
was about 40 M before the floods hit
it hard. Though no exact figures so
far have been released about the
livestock losses, but according to the
sources in livestock department more
than 40% of the cattle heads have
perished due to floods in the province,
while the rest of animals are suffering
from various diseases. If preventive
steps are not taken on war footing the
livestock sector in Sindh might suffer
irreparable loss, they warned.
(The Nation – August 22, 2010)
Tracking Opportunity & Risk Related Developments
Quarter of Country Poultry farms wiped
out
The poultry industry has suffered
losses in the vicinity of Rs.6 B due to
the damage wreaked by the recent
floods. Former chairman of the
Pakistan Poultry Association, warned
that the industry was at the verge of
collapse and that the livelihood of 1.5
M people is at risk.
He estimated that around 25% of the
industry has been destroyed
and…Pakistan could face a severe
shortage of not just chicken but other
meat products as well.
“There are around 25,000 poultry
farms in Pakistan and at least 6,000
farms have been ruined because of
the floodwaters,” he said. “Our
capacity has dropped by 25% and now
we can only produce 2.1 M chickens
on a daily basis.”
(Daily Tribune – August 24, 2010)
IMPACT: TEXTILES
Country may miss cotton production
target by 2.25 M bales
Pakistan may miss the cotton
production target by about 2.25 M
bales due to devastation caused by
the floods. At present, production of
11.75 M cotton bales is expected
against the set target of 14 M bales for
the year 2010/11, officials at Ministry
of Food and Agriculture said. Cotton
was sown on 3.199 M hectares, out of
which cultivated area of 0.588 M
hectares has been damaged.
According to the Ministry for Food
and Agriculture estimates, the floods
have caused huge losses to Pakistan
agriculture economy and have swept
away cotton crop on 0.588 M acres
across the county. The worst hit cotton
growing areas are districts Layya,
Rajanpur, D G Khan, Bhakkar and
Muzafargarah in Punjab, and Mirpur
Khas, Matyari, Sukkur, Khairpur and
Hyderabad districts in Sindh.
According to officials in Minfa during
2010/11 Pakistani textile sector will
be facing acute shortage of the
commodity and it will have to import
about 2 to 3 M bales of cotton. They
said that farm production of Pakistan,
which is Asia's third largest grower
of wheat and the fourth biggest
producer of cotton, may decline by 20
to 30 percent because of this damage.
(Business Recorder – August 29, 2010)
Estimates of loss to cotton crop in the
country - Textile sector to spend $1.01bn
on import
The government and private sector’s
estimates of cotton loss reflect a loss
of 1.4 M bales, Pakistan Cotton
Ginners Association said. The textile
sector of the country has to bear a
burden of $1 billion import cost on
cotton as the total requirement of mills
and spinning sector for 2010-11 is
estimated to be around 15 M bales
The private sector had estimated
production of lint about 15 M bales
while the government estimated about
14 million bales during crop season
2010-11, senior member PCGA said.
“The crop size for session 2010-11 after
facing losses by flood waters will be
around 13 M bales and if we see the
loss on higher side then crop size will
be 13.59 M bales”, he maintained.
He said textile sector has already
negotiated import of 1.2 M bales with
Indian and Brazilian cotton exporters
to fill the immediate shortfall of the
produce in the country.
04

He said the worst damage was outside
the cotton growing districts, according
to Cotlook. Some estimates continue
to project a loss of 10 to 15% of the
cotton crop. Private sector’s estimates
are about 12.0-12.5 M bales outturn,
he added. He said the Pakistani
importers have already matured deals
for 45,000 bales of cotton with Indian
exporters during the last fifteen days.
The dollar-rupee parity would
increase the cost. As a result of it, the
input cost of manufacturing cotton
material would go up to nearly 10
percent, he added.
He said Pakistan produced around
12.69 M bales during outgoing crop
season 2009-10, while the textile
sector’s total need is 15 M cotton bales.
(Daily Times – August 25, 2010)
IMPACT: ECONOMIC
GROWTH RATE
3.5% Growth Possible
"The floods have eaten three million
tons of cotton -- over 20 percent of our
14 million bales for this year. It will
negatively affect by 25 percent large-
scale manufacturing and ultimately
impact on exports," Ashfaq Hasan
Khan, a former government economic
adviser, told AFP. …GDP had been
expected to grow by 4.5 percent in the
fiscal year ending June 30, 2011, but
the floods could shave at least one
percent off growth estimates. ”Our
assessment suggests Pakistan could
achieve about 3.5 percent GDP growth
rate this fiscal year," Khan said. "It
means a loss of around two billion
dollars."
(AFP, August 17, 2010)
Tracking Opportunity & Risk Related Developments
2.6% Growth Now
…Gross Domestic Product (GDP)
growth target is to be lowered from
4.5% to around 2.6%, however,
revenue collection target and inflations
projections to be revised upwards
keeping in view the floods impact.
…Sources said that meeting of the
Medium Term Budgetary Framework
(MTBF) being held at Ministry of
Finance would review the rolling
targets of key macroeconomic
indicators for the next three years,
which were unveiled in the budget.
They recent floods have changed the
economic priorities of the country and
budgetary targets have become totally
irrelevant…This information is
expected to be shared with IMF during
talks currently underway in
Washington that would continue till
September 2.
(Daily Times – August 29, 2010)
IMF: economic growth will fall to 2% (or
worse)
Pakistan, negotiating new lending
terms with the IMF, now estimates
that economic growth will fall to 2%
(or worse) of GDP this year, down
from a predicted 4.5%. Repairing
roads, bridges, the electricity grid and
other infrastructure (including flood
protection) will be costly, but should
at least boost the economy later.
(The Economist – August 26, 2010)
Brookings Institution: less than 2.5%
…It is early to weigh the long-term
consequences, but they are worrisome.
The statistics being quoted indicate
the of the floods. … The impact on
the economy will be enormous and
early estimates are that growth will
be halved. This indicates that instead
of the projected 4.5% it will be less
than 2.5%. The further consequence
is that the IMF target of capping the
budget deficit at 5.1 % of the GDP is
unlikely to be met. In fact, the $55
billion external debt (servicing it takes
away 23% of export earnings) is set
to grow, adding to the already
declining economic situation. Experts
are predicting a massive drop in
exports and an increase in food
imports, further adding to the trade
deficit. The overall effect is that in
spite of the endurance and resilience
shown by Pakistanis in past disasters,
there is likely to be prolonged
disruption; rehabilitation may take
anything up to five years or more with
a total requirement of over USD 10
billion. …The overall result is that
Pakistan needs massive support, as
the magnitude of the requirement is
clearly beyond its own capacity, both
in terms of resources and expertise.
Outside nations should view this not
cynically, but though a lens of both
aid and strategy. The human need is
obvious; Pakistan’s stability is
critically important to the end result
sought by the U.S. in Afghanistan,
while an improvement in South Asian
stability, and most importantly the
India-Pakistan relationship, would
make a significant difference in the
overall environment.
(The Brookings Institution, By Jehangir
Karamat, Visiting Fellow - September 2, 2010)
Moody's: 3% to 3.5%
International Aid Seen Helping Islamabad
Avoid Bankruptcy Following Disaster
…Assistance from the International
Monetary Fund and Western countries
will likely help Pakistan avoid another
brush with bankruptcy as it tries to
cope with the damage, which by some
estimates may reach $43 billion. But
the floods will weigh heavily on
05

economic growth this year and leave
a long-term mark on the economy.
"The hit on the growth rate is going
to be very severe," said Philip Wyatt,
a senior economist at UBS. "We can
see a loss of one or two points of
economic growth, depending on the
damage." In the fiscal year ended June
30, Pakistan's economy grew 4.1%.
Moody's Investors Service, which had
expected Pakistan's economic growth
to expand to 4.5% this fiscal year, may
lower its estimate to 3% to 3.5%,
analyst Aninda Mitra said.
Moody's is unlikely to upgrade
Pakistan's credit rating in coming
months due to the devastation from
the floods and other challenges, but
the country's current B3 rating
"adequately captures the risk" of the
likely economic slowdown and is
unlikely to be downgraded further,
said Mr. Mitra. A B3 rating is just one
notch above the C level, which applies
to countries in effective sovereign
default, and makes it hard for a
country to issue bonds in the
international market.
Concerns about the economic fallout
have kept pressure on Pakistan's
financial markets, though the impact
has been moderate. The cost of
insuring against a default or
restructuring of Pakistan's bonds
remains at very elevated levels, but
has been relatively steady in recent
weeks, a sign that investors anticipate
IMF and U.S. support to prevent any
fiscal crisis. The spread on Pakistan
five-year credit default swaps was
quoted at 1,099 basis points Tuesday,
roughly on par with those of other
high-risk sovereign bond issuers like
Venezuela, but well below early-2009
highs of over 2,100 basis points during
the global financial crisis.
Tracking Opportunity & Risk Related Developments
The Pakistan rupee, one of Asia's
weakest currencies in recent years,
has fallen in recent days, but has found
support above its record low against
the dollar of 85.84 rupees hit on Aug.
2, helped by expectations that
remittances from overseas Pakistanis,
which have averaged around 10% of
GDP in recent years, may rise to help
families at home cope with the floods.
But analysts expect the rupee to
remain under pressure in coming
months due to Pakistan's current
account deficit and high inflation rate,
which ran at 12.3% in July. The floods
are likely to push up food prices and
transportation costs for other goods,
likely eliminating any chance that
inflation might fall below 10% this
year, said Mr. Wyatt at UBS.
(The Wall Street Journal – August 25, 2010)
ADB: growth could be 3%
The worst floods in decades could
knock down Pakistan's economic
growth for fiscal 2010/11 to between
zero and two percent, Pakistani
officials said on Monday, fuelling
concern about the country's stability.
The Asian Development Bank,
assessing flood damage and Pakistan's
needs along with the World Bank,
said last week economic growth could
be three percent. The finance ministry
said the country would miss this year's
4.5 gross domestic product growth
target, but did not give another figure.
Sakib Sherani, a senior adviser to the
finance ministry, said there was a
whole range of growth estimates
which would be revised once the
actual impact of the floods became
clear. "We think zero percent is the
lower bound of these estimates,"
Sherani told Reuters, adding that this
was his own estimate, and not an
official figure from the finance
ministry.
The Pakistan Planning Commission's
forecast was not as grim. "I agree the
growth will come down but at the
same time, the zero percent is cruel,
it will be one to two percent," said
Nadeem ul Haque, deputy chairman
of the commission, which formulates
and monitors implementation of
development projects. "There will be
a negative impact but when
reconstruction starts in November or
December and people go back to their
lands and restart farming, there will
be a positive impact."
(Reuters – August 23, 2010)
World Bank to provide $900 M loan to
Pakistan
The World Bank said it has agreed to
provide a $900 M loan to flood-hit
Pakistan, saying the economic impact
of the disaster on the economy was
expected to be huge.
The government of Pakistan has
requested around $900 M of financial
support from the World Bank, which
we have committed to provide,” a
statement from the Washington-based
bank said.
(Dawn – August 16, 2010)
IMPACT: INFLATION
Inflation could soar
Sherani said inflation could reach as
high as 25 percent, compared with the
2010/11 target of 9.5 percent. (He)
said lower commodity prices could
prevent prices from spiking up. "We
will have to import essential items
and if international commodity prices
06

go down, then inflation at 25 percent
will be less probable," he said.
(Reuters – August 23, 2010)
IMPACT: INFRASTRUCTURAL
LOSSES
(Additional Developmental Expenses)
Preliminary estimates: over $7bn in
damages
Heavy monsoon rains resulting in
large scale flooding in Pakistan may
have caused more than $7 B in
damages (estimates structural and
content damage in Pakistan to be
around $4.3 B, including $2.1 B in
losses to residential contents and $1
B to public buildings) , preliminary
estimates in a new joint study from
United States Ball State University
and University of Tennessee said.
The preliminary estimate of damage
is a result of a model created by
Director of Ball States Centre for
Business and Economic Research
(CBER) and an economics professor
at the University of Tennessee.
(The News – August 25, 2010)
Pakistan floods: Damage and challenges
Most damage to infrastructure has
been caused in the mountainous
north, where gushing currents washed
away roads and bridges, cutting off
large communities from each other
and from the rest of the country.
Infrastructure in Punjab has also been
extensively damaged Roads, bridges
and rail tracks have also been
damaged extensively in the Punjab
and Sindh provinces. Officials say
more than 45 major bridges and
thousands of kilometers of roads have
been destroyed or badly damaged.
Thousands of electricity poles and
Tracking Opportunity & Risk Related Developments
communications towers have been
uprooted.
In the north-west, a dam that irrigated
nearly 200,000 acres of farmland has
been destroyed. It is still unknown
how much damage has been caused
to the irrigation system in Punjab and
Sindh provinces, which is the largest
contiguous irrigation system in the
world and has been entirely flooded.
ECONOMIC IMPACT … rough
estimates by experts put total damage
anywhere between $25bn and $40bn
(£16bn-£26bn). Minister for Food and
Agriculture says some 20% of the
country's total cropland has been
inundated, causing a loss of $2.8bn.
This is obviously going to impact on
the country's textile and sugar
industries. Experts expect inflation to
exceed 12% in coming months, which
will obviously hit the most vulnerable
segment of the population the hardest.
Textile exports, which constitute
Pakistan's major foreign exchange
earner, have exceeded the targets for
this year but if agriculture is not put
back on track, they may suffer and
the country's gross domestic product
(GDP) growth may take a hit.
FOOD … Pakistan had a bumper crop
last year so there is no immediate food
shortage in the country….But millions
of acres of pulse and rice crops have
been washed away, which may lead
to shortages and high prices. The
situation may deteriorate if farmers
miss the winter sowing season, which
starts in September and continues
until November. The loss of cattle may
also affect supply and prices of dairy
products. Experts estimate that
200,000 cattle have died in the floods,
and some 10 million are now at risk
due to shortage of water and upkeep.
DEMOGRAPHICS…Sluggish aid
delivery and delays in restoration of
vital infrastructure are also likely to
heighten fears of increased
urbanisation. Tens of thousands of
people displaced by the floods have
taken refuge in urban centres of
Punjab and Sindh. If the funding to
rebuild their houses and the
restoration of their infrastructure is
slow, they may stay on in the cities.
This will put pressure on already
crowded Pakistani cities and
exacerbate ethnic tensions, particularly
in Sindh province.
(BBC News – South Asia – August 26, 2010)
IMPACT: TOTAL NPLs
NPLs may cross Rs500bn in FY11
The non-performing loans (NPLs) are
likely to cross the Rs500-billion-mark
by end of the current fiscal year in the
wake of flash floods that have wiped
out trade and businesses in affected
areas across the country, said bankers
on Wednesday.
The State Bank of Pakistan has also
indicated that the NPLs would
increase by Rs48 billion this fiscal year
mainly due to devastation caused by
floods.
Due to bad performance of the
economy and poor risk management
by banks the total NPLs have already
reached to record Rs473 billion as of
June 30, 2010.
“No calculation has so far been made
for flood-related losses of trade,
industry and other businesses, which
borrow money from banks, but initial
estimates put it around Rs50 billion,”
said a senior banker.
07

According to the initial estimates, the
total NPLs would be over Rs48 billion
in the flood-hit areas, he said.
Banks have yet not come out with any
concrete figure of flood-related losses
while the government is still waiting
for receding of floodwaters.
The analyst said the direct impact of
such a high NPLs that could be Rs525
billion at the end of this fiscal would
force banks to avoid extending loans
and continue investing in government
papers.
In the financial year 2008-09 the
lending to private sector was almost
negligible but the last fiscal 2009-10
witnessed improvement especially in
the second half of the fiscal year.…the
massive devastation of land, crops,
houses, property, etc., caused by the
floods and heavy rains would not
allow banks to show relaxation in their
lending policy.
“I believe that the banks would have
to write-off billions of rupees since
the floods have wiped out industries
and trade in the affected areas,” said
Abid.
A senior banker said that the
government would have to announce
more relief and relaxation regarding
loans in the calamity-hit areas of
Punjab, Sindh and Balochistan.
(Dawn – September 2, 2010)
IMPACT: OTHER KEY
INDUSTRIES
After taking into consideration the
overall negative impact due to a lower
economic growth rate and higher
expected inflation the direct impact
on key industries is as follow:
Tracking Opportunity & Risk Related Developments
Textile Composite
Textile-Synthetic Fibers/Polyester
Textiles-Spinning
Energy-Power Generation & Distribution IPPs)
Energy-Oil (Petroleum Refining)
Energy-Oil (Petroleum Distribution/Marketing)
Fertilizers
Cement
Construction
Food, Beverages & Consumer Products
Automotive-Assemblers/Manufacturers
Sugar
Telecommunication
Machinery & Equipments
Chemicals (Inc. Plastic & Rubber Products)
Pharmaceuticals
Transportation
TEXTILES
Rs.12 B funds of textile exporters stuck
up
Rs.12 B funds of textile exporters have
been stuck up in draw back regime as
the SBP is not paying the exporter's
claims over the last two months. This
was stated by the Chairman Pakistan
Textile Exporters Association and Vice
Chairman talking to newsmen.
(Business Recorder – August 12, 2010)
New Indian cotton policy may
benefit Pakistan
India has allowed cotton exports
without mandatory licenses, but the
registration process will be required,
a government notification said. The
notification said the above will come
into effect from October 1, 2010, when
the cotton the cotton year begins. India
halted export registration on April 19
and allowed exports under license on
May 21 to rein in prices.
Free exports will benefit flood ravaged
Pakistan, which lost a large crop that
fuels its export earning textile
industry, trade and analysts said.
Trade says Pakistan will import about
Marginal Negative
Marginal Positive
Negative
No Impact
No Impact
No Impact
Marginal Positive
Positive
Positive
Negative
Marginal Positive
Negative
No Impact
No Impact
Marginal Positive
Marginal Positive
No Impact
3 M bales (of 170 kg each) more of
cotton after floods from average
import of 1.5-2 M bales. "If it's free
now, Pakistan will seek most of its
cotton imports from us but China still
will be the major buyer," said a senior
official with Sekhsaria & Co, a
Mumbai-based exporter.
(Business recorder – August 18, 2010)
Textile exports 23pc up
Textile sector had shown healthy
export of 23% in July 2010 as against
the corresponding period of the
previous year, Federal Bureau of
Statistics reported.
According to the latest figures, exports
of textile group were recorded at $
986 M in July 2010 against $ 802 M in
the same month of 2009 registering a
handsome growth of 22.90%.
The break-up of textile group shows
that in the previous month (July),
export of cotton cloth increased by
42.06% yarn, 0.5% knitwear, 13.20%
bed wear, 21.99% towels, 17.48% tents,
40.48% and readymade garments,
32.69% art silk and synthetic textile,
40.39% made up articles, 32.3% and
08

other textile materials, 58.26%.
However, the export of raw cotton
decreased by 78.33% cotton yarn
declined by 1.70% and cotton (corded)
by 87.76% in the month of July.
(The Nation – August 21, 2010)
OIL
China to set up Oil Refinery
China on Thursday agreed to establish
an oil refinery in Pakistan to meet the
growing demand of fuel. The China
International Project Investment
Management Centre in this connection
signed an agreement with Pakistan's
Indus Refinery Limited here on
Thursday. The refinery will be set up
in Karachi with a capacity of 203,000
barrels per day. Pakistan's Ambassador
to China, witnessed the signing
ceremony, which took place in a local
hotel.
(Business Recorder – August 6, 2010)
OGDCL’s discoveries
OGDCL has discovered gas from its
exploratory well Gopang Well No 1 in
the joint venture of Nim Block
comprising OGDCL, as operator (95%)
and Government Holding (Pvt)
Limited (5% carried) in district
Hyderabad, Sindh Province.
Reserves of high quality natural gas
have also been discovered by in Kohat
District of Khyber-Pakhtunkhwa. The
methane content of the gas is estimated
to be around 96%.
(Business Recorder/Tribune – August 20/25,
2010)
OGDCL’s Qadirpur gas field resumes
production
After hectic efforts and maintenance
carried out by the OGDC, the country’s
third largest gas field Qadirpur has
resumed the production of 310.80
million cubic feet per day (mmcfd).
Sources in the Ministry of Petroleum
and Natural Resources informed Daily
Times that three compressors of
Qadirpur gas field were closed due to
Tracking Opportunity & Risk Related Developments
devastation of floods in the country,
however after maintenance in the field,
310.80 mmcfd gas production has
resumed.
“While restarting of gas supply after
floods havoc, the country is still facing
the gas shortage of 130 mmcfd and the
basic reason of this shortage is the
floods devastation particularly in the
areas where the major gas plants are
installed,” he added.
“Due to floods devastation, production
of gas in different fields has reduced.
Qadirpur gas field’s production has
reduced up to 8 mmcfd, Sehwan 38
mmcfd and gas production of Rehmat
Oil Field has reduced up to 13 million
mmcfd,” sources maintained.
(Daily Times – August 20, 2010)
Record Oil imports in July
The country's oil imports rose to the
highest-ever level of 1.9 M tons in July
2010 as compared to 1.6 M tons in the
same month in 2009, showing a growth
of 20 percent on y-o-y basis. "The major
reason for such high growth in oil
import volumes is mounting demand
of furnace oil, a major fuel for thermal
power generation as its imports grew
by 51% on yearly basis to 0.7 M tons,"
analysts said.
According to oil import statistics
released by the OCAC both refineries
and oil marketing companies imported
1.9 M tons of oil (crude and oil
products) in July 2010 as compared to
1.6 M tons during the same period last
year, with an increase of 20% on y-o-
y basis.
(Business Recorder – August 25, 2010)
Refineries margins down
The Gross Refinery Margins (GRMS)
are down 60% month-on-month to
$1.5-1.8 per barrel in August 2010 as
compared to $4.6 per barrel in July
2010, production figures of July
showed.
It is noted that margins have been on
a declining trend for the last 2 months.
The profitability of the refineries is
likely to be affected in 1st quarter of
the FY 2010-11 (Q1FY11) if margins do
not recover significantly during the
remaining quarter, sector analyst said.
(Daily Times – August 29, 2010)
POWER/ENERGY
More incentives for Fast-track power
The government has approved
additional financial incentives for 5
fast-track projects, on the
recommendation of the Private Power
and Infrastructure Board (PPIB),
officials sources told. They said that
PPIB is processing 777 MW of projects
under fast track regime, which were
earlier approved by the ECC in 2006,
with targeted completion by December
2010.
Out of these projects, two projects,
namely Radian Energy and Grange
Holding Projects, are at very advanced
stages of development and are
expected to be commissioned by 2011
and 2012.
The PPIB had suggested that, keeping
in view the shortage of 5000 MW and
the fact that these projects are expected
to be commissioned in the year 2011-
12, these projects are allowed to be
processed under revised guidelines.
Sources said that due to power
shortage of 5000 MW by year 2014-15,
the PPIB has initiated two projects
based on international competitive
bidding (ICB), including a 300 MW
project based on furnace oil near
Chiniot, Punjab, and another 300 MW
coal based project at Jamshoro.
(Business Recorder – August 4, 2010)
Iran inaugurates main part of gas pipeline
Iran inaugurated a major section of a
multi-billion-dollar pipeline, which is
due to transfer its rich gas reserves to
Pakistan. Officials said this section of
pipeline transfers natural gas from
Assalouyeh Energy Zone in the south
to south-eastern city of Iranshahr, near
the Pakistani border. The project was
09

inaugurated by First Vice-President in
a special ceremony also attended by
the country's Oil Minister.
The project had taken five years with
a cost of $1.3 B. The 902-kilometer
pipeline, which will supply gas to
eastern regions, is also aimed at
exporting gas to Pakistan and India.
(Business Recorder – August 24, 2010)
Korea to install 750kvt wind turbines
South Korea will spend $ 2 M on the
installation of wind turbines in
Hawksbay and Jhumpir areas to
generate 750 kilowatts.
The project director Korea Electric
Power Company during a meeting
discussed the preparation of feasibility
report and allotment of land at Sindh
Board of Investment (SBI).
Secretary Investment Sindh and DG
SBI, CEO Alternate Energy
Development Board, representative of
KEPCO and Korean diplomat attended
the meeting. The Korean delegation
said this amount would be donated
from the special fund Climate Change
Partnership Project Fund, created by
Korean government to promote
alternate energy projects in Asian
countries. The electricity generated
from these turbines will be provided
to the adjacent towns and villages to
remove their backwardness.
(Daily Times – August 27, 2010)
Production of expensive electricity in the
Region
Pakistan is producing expensive
electricity because of its dependence
on furnace oil and lack of use of
sources such as wind, sunlight and
coal, a study of power generation
capacity of different countries reveals.
According to World Coal Institute,
41.5% of global electricity in the world
is produced through coal, 21.1%
through gas, 16% through water
resources, 14.6% through nuclear
power plants and only 5.8% through
oil. Wind, biomass and sunlight a
Tracking Opportunity & Risk Related Developments
ccount for 2.3% of global electricity
production.
Of the 18,500 MW installed electricity
generation capacity in Pakistan 6,400
MW is produced through water
resources and 300 MW through nuclear
fuel. The rest, about 12,000 MW, is
produced through oil and gas. Since
there is a shortage of gas, particularly
during winter, sometimes almost all
power is generated through furnace
oil.
(The News – August 26, 2010)
Pepco to be wound up by October 31
Cabinet Committee on Restructuring
(CCoR) decided to wind up Pakistan
Electric Power Company (Pepco) by
October 31, 2010, sources told. They
said the World Bank has asked
Pakistan government to wind up Pepco
on fast track basis and grant autonomy
to power distribution and generation
companies under the restructuring
plan. Pepco plays the role of an
oversight body in power sector.
After it is wound up power distribution
companies would be working without
any overseer. Experts termed the
decision unrealistic and added that it
would not be possible for the
government to wind up Pepco as per
the deadline set by CCoR because of
the continuing power crisis in the
country.
(Business Recorder – August 31, 2010)
Power tariff raised by 63.6% in 30 months
The government increased power tariff
by 63.6% during last 2-1/2 years. This
was stated by sources in the Ministry
of Water and Power while presenting
an alarming picture before the Ministry
of Petroleum and Natural Resources
to compel it to make the entire gas
available at Kunar/Pasakhi gas field
for power generation.
"The current generation pattern and
fuel mixes has more than tripled the
cost of generation, requiring
proportionate increase in power tariffs,"
the Ministry of Water and Power said,
adding that only during the last 30
months there has been an increase of
63.6% in power tariff.
"Natural gas from Kunar/Pasakhi gas
field has been identified as a major
intervention to make power tariff more
affordable," the Ministry of Water and
Power said, adding that, at present,
electricity cost on fuel oil stands at
Rs.11.37 per Kwh, diesel at Rs.15.88
per Kwh, and natural gas at Rs.2.86
per Kwh.
(Business Recorder – August 5, 2010)
Turkmenistan plans to supply electricity
Turkmenistan aims to attract foreign
investors to build the first leg of a trans-
Afghan power link to serve Pakistan
with electricity generated from Central
Asia's largest gas reserves, a
government source told. The Turkmen
stage of the project would involve the
revamp of a gas-fired power station in
the eastern city of Marv and the laying
of new power lines to the border with
Afghanistan, the source said, speaking
on condition of anonymity.
"President has instructed the Energy
Ministry to attract foreign investment
to realise a project for the export of
Turkmen electricity to Pakistan via
Afghanistan," the source said. The
source did not specify the required
amount of investment or the timetable
for the project.
Turkmenistan's power stations have
capacity to generate 17 B kilowatt hours
(KWh) annually, 70% more than
annual domestic consumption of
around 10 B KWh. The country plans
to increase annual consumption to 20
B KWh by 2020 and to boost exports
to slightly more than 10 B KWh.
(Business Recorder – August 12, 2010)
Two new power projects launched
Two projects--500 KV D G Khan Sub-
Station, and 220 KV Dadu-Khuzdar
Transmission System--have been
launched at an estimated cost of Rs 6.4
10

M. According to documents made
available 500 KV D G Khan Sub Station
has been launched with estimated cost
of Rs 4.467 M financed by ADB. The
implementation period of the project
is 2010-12.
A total of 143.318 acres land has been
acquired for the construction of the
gird station. Company, Barqaab has
been appointed as consultants to the
project. The bids for 500KV D.G Khan
Sub-Station would be opened on
August 13, 2010. 220 KV Dadu-
Khuzdar Transmission System has
been launched with an estimated cost
of Rs 2.901 M being financed by JICA
through loan. The completion date of
this project is June, 2011.
(Business Recorder – August 8, 2010)
AUTOMOTIVE
Car sales decline 31% in July
Pre-buying of cars by dealers in June
2010 coupled with rampant flood in
the country has taken a toll on the auto
sector as car sales have dropped by
31% in July 2010 as compared to last
month.
According to the recent data released
by PAMA, the car sales registered a
decline of 31% M-on-M basis, as only
9,796 units were sold as compared to
14,320 units in June. Auto sales have
also recorded a decline of 34% during
the said period.
Analyst said that the main reason for
the decline in sales is pre-buying by
dealers in June 2010 in anticipation of
higher car prices following 1% increase
in sales tax in budget FY11 coupled
with the flood situation in the country
badly affected sector.
(Daily Times – August 12, 2010)
Indus Motor to invest Rs. 1.6 B
Pakistan's leading car manufacturer,
Indus Motor Company, has plans to
further invest Rs. 1.6 B to indigenize
body parts, such as doors, bonnets,
Tracking Opportunity & Risk Related Developments
and rear bonnets, a spokesman of the
Company told.
(Business Recorder – August 2, 2010)
Rising yen to impact car prices
“The car prices may be raised by up to
Rs.50,000 a unit to offset the impact of
a rising yen and protect our margins,”
a director of one of the country’s three
Japanese car assemblers told.
(Dawn – August 24, 2010)
TELECOM
CMMI Version 1.2 - NetSol first Pakistani
companies to be re-assessed
NetSol Techno-logies has won the truly
outstanding distinction of becoming
the first Pakistani company to be re-
assessed at Maturity Level 5 against
CMMI(r) Version 1.2 by Carnegie
Mellon Software Engineering Institute
(SEI). In doing so, it has created a
marvellous milestone for Pakistani IT
industry and placed Pakistan at the
forefront of IT software producing
countries.
(Business Recorder – August 25, 2010)
French Investment - Manufacturing of IT
/ power equipment
A leading global investor in IT and
power sectors has assured the Pakistan
Computer Association (PCA)
about expanding their operations in
Pakistan to increase investment in
manufacturing of equipment of
IT/power sector in the country.
During a meeting between Vice
President IT of Schneider France
(Pakistan & Afghanistan), and the PCA
delegation said that to achieve
sustainable development, Pakistan not
only needs to enhance its power
generation capacity but also to adopt
effective power conservation
technology. By using effective
technology, almost 40 percent energy
could be saved and it would be the
right answer to deal with power crisis
in Pakistan as well.
While talking to the PCA delegation,
the foreign investor said, "We have
already made significant investment
in Pakistan and we are ready to expand
our operations as well as investment
in Pakistan to improve effective use of
electric power in Pakistan".
(Business Recorder – August 9, 2010)
161% increase in Mobile Internet users
Pakistan Telecommunication
Authority’s statistics made available
to reported the number of internet
subscription on network of different
cellular operators have reached 14.4 M
by the end of closing financial year
2009-10.
The number of internet subscribers on
cellular operators’ network was
recorded 4.4 M by the end of 2008-09.
Telenor has grabbed the biggest share
in terms of number of mobile internet
users, however, penetration-wise Zong
is leading the market with its lowest
cost package of internet services.
As per estimated figures, the number
of internet users had reached 19.5 M
by 2009-10 as compared, with the
number of users reported less than 19
M in the country by the end of
corresponding previous year.
However, the number of internet
connections has reached nearly 10 M
in the country including broadband
and dial-up.
The broadband growth witnessed
150% in just two years, which has never
been experienced before.
The number of broadband users has
grown from 45,000 in 2007 to 900,000
this year. Due to these results, Pakistan
has been placed 6th in terms of
quarterly growth and 10th in terms of
annual growth in the global broadband
market by a leading web source on
broadband statistics.
(Daily Times – August 6, 2010)
11

PTCL’s profit up
The profit after tax of PTCL increased
to Rs.9.294 B in the year ended June
30, 2010 (FY10) as compared to Rs.9.151
earned in FY09. The BoDs in its meeting
declared that the company''s EPS
increased to Rs.1.82 in the period under
review against Rs.1.79 a year back.
According to the financial results the
company''s revenue declined to
Rs.57.174 B in FY10 against Rs.59.239
B in FY09. The cost of services increased
to Rs 38.258 B against Rs.37.732 B. The
company''s administrative and general
expenses reduced to Rs.7.223 B against
Rs.8.935 B while selling and marking
expenses increased to Rs.2.142 B
against Rs.1.817 B.
The company''s other operating income
increased to Rs.5.134 B against Rs.4.267
B. The company''s profit before taxation
increased to Rs.14.281 B in FY10 against
Rs.14.020 B in FY09.
(Business Recorder – August 28, 2010)
World's first EVO 3G Nitro
PTCL formally launched "the world's
first and most cutting edge EVDO Re
commercial network a wireless
broadband that offers speeds up to 9.3
Mbps. Pakistan has became the first
country while PTCL the first company
in the world to introduce EVO 3G Nitro
which is all set to meet the next
generation's need for ultimate high
speed and superior performance while
providing this service commercially.
(Business Recorder – August 15, 2010)
OTHER INDUSTRIES
FFC to buy Agritech Limited
Fauji Fertilizer Company has expressed
its intention to acquire up to 79.85%
shares with management control in
Agritech Limited (AGL).
Fauji would retain its 100% market
share in DAP manufacturing.
The analyst noted that following the
acquisition, FFC would be empowered
to further diversify its product portfolio
Tracking Opportunity & Risk Related Developments
gaining access to Single Super
Phosphate (SSP), a close substitute of
DAP, through Hazara Phosphate,
which is a fully-owned subsidiary of
AGL.
(Dawn – August 24, 2010)
Country’s first polyester film plant to start
production by 2011
Pakistan's first ever BOPET (polyester
film plant), being set up at Port Qasim
at a total cost of Rs.2.6 B, will go into
production by the end of next year
(2011). Presently, there are no
manufacturers of polyester film in
Pakistan and all demand is being met
through imports.
The plant will not only meet the total
demand for polyester film in Pakistan
but will also be exported to many other
countries due to shortage of this film
world-wide. According to the
promoters, the plant is being set up by
M/s. Astro Plastics (Pvt) Ltd, which is
part of the Candyland/Ismail Group.
Polyester film is used not only in
packaging of products such as
confectionery, biscuits, potato snacks
(all products manufactured by the
group) but also in textiles, tea, soaps,
shampoos, and many other
applications.
The plant has been bought from the
world renowned machinery
manufacturer, Bruckner AG, Germany
and an advance payment of 10 percent
has already been made.
(Business Recorder – August 30, 2010)
Leather export declines in 3 years
The export of leather and leather
products during the years 2007-08 to
2009-10 declined by 31.43%, Pakistan
Tanners Association said. The decline
in exports during the 2008–09 was
19.26% compared with 2007–08 and
further exports declined by 15.07%
during the year 2009–10, chairman
BMG PTA, said.
The reasons for this decline including
cost of doing business have gone up
in Pakistan in last 3 years. Only in
wages and utilities the cost per square
foot of leather has increased by 50–60%.
Similarly, cost of imported chemicals
has gone up because suppliers from
Europe increased the prices by about
30–40% in the last 3 years and in
Pakistan exchange rate, interest rate
and other charges have also increased.
Our chemical cost has increased by
about 33 to 45% in these years. On the
other hand per unit export price has
gone down for various products
All exchange rate benefit to the exporters
was drained out through price reduction
in leather, 14.92%, leather garments
15.13% and leather gloves 21.59% and
all profitability of industry was eaten
up by increased inputs.
Damage to livestock in war-hit areas
of Swat and North Wazirstan also
inflicted heavy losses on supply of
leather and skin.
(Daily Times – August 27, 2010)
Indian shipping line to begin operations
from Pakistan
For the first time in the history of Indo-
Pak relations the Indian national flag
carrier would start container shipping
services from Pakistan from next
month. The Shipping Corporation of
India (SCI) has added Pakistan to its
global network and would be
commencing its container services from
the neighbouring country to regions
like Europe, Mediterranean, Gulf, Far
East and India.
According to sources, SCI services
would originate from Karachi and
would cater all major inland locations
of the country. The Indian national flag
carrier would be providing services on
the routes like Indian Subcontinent
Europe Service (ISL Service), India
Mediterranean Service (I MED Service),
SCI Middle East India Liner Express
Service (SMILE Service), INDEX-1 and
INDFEX-2 Services.
(Business Recorder – August 24, 2010)
12

Investment of $3.3bn in gold & copper
mining
Tethyan Copper Company Pakistan
(Pvt) Limited (TCC) has submitted its
feasibility study report to the Provincial
Government with a view of getting a
mining license to exploit copper and
gold resources.
The project cost is estimated at $3.3 B.
It will be the biggest foreign financed
project in the history of Pakistan. Such
a huge foreign investment is unparallel
in the economic history.
Estimated payable metal production
over about 56 years of mine life is 22
B pounds of copper (10.000.000 tones)
and 13 M ounces of gold.
“We are very happy that the Project
has reached this important milestone.
Based on extensive world class
engineering, technical and financial
studies by TCC, the viability of Reko
Diq project has been established and
we are looking forward to work with
our partner, the Government of
Balochistan on taking this project
towards the construction stage,” said
TCC CEO.
“A feasibility study of a mining project
determines whether the proven
mineral resource is technically and
financially viable and is considered an
important landmark in mining project
development phase,” he said.
(Daily Times – August 31, 2010)
AGRICULTURE
ZTBL disbursed Rs 48.585 B
The Zarai Taraqiati Bank Limited
(ZTBL) disbursed Rs. 48.585 B as loans
among 342,579 farmers from all
provinces, Gilgit-Baltistan and Azad
Jammu and Kashmir (AJK) from
January to June 2010 It disbursed Rs.
40.591 B in Punjab, comprising 83.6%
of total loans among 294,792 farmers.
An amount of Rs.5.306 B (10.9% of total
loans) was disbursed among 28,463
Tracking Opportunity & Risk Related Developments
farmers in Sindh, and Rs. 2.339 B (4.8%
of total loans) was disbursed among
13,526 farmers in Khyber-
Pakhtunkhwa during this period.
Likewise, Rs.0.097 B agriculture loans
were distributed among 542 farmers
in Balochistan, Rs 0.099 B to farmers
in Gilgit-Baltistan and Rs. 0.153 B in
AJ&K was disbursed among 795 and
4,461 farmers respectively.
The ZTBL recovered Rs.39.436 B out
of Rs.40.591 in Punjab, Rs.5.144 B out
of Rs. 5.306 in Sindh, Rs.3.621 B out Rs.
2.339 B in KP, Rs. 0.090 B out of 0.097
B in Balochistan, Rs. 0.096 B out of Rs.
0.099 B in Gilgit-Baltistan and Rs. 0.140
B out of Rs. 0.153 B were recovered
during January to June 2010.
(Business Recorder – August 18, 2010)
Cotton Vision 2015
Cotton alone contributes nearly 65%
of the foreign exchange earnings of
Pakistan and the Bt cotton varieties (IR
3701 and IR 1524) developed by
Pakistan Atomic Energy Commission’s
(PAEC) Biotech Centre, NIBGE
hopefully will help in achieving cotton
vision 2015 of government. The object
is to boost production to 20 M bales by
2015, an official of PAEC said. Besides
Bt cotton technology is expected to
reduce production (input) cost as well
as reduction in number of sprays of
dangerous and toxic chemicals. He said
the second approved variety IR-1524
is tolerant to water stress, a feature
emerging as a national threat to
agriculture productivity. It has also
shown higher tolerance to cotton leaf
virus disease, he added.
(Daily Times – August 25, 2010)
Hydroponic farming
Pakistan can enhance vegetable and
fruit crops yield with hydroponic
farming technology to overcome the
food shortages and price hike, Ministry
of Food and Agriculture said.
This technology would not only raise
the yield, but also enhance the nutrition
abilities of plants, Minfa said in a
statement.
Hydroponics can be a futuristic
technology for Pakistan to ensure
proper supply of vegetables and fruits
crop as it uses 70 percent to 90 percent
less water than irrigated soil-based
agriculture.
An official in the Ministry of Food and
Agriculture said that no water was lost
in the ground or absorbed by weeds
or lost in evaporation. A website
relating to agri news reported that a
hydroponic pilot project had already
been launched in Rawat (Islamabad)
under the name bio-blitz over just five
acres of land. The state-of-the-art five
acres Green House facility is producing
hydroponic tomatoes, he said.
(The News – August 1, 2010)
22% declines in import of pulses
The country's import of pulses has
witnessed a sharp decline of 22% in
July 2010, which the importers
attributed to soaring global prices,
while flood continues to ravage
standing crops. "Cost of pulses has
posted more or less 50% increase
globally and subsequently locally," said
President KCCI.
Import of pulses decreased 22% or
$6.256 M during July 2010, according
to official statistics; however, the
President KCCI said the commodity
import would increase in future, as
importers had started anticipating an
abnormal rise in its demand in the
flood-stricken country. Pulses import
declined to $22.081 M in July 2010 from
$28.337 M in July 2009 with 22% or
$6.256 M slump.
(Business Recorder – August 29, 2010)
New crop varieties boost production
The development of 45 new high-yield
pest resistant crop varieties is resulting
in manifold increase in production,
fetching more than Rs.6000 M in
additional annual incomes to farmers,
sources said.
Pakistan Atomic Energy Commission
(PAEC) through its agricultural and
biotechnology institutes is helping
farmers achieve more with limited
resources.
13

According to official sources, of the
total cultivated area in the country,
PAEC crop varieties are used in 60%
of the sown area in Sindh, 50% in
NWFP and 20% of the sown area in
Punjab.
Due to PAEC’s contributions,
manufacturing a non-toxic and non-
pollutant bio fertiliser is now a
possibility.
Furthermore, technology for the
reclamation of saline land is also being
evolved by PAEC.
Sources said the Seed Council of Sindh
has granted approval for different crop
varieties, which included two varieties
of wheat (NIA-Sunhari and NIA-
Amber) and one cotton variety (NIA-
Ufaq) of Nuclear Institute of
Agriculture (NIA), Tandojam.
With the release of these varieties, the
total number of varieties developed by
NIA, Tandojam has risen to 25.
(The News – August 4, 2010)
New policy unveiled
Sunflower, canola procurement price
fixed Federal Minister for Food and
Agriculture announced Rs.1,800 per
40 kg procurement price for canola and
sunflower and set a target of one
million acres of land to be utilised for
sowing the two crops in the flood-
affected areas.
Unveiling the new policy on canola
and sunflower at a press conference
the minister said the policy was aimed
at providing financial benefit of Rs.3
B to the growers.
The government will procure canola
against cash payment in order to give
maximum benefit to farmers, he
announced.
(Dawn – August 31, 2010)
Tracking Opportunity & Risk Related Developments
MICRO & SMEs
SBP devising new microfinance strategy
The SBP acting governor has said the
central bank is working on a new
Microfinance Strategy with a greater
focus on ‘inclusive financial services’
that will enable the microfinance sector
to cope with emerging challenges.
Speaking at the Swiss Agency for
Development and Cooperation
Partnership for Microfinance
Experience Sharing Event held at a
local hotel in Karachi
He said the new strategy will
emphasize upon the industry to
strengthen its fundamentals by
developing infrastructure required for
sustainable and inclusive growth. “The
new strategic framework is intended
to help the sector get back on its growth
trajectory while stressing on new
initiatives in the areas of deposit
mobilization, up-scaling loan sizes,
developing partnerships, and
encouraging successful provincial /
regional Microfinance Banks (MFBs),”
he added.
(The Nation – August 19, 2010)
FINANCIAL SERVICES
Banking sector’s profit up
After two years' deceleration, banking
sector profits posted a big increase of
33% during the first half of the current
calendar year 2010. According to
analyst, the profit of listed banking
sector reached Rs.35.512 B in first half
of current calendar year as compared
to Rs.26.630 B in corresponding period
of last FY, depicting an increase of
Rs.8.88 B.
Despite healthy surge in profits, the
bankers see some uncertainty in future
profitability as the State Bank is
expecting increase in NPLs due to
floods, which have caused extensive
damages in agricultural and SME
sectors.
(Business Recorder – August 28, 2010)
Banking spread shoots up
The half yearly report showed that
banks have increased their profitability
despite poor performance of economy
but they earned by keeping most of
the profits at the cost of depositors.
The latest information provided by the
SBP showed that the banking spread
has sharply increased to 7.6% in July,
which was 16-month high. Higher
banking spread means banks get more
while depositors get less return on their
deposits.
The State Bank has increased the
discount rate by 0.5% to 13% which
suddenly increased the return on
banks’ investments. Banks have been
making heavy investments on
government papers on which the
return also increased after
enhancement of policy interest rate.
(Dawn – August 31, 2010)
Mutual funds industry grew by 6.4%
The local mutual funds industry
appreciated by 6.4% in month of July
2010-11 to close at Rs.212 B, which is a
positive trend seen after 3 months.
In the last three months since April,
when industry was witnessing
declining trends, the month of July saw
the industry showing signs of
appreciation.
Comparing the industry size to
December 2009 level of Rs.225 B, the
industry still lags behind by 5.7%.
Analysts said that since the
announcement of the Capital Gain Tax
(CGT) implementation on equities,
investors have been shifting their funds
more towards the income and money
market funds categories (especially to
the money market funds category,
which showed an appreciation of a
massive 142% during the last 7 months
of 2010 while 29% growth was
witnessed alone in July 2010 on a MoM
basis).
(Daily Times – August 31, 2010)
14

NPLs dropped in Q2 of 2010
Banking sector witnessed a significant
breakthrough in curtailing the constant
lending of NPLs in the 2nd Q of the
calendar year 2010.
The SBP updated statistics showed the
banks NPLs accretion dropped
significantly as their lending amount
was contained to Rs.2.6 B in Q2 of 2010,
showing a sharp decline as against the
previous two quarters, which reported
NPLs at Rs. 19.6 B and Rs 16 B,
respectively.
The total outstanding NPLs reached
Rs. 460 B by June 2010, the central bank
reported. The net NPL ratio for all
banks as of Q2 of 2010 declined to 3.8%
from 4.2% at the end of Q1 of 2010.
The NPLs issued by private banks have
increased by Rs.4.7 B in Q2 of 2010 as
against Rs .15 B in Q1 of 2010, whereas
those for specialized banks rose by
Rs.1.1 B as compared with Rs. 852 M
in Q1, 2010.
NPLs for the public sector banks such
as NBP, BoP and others reflected
reversals of Rs 4.3 B as against
accretions of Rs 4.8 B in Q1 of 2010.
(Daily Times – August 20, 2010)
REGULATORY
SBP streamlines agricultural lending
The SBP issued fresh instructions to
banks for streamlining agricultural
lending procedures and
documentation in order to ensure
timely disbursement of agricultural
credit to the farming community.
According to a Circular ACD No 2, the
State Bank in consultation with banks
has revised the list of documents to be
obtained against various kinds of
agricultural loans and streamlined the
turnaround time for agricultural loan
processing to avoid unnecessary delay
in sanctioning of the loans.
(Business Recorder – August 12, 2010)
Tracking Opportunity & Risk Related Developments
SECP registers 232 firms
SECP registered 232 companies during
July 2010 - increasing the total corporate
portfolio to 56,351 companies.
The highest number of companies, i.e.,
89, was registered at the Company
Registration Office in Lahore, followed
by the Karachi and Islamabad
registering 66 and 49 companies
respectively. The CROs of Peshawar,
Faisalabad, Multan, registered 9
companies each, while only 1 company
was registered at Quetta CRO.
Of the 232 companies, 37 and 28
companies are from trading and
services sectors respectively. 16 and 15
companies are from I.T. and
construction whereas the share of
tourism and engineering sectors has
been 11 companies each.
(Daily times – August 5, 2010)
State Bank announces immediate
initiatives
The Acting Governor, SBP has
announced new initiatives along with
the setting up of four committees of
banks for the revival of economic
activities in the flood affected areas of
the country.
Presiding over a meeting of the
Presidents/CEOs of all banks at SBP,
he disclosed that SBP has decided to
make available SBP refinancing
schemes at concessional rates for
agriculture and small businesses in
flood affected areas, grant relaxations
in provisioning requirements for loans
stuck up because of this tragedy, and
appropriate credit guarantee schemes
to share losses with banks to encourage
them to extend fresh loans in these
areas. He said these initiatives are ready
to be announced as modalities are
finalized in consultation with all
stakeholders.
He also said that the committees will
be on SME Finance, Agricultural
Finance, Microfinance and General
Relief Activities. While the Flood Relief
Committee of Pakistan Banks
Association (PBA) will coordinate with
Banks to channelize the flood relief
measures to the flood affected people,
the other three committees will put
forward their recommendations for
the immediate relief and smooth flow
of credit to the flood affected people
of the country, he added.
(The Nation – August 21, 2010)
MACRO ENVIRONMENT
46% decline in July FDI
Despite improvement on economic
front, weakening trend in foreign
investment continues during the CFY
and foreign direct investment posted
46% slump in July 2010. Economists
say that on domestic front worst law
and order situation, poor industrial
infrastructure and high cost of doing
business are directly affecting foreign
investment.
This would be the 3rd consecutive FY
in which the country is likely to post
decline in FDI, they said. The SBP said
that FDI had posted a decline of 45.9%
during July 2010.
July 2010 FDI reduced to $98.5 M as
compared to $182 M in same period of
FY 2009, depicting a decrease of $83.5
M. However, portfolio investment
registered a surge of 1,148% due to
some profit talking in the equity
market. Portfolio investment mounted
to $46.3 M in the first month of FY 2011
relative to a negative position of $4.4
M in corresponding period of last FY.
(Business Recorder - August 17, 2010)
Domestic debts rise to record Rs 4.6 trillion
The country's domestic debts surged
by Rs.792 B to Rs.4.6 trillion in FY 2009-
10 due to significant rise in fiscal deficit,
revenue shortfall, and slow-down in
privatisation process.
According to the SBP, the country's
domestic debts, comprising permanent
debt, floating debt, unfunded debt and
foreign currency instruments,
registered a healthy growth of 20.50%
15

during FY 2010. In absolute terms, the
domestic debts reached the level of
Rs.4.652 trillion on June 30, 2010 against
Rs.3.86 trillion on June 30, 2009,
depicting an increase of Rs.792 B
during last FY. Increase in domestic
debt during fiscal year 2009 was Rs.586
B raising to Rs 3.86 trillion.
(Business Recorder – August 4, 2010)
Exports grow to $1.783 B in July
First month (July) of the ongoing fiscal
year 2010-11 has started with a positive
note and Pakistan’s exports have
posted a handsome growth with total
exports at $1.783 B. Similarly the
imports of the country also witnessed
a healthy growth and totaled at $3.235
B in July 2010. The trade deficit during
July 2010 has been recorded at $1.4 B.
However, authorities in the ministry
of commerce strongly feel that impact
of flood 2010 on exports would be quite
visible in the month of September
when figures for exports in the month
of August 2010 would be available.
According to the official, road and rail
links have been damaged due to floods
and there have been difficulties in the
movement of exportable goods from
upcountry to ports of the country.
(Daily Times – August 12, 2010)
Foreign debt soars to $55.63 billion in
FY10
The stock of external debt and liabilities
of Pakistan reached $55.63 B by the
end of FY10 from $52.33 B a year ago,
the central bank said.
Economists said that the foreign debts
have touched the alarming level and
recommended measures on emergency
basis to avert default position.
“There are concerns over repayment
of short-term loans, starting 2011 and
it is feared that the government would
borrow more from the international
donors,” said a renowned economist.
“The more borrowing from donor
agencies to repay the previous loans
would push the country towards
default,” he said.
Tracking Opportunity & Risk Related Developments
According to the SBP data issued, the
total external debts stood at $54.506 B
by June against $51.059 B a year ago.
The major component in the external
debt is loan from the IMF, which stood
at $1.055 B with the federal government
and $7.022 B with the central bank.
The foreign exchange liabilities reduced
to $1.122 B from $1.274 B, which
included central bank deposits, foreign
currency bonds and other swap
liabilities.
(The News – August 7, 2010)
July CPI seen up 12.34%
Pakistan’s consumer price index, the
key indicator of inflation, likely rose
by 12.34% year-on-year in July, a
slower rise than in June, thanks to a
high base affect, according to a Reuters
poll.
July consumer prices were seen rising
12.34% from a year earlier, according
to the median of a survey of 10 analysts
and economists. The CPI rose by
12.69% in June.
The SBP has maintained a tight
monetary policy and raised the key
policy rate by 50 bps to 13% last month
to reinforce its fight against inflation
and a widening fiscal deficit.
“Inflation is likely to rise further due
to the loss of crops and devastation
caused by the floods,” said Director at
Invisor Securities Ltd. Analysts also
said prices usually rise in the holy
month of Ramadan which is due to
begin this week.
(The Nation – August 11, 2010)
July current account deficit amounts
to $635 M
The country registered current account
deficit (CAD) $635 M during July 2010,
the first month of the CFY. The SBP
said that the country's current account
deficit had dipped by 1.5%
or $10 M, to $635 M, during July 2010
as compared to $645 M during July
2009.
However, this figure was higher by 44%
than $441 M recorded in June 2010. July
2010 CAD without official transfers was
also higher than the same period of last
fiscal year. Without official transfers,
CAD had climbed to $765 M during
July 2010 as compared $648M in July
2009, depicting an increase of 18% or
$117 M during July 2010.
With a deficit of $222 M, the country's
altogether income from abroad in July
2010 stood at $57 M as compared to
$279 M payments of income to the
overseas. Services sector exports
presented a healthy and better
performance as the services imports
declined, while exports posted some
rise. Services exports reached $282 M
in 1st month of CFY as compared to
export of $249 M in corresponding
period of last FY, depicting an increase
of $33 M in July 2010. In addition,
services imports declined to $556 M in
July 2010 from $566 M in July 2009.
With $1.645 B exports and $2.914 B
imports, goods trade deficit stood at
$1.269 B in the 1st month of CFY. "Some
decline in CAD has been contributed
by increase in goods and services
exports, besides huge payments home
remittances during July," analysts said.
However, they said that month on month
basis current account deficit posted some
increase, which is a matter of concern
and policy makers should take some
steps to control it. It may be mentioned
here that during fiscal year 2009-10, the
country had posted CAD of $3.495 B as
compared to $9.261 B in FY 2008-09.
(Business Recorder – August 18, 2010)
July trade deficit up 24 %
The country witnessed a trade deficit
of $1.451 B in the first month (July) of
CFY against $1.171 B in the same
month of last year showing a surge of
about 24 %. Exports have shown about
22 % (exact 21.83 %) growth in July
and reached $1.788 B as compared to
$1.4676 B in the corresponding month
of the previous FY.
However, imports depicted a growth
of 22.7% to $3.2388 B from $2.64 B in
July last year. Trade figures show
exports have declined by 1.73% in July
as compared to June 2009-10 when
16

exports earned $1.8194 B. Imports
indicated 0.45% growth in July as
compared to June. Trade deficit
indicated 3.28% increase.
(Business Recorder – August 12, 2010)
Poor social sector indicators -
Pakistan likely to miss millennium
development goals
The World Bank has predicted that
Pakistan is likely to miss the 2015
Millennium Development Goals for
improving its social sector indicators
envisaged under the umbrella of
United Nations (UN).
“Pakistan is unlikely to meet the
MDGs. While the country was on
track to meet the poverty reduction
goal, the recent economic crisis and
its adverse impact on poverty may
have jeopardised its achievement,”
the World Bank’s Country Partnership
Strategy (CPS) said, which was
prepared by the Bank for lending $6.0
B to Islamabad over the next 4 years
(2010/13).
It said that despite an improvement
in the human development indicators
since 2001/02, Pakistan still lag well
behind the other low-income countries
at a similar level of income,
heightening the vulnerability of its
population.
(The News – August 10, 2010)
Fiscal deficit at 5pc of GDP in FY11
The SBP has estimated that the fiscal
deficit would be around 5% of the
gross domestic product in 2010/11
against the government projection of
four percent.
The central bank in a report on
weakening of fiscal position of the
country released recently said that the
excessive reliance on domestic sources
to finance the fiscal deficit shows both
the weakening of fiscal position and
less-than-expected realisation of
projected external financing.
Tracking Opportunity & Risk Related Developments
This position breached the revised Services sector deficit narrows by 13.83%
fiscal deficit target of 5.1% of the GDP
in FY10 and provisionally it would The country's services trade deficit
narrowed down by 14% during July
stand around six percent, it said.
2010 mainly due to low imports and
“Provisional figures indicate that the rising exports of services sector. The
revised FY10 fiscal target of 5.1% of SBP said that the country's services
the GDP has been breached and could sector trade performance was very
be higher than six percent of the encouraging with a massive decline
GDP,” the SBP said. in imports and notable increase in
exports.
The central bank said that the budget
According to SBP statistics overall
deficit target has been set at 4.0% of services sector trade deficit reduced
the GDP in FY11. “Given an ambitious by 13.83% at $274.016 M during July
tax revenue target by the FBR, higher 2010, as compared to $317.294 M in
requirement of security-related July 2009, depicting a decrease of
expenditures and a sizeable $43.278 M in the 1st month of FY 2011.
development budget, reducing the Economists said that although services
deficit has declined by some 14
fiscal deficit close to the target level,
percent but it is still at higher level
though imperative, would be quite and should be reduced to save forex
challenging,” it added. reserves.
(The News – August 3, 2010) (Business Recorder – August 22, 2010)
Table: RISK & OPPORTUNITY TRENDS
(Based on Current Developments)
SECTOR RISK OPPORTUNITY
Textile
Oil
Power / Energy
Sugar
Cement / Construction / Steel
Automotive
Telecommunication
Other Industries
Agriculture
Micro Business & SME
Financial Services
Regulatory
Macro Environment
* Up Down No Change
17

ACCELERATING GLOBAL
RISKS – SPECIAL
EXCERPTS
(RE) INTRODCTION We are in the
midst of an unprecedented global
financial and economic crises that
has lead to widespread uncertainty
and nervousness. Hopes raised
through a crescendo of global market
and establishment analysts, over
the past year or so, that courtesy
of unprecedented bailouts, a
recovery lies just ahead and all
will soon be well as the global
economy returns to a sustainable
path of normalcy. Global imbalances
will gradually work themselves out
and all will be well. Analysis and
supporting materials on these lines
have refused to calm the escalating
and widespread sense of fear and
dread. There is growing evidence,
and analytics, in support of the case
that the worst is yet to come,
economically 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 has been made, in
this report, based on 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 a Deep Recession/
Deflation,
• Outlook for a US-Sovereign
Debt Crises
Tracking Opportunity & Risk Related Developments
• US Dollar 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
• US-NATO failure in Afghanistan
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
EL-ERIAN: FED CAN'T DO MUCH
MORE TO BOOST ECONOMY
CNBC, August 10, 2010
Despite all the anticipation over
today's Federal Reserve meeting,
there's little else the central bank can
do now to help the economy recover,
Pimco's co-CEO Mohamed El-Erian
told CNBC.
IS THIS FINALLY THE ECONOMIC
COLLAPSE?
Fortune, By Keith R. McCullough - August
11, 2010
…Points of economic collapse are
generally crystal clear in the rear-view
mirror. Professional politicians in
Japan have been telling stories for 20
years as to why they can prevent
economic stagnation. In the US, the
storytelling started in 2007. All the
while, stock market and real-estate
prices have repeatedly rallied to
lower-highs, then collapsed again, to
lower-lows.
Despite the many differences between
Japan and the US, there is one
similarity that continues to matter
most in the risk management model
my colleagues and I use at Hedgeye,
our research firm -- debt as a
percentage of GDP. Now that the US
can't cut interest rates any lower, the
only option left on the table is what
the Fed just announced it would start
doing -- buying Treasury debt. And
that could lead the country to the brink
of collapse: According to economists
Carmen Reinhart & Ken Rogoff,
whose views we share, crossing the
90% debt/GDP threshold is the
equivalent of crossing the proverbial
Rubicon of economic growth. It's a
point from which it's almost
impossible to return.
… Markets trade on expectations.
Yesterday's zig-zag in the S&P 500
was unlike most sleepy August
trading days in America. That's
because the 'government is good'
crowd leaked word that this second
round of "quantitative easing," known
as QE2, was coming, and that Ben
Bernanke was going to respond to our
buy-and-hope begging. (The first
round of quantitative easing was the
Fed's unprecedented purchase of
agency debt to prop up the housing
market, along with credit facilities for
big banks, which began in 2008 and
ended earlier this year.)
18

To think that we have institutionalized
market expectations to this degree is
downright frightening. It seems
impossible but true that all rallies start
and end with rumors about what Fed
Chairman Ben Bernanke, a humble
looking man of government, had to
say at 2:15 PM EST yesterday
afternoon, or any other day he makes
a statement.
THE HORROR SHOW
New York Times, By Bob Herbert - August
9, 2010
The employment situation in the
United States is much worse than even
the dismal numbers from last week’s
jobless report would indicate. The
nation is facing a full-blown
employment crisis and policy makers
are not responding with anything like
the sense of urgency that is needed.
The employment data for July,
released by the government on Friday,
showed that private employers added
just 71,000 jobs during the month and
that the unemployment rate remained
flat at 9.5 percent. But as bad as those
numbers were, if you look beyond
them you’ll see a horror show.
Government workers were walking
the plank from coast to coast. About
143,000 temporary Census workers
were let go, and another 48,000
government employees at the budget-
strapped state and local levels lost
their jobs. But the worst news, with
the most ominous long-term
implications, was that the reason the
unemployment rate was not higher
was because 181,000 workers left the
labor force.
With many of them beaten down by
the worst jobs situation since the Great
Depression, they just stopped looking
for work. And given the Alice-in-
Wonderland way in which we
compile our official jobless statistics,
they are no longer counted as
unemployed.
Tracking Opportunity & Risk Related Developments
….We are not even beginning to cope
with this crisis, which began long
before the onset of the so-called Great
Recession. The economy is showing
absolutely no sign of countering the
nation’s staggering jobs deficit. …Of
the 14.6 million men and women
officially counted as unemployed,
nearly 45 percent have been out of
work for six months or longer. ..Said
Mr. McMillion: “When you combine
the long-term unemployed with those
who are dropping out and those who
are working part-time because they
can’t find anything else, it is just far
beyond anything we’ve seen in the
job market since the 1930s.”
….We’ve got more and more people
in our working-age population and
fewer and fewer jobs to go around.
Mr. McMillion tells us that there are
now 3.4 million fewer private-sector
jobs in the U.S. than there were a
decade ago. In the last 10 years, we’ve
seen the worst job creation record
since 1928 to 1938.
We’re not heading toward the danger
zone. We’re there. The U.S. will not
remain a stable society if this great
employment crisis is not addressed
head-on — and soon. You cannot
allow joblessness on this scale to fester.
It’s wrong, and the blowback will be
as destructive and intolerable as it is
inevitable.
AMERICA IS AT RISK OF
BOILING OVER
Wall Street Journal, By Peggy Noonan -
August 7, 2010
…..Something inside was telling us
we were living through "not the placid
dawn of a peaceful age but the illusory
calm before stern storms."…I thought
of this again the other day when
Drudge headlined increasing lines in
London for Americans trading in their
passports over tax issues, and the sale
of Newsweek for $1.
Our problems as a nation have been
growing on us for a long time. Their
future growth, and the implications
of that growth, could be predicted.
But there is one thing that is both new
since 1994 and huge. It took hold and
settled in after the crash of 2008, but
its causes were not limited to the crash.
The biggest political change in my
lifetime is that Americans no longer
assume that their children will have
it better than they did. This is a huge
break with the past, with assumptions
and traditions that shaped us.
The country I was born into was a
country that had existed steadily, for
almost two centuries, as a nation in
which everyone thought—wherever
they were from, whatever their
circumstances—that their children
would have better lives than they did.
That was what kept people pulling
their boots on in the morning after the
first weary pause: My kids will have
it better. They'll be richer or more
educated, they'll have a better job or
a better house, they'll take a step up
in terms of rank, class or status.
Parents now fear something has
stopped. They think they lived
through the great abundance, a time
of historic growth in wealth and
material enjoyment. …Optimists think
that if we manage to turn a few things
around, their kids may have it . . .
almost as good. The country they
inherit may be . . . almost as good.
And it's kind of a shock to think like
this; pessimism isn't in our DNA. But
it isn't pessimism, really, it's a kind of
tough knowingness, combined, in
most cases, with a daily, personal
commitment to keep plugging.
But do our political leaders have any
sense of what people are feeling deep
down? They don't act as if they do. I
think their detachment from how
normal people think is more
19

dangerous and disturbing than it has
been in the past….But I've never seen
the gap wider than it is now. I think
it is a chasm. In Washington they don't
seem to be looking around and
thinking, Hmmm, this nation is in
trouble, it needs help. They're thinking
something else… They don't seem to
know or have a sense of the mood of
the country.
And so they make their moves,
manipulate this issue and that, and
keep things at a high boil. And this at
a time when people are already in
about as much hot water as they can
take.
Inner pessimism and powerlessness:
That is a dangerous combination.
THE DOWNSIZING OF
AMERICAN FOREIGN POLICY
The New Republic, By Michael Mandelbaum
- August 10, 2010
In the wake of the financial
meltdown triggered by the collapse
of 2008, and the deep global recession
that the Lehman collapse
dramatically worsened, the American
financial sector is
shrinking….Something similar is
about to happen to American foreign
policy…the scope of America’s
international activities will contract
in the years ahead because the
American government will have far
less money with which to conduct
the nation’s foreign policy.
The United States will have far less to
spend on foreign policy because it will
have to spend far more on other
things. It has a large and growing
national debt, which the measures
designed to cope with the financial
crisis and the deep recession that it
worsened have substantially
increased. Moreover, the costs of the
country’s principal entitlement
Tracking Opportunity & Risk Related Developments
programs, Social Security and
Medicare, will soar in the decades
ahead as the 75 million baby
boomers–Americans born between
1946 and 1964–begin to retire and
collect the benefits they have been
promised.
The American government will not
be able to borrow all the money it
will need to pay the growing interest
on the national debt and its
obligations to the swelling ranks of
the nation’s senior citizens. It will
have to raise taxes and reduce
spending, including spending on
entitlements. In an era in which fewer
resources will be available for
everything, it is certain that fewer will
be available for foreign policy. When
working Americans are paying more
than in the past to support their fellow
citizens who have retired, and retirees
are receiving fewer benefits from the
government than they were promised,
neither group will be eager to offer
generous support to overseas
ventures. This change in attitude will
change the domestic basis of
American foreign policy.
…In these circumstances, the public
will no longer feel able to afford, and
so will not support, operations to
rescue people oppressed by their own
governments and to build the
structures of governance where none
exists. Interventions of this kind,
which the United States has
undertaken in the last two decades
in Somalia, Haiti, Bosnia,
Afghanistan, and Iraq, will not be
repeated… payroll levy…Such a tax hike would
SOVEREIGN & US DEBT CRISES
U.S. IS BANKRUPT AND WE
DON'T EVEN KNOW: LAURENCE
KOTLIKOFF
Bloomberg, By Laurence Kotlikoff (Laurence
J. Kotlikoff is a professor of economics at Boston
University) - August 10, 2010
Let’s get real. The U.S. is bankrupt.
Neither spending more nor taxing
less will help the country pay its
bills.
What it can and must do is radically
simplify its tax, health-care, retirement
and financial systems, each of which
is a complete mess. …Last month, the
International Monetary Fund released
its annual review of U.S. economic
policy. Its summary contained these
bland words about U.S. fiscal policy:
“Directors … noted that a larger than
budgeted adjustment would be
required to stabilize debt-to-GDP.”
But delve deeper, and you will find
that the IMF has effectively
pronounced the U.S. bankrupt. Section
6 of the July 2010 Selected Issues Paper
says: “The U.S. fiscal gap associated
with today’s federal fiscal policy is
huge for plausible discount rates.” It
adds that “closing the fiscal gap
requires a permanent annual fiscal
adjustment equal to about 14 percent
of U.S. GDP.” The fiscal gap is the
value today (the present value) of the
difference between projected spending
(including servicing official debt) and
projected revenue in all future years.
To put 14 percent of gross domestic
product in perspective, current federal
revenue totals 14.9 percent of GDP.
So the IMF is saying that closing the
U.S. fiscal gap, from the revenue side,
requires, roughly speaking, an
immediate and permanent doubling
of our personal-income, corporate
and federal taxes as well as the
leave the U.S. running a surplus
equal to 5 percent of GDP this year,
rather than a 9 percent deficit. So the
IMF is really saying the U.S. needs
to run a huge surplus now and for
many years to come to pay for the
spending that is scheduled. It’s also
saying the longer the country waits
to make tough fiscal adjustments,
the more painful they will be.
20

Is the IMF bonkers? No. It has done
its homework. So has the
Congressional Budget Office whose
Long-Term Budget Outlook, released
in June, shows an even larger
problem.
Based on the CBO’s data, I calculate
a fiscal gap of $202 trillion, which is
more than 15 times the official debt.
This gargantuan discrepancy
between our “official” debt and our
actual net indebtedness isn’t
surprising. It reflects what
economists call the labeling problem.
Congress has been very careful over
the years to label most of its
liabilities “unofficial” to keep them
off the books and far in the future.
How can the fiscal gap be so
enormous? Simple. We have 78
million baby boomers who, when fully
retired, will collect benefits from Social
Security, Medicare, and Medicaid that,
on average, exceed per-capita GDP.
The annual costs of these entitlements
will total about $4 trillion in today’s
dollars. Yes, our economy will be
bigger in 20 years, but not big enough
to handle this size load year after year.
This is what happens when you run
a massive Ponzi scheme for six
decades straight, taking ever larger
resources from the young and giving
them to the old while promising the
young their eventual turn at passing
the generational buck.
Herb Stein, chairman of the Council
of Economic Advisers under U.S.
President Richard Nixon, coined an
oft-repeated phrase: “Something that
can’t go on, will stop.” True enough.
Uncle Sam’s Ponzi scheme will stop.
But it will stop too late.
And it will stop in a very nasty
manner. The first possibility is
massive benefit cuts visited on the
baby boomers in retirement. The
second is astronomical tax increases
Tracking Opportunity & Risk Related Developments
that leave the young with little
incentive to work and save. And the
third is the government simply
printing vast quantities of money to
cover its bills.
Worse Than Greece: Most likely we
will see a combination of all three
responses with dramatic increases in
poverty, tax, interest rates and
consumer prices. This is an awful,
downhill road to follow, but it’s the
one we are on. And bond traders will
kick us miles down our road once
they wake up and realize the U.S. is
in worse fiscal shape than Greece.
Some doctrinaire Keynesian
economists would say any stimulus
over the next few years won’t affect
our ability to deal with deficits in the
long run.
This is wrong as a simple matter of
arithmetic. The fiscal gap is the
government’s credit-card bill and each
year’s 14 percent of GDP is the interest
on that bill. If it doesn’t pay this year’s
interest, it will be added to the balance.
Demand-siders say forgoing this
year’s 14 percent fiscal tightening, and
spending even more, will pay for itself,
in present value, by expanding the
economy and tax revenue.
My reaction? Get real, or go hang out
with equally deluded supply-siders.
Our country is broke and can no
longer afford no- pain, all-gain
“solutions.”
TALEB SAYS GOVERNMENT
BONDS TO COLLAPSE, AVOID
STOCKS
Bloomberg, By Renee Bonorchis and Miles
Weiss – August 11, 2010
(Nassim Nicholas Taleb, who warned that
unforeseen events can roil markets in "The
Black Swan," said he is "betting on the collapse
of government bonds" and that investors
should avoid stocks.)
“I’m very pessimistic,” he said at the
Discovery Invest Leadership Summit
in Johannesburg today. “By staying
in cash or hedging against inflation,
you won’t regret it in two years.”
….The financial system is riskier
than it was before the 2008 crisis that
led the U.S. economy to the worst
contraction since the Great
Depression, Taleb said.
Prior to the collapse of Lehman
Brothers Holdings Inc. in September
2008, Taleb warned that bankers were
relying too much on probability
models and were disregarding the
potential for unexpected catastrophes.
His book labeled these events black
swans, referring to the widely held
belief that only white swans existed
until black ones were discovered in
Australia in 1697, and said that they
were becoming more severe.
Taleb helped pioneer the concept of
hedging against these tail-risk events
while trading options in the 1980s for
banks such as First Boston Inc., now
part of Credit Suisse Group AG. Now
a professor at New York University’s
Polytechnic Institute, Taleb set up the
tail-risk hedge fund Empirica LLC in
1999 and ran it for six years.
In February, he told a conference in
Moscow that “every single human
being” should bet Treasury bonds
will decline. It’s a “no-brainer” to
sell short the debt, he added. …
FED MOVE ON DEBT SIGNALS
CONCERN ABOUT ECONOMY
New York Times, By Sewell Chan - August
10, 2010
WASHINGTON — Federal Reserve
officials, acknowledging that their
confidence in the recovery had
dimmed, moved again on Tuesday
to keep interest rates low and
encourage economic growth. They
also signaled that more aggressive
measures could follow if the job
21

market and other indicators continued
to weaken.
With short-term interest rates already
close to zero, the Fed’s policy makers
have relatively few tools available
to encourage consumer and corporate
spending. So they now plan to use
the proceeds from the Fed’s huge
mortgage-bond portfolio to buy long-
term government debt.
…Though the immediate impact is
likely to be modest, the decision is a
turnabout from only a few months
ago, when officials were discussing
when and how to begin to raise
interest rates and gradually shrink the
$2.3 trillion balance sheet amassed
through the Fed’s response to the 2008
financial crisis.
In buying at least $10 billion a month
in new Treasury securities — a small
fraction of the roughly $700 billion in
Treasury debt the Fed holds — the
central bank is trying to help keep
money readily available in the
financial markets.
With Congress seemingly unable to
agree on substantial new stimulus
spending, the Fed could face a far
tougher decision later this year:
whether to take more drastic steps to
pump money into the economy and
make credit even cheaper.
“We’re in a lousy middle between the
economy picking up on its own and
falling off a cliff,” said Cathy E.
Minehan, a former president of the
Federal Reserve Bank of Boston. “And
that makes policy-setting really hard.”
US DOLLAR CRISES & AN
ALTERNATIVE RESERVE
CURRENCY
(Consequent or Concurrent to the
Debt Crises)
Tracking Opportunity & Risk Related Developments
IMF DOCUMENT ILLUSTRATES
PLAN TO RAISE GLOBAL
CURRENCY
Information Liberation, By Stephen C. Webster
- August 07, 2010
It's no secret that many of the world's
largest industrialized nations are
somewhat eager to ease their reliance
on the U.S. dollar. For months China
and Russia have pushed ever subtly,
for a new "global reserve currency,"
to give governments around the world
enhanced economic stability in the
event of greater fluctuations in the
dollar's value.
But what wasn't known, until recently,
is how far along the International
Monetary Fund was in the planning
of elevating its so-called "special
drawing rights" from mere
international agreement to an actual,
legitimate global currency.
The report examines what it calls the
"imperfections" of the global reserve
banking structures, and how hoarding
of reserves by sovereign nations can
subject the system to risk and
occasional shocks.
In 35 pages of extrapolation and
footnotes, the IMF's Strategy, Policy
and Review Department lays out the
how and why of a global currency,
which would move from an "inside
money" as the SDR to an "outside
money" that is traded by governments.
However, they conclude that "the
ideas discussed are unlikely to
materialize in the foreseeable future
absent a dramatic shift in appetite for
international cooperation."
The PDF document appeared to have
been taken offline at time of this
writing, but a cached version was still
available. The document is from April,
but was only recently noticed by
Financial Times.
"[In] the eyes of the IMF at least, the
best way to ensure the stability of
the international monetary system
(post crisis) is actually by launching
a global currency," they note.
The report was issued months before
a recent United Nations Economic and
Social Council called on nations to
move away from the dollar as their
reserve currency. The U.N. based its
advice on the adverse effects felt by
developing nations that were hit
especially hard during the 2008-2009
U.S. economic instability.
President Obama, Treasury Secretary
Geithner and Federal Reserve
Chairman Ben Bernanke have
steadfastly maintained that the world
does not need a new reserve currency.
STRATEGIC DIVERGENCE –
CHINA, RUSSIA & TURKEY
WILL ASIA NIX IRAN
SANCTIONS?
The Diplomat, By Richard Weitz - August 10,
2010
…However, such concerns don’t
appear to have tamped down the
enthusiasm of Chinese firms to take
the place of the departing Western
companies. In late July, Iran’s deputy
oil minister, Hossein Noghrekar, said
that Chinese companies had already
invested $40 billion in Iran’s energy
sector and that Chinese and Iranian
representatives were discussing the
construction of seven refineries in
Iran, which would enormously
expand Iran’s capacity to refine its
oil into gasoline. The Chinese
delegation, meanwhile, refused to
support the fourth Security Council
sanctions resolution until wording
that prohibited foreign investment
in Iran's energy sector was removed
from the draft text.
In addition, Chinese government
representatives have criticized the
enactment of the latest US and EU
22

sanctions as excessively harsh and
counterproductive and have instead
endorsed holding additional
negotiations and dialogue aimed at
resolving the Iranian nuclear issue
without further sanctions or the use
of force.
In addition to Chinese investors in
Iran simply ‘backfilling’ for the
departing Western firms, US officials
also worry that Chinese dealers will
circumvent trade sanctions by
expanding their use of intermediaries
to sell gasoline and other sanctioned
products to Iran. … Chinese
companies have also invested large
sums in the Iranian economy, with
more than 100 Chinese firms now
operating in Iran.
But the volume of Chinese-Iranian
commerce isn’t the only factor
discouraging Chinese adherence to
unilateral US and EU sanctions. The
fact is that many Chinese firms with
large economic stakes in Iran just don’t
have many (if any) business ties with
the United States or the European
Union and so aren’t intimidated by
the prospect of losing access to
Western markets.
So will Japan fall in line? Again China
looms large, with Japanese officials
privately complaining to their US
colleagues about the Chinese simply
replacing any Japanese companies
that disengage from the Iranian
market.
…as was the case with US lobbying
for support from China over the wars
in Iraq in 1990 and 2003, China can be
expected to drive a very hard bargain.
IRAN - A NEW MID-EAST WAR
IN THE MAKING
THE POINT OF NO RETURN
The Atlantic, By Jeffrey Goldberg - September
2010
Tracking Opportunity & Risk Related Developments
For the Obama administration, the
prospect of a nuclearized Iran is dismal
to contemplate— it would create major
new national-security challenges and
crush the president’s dream of ending
nuclear proliferation. but the view from
Jerusalem is still more dire: a nuclearized
Iran represents, among other things, a
threat to Israel’s very existence. in the
gap between Washington’s and
Jerusalem’s views of Iran lies the question:
who, if anyone, will stop Iran before it
goes nuclear, and how? As Washington
and Jerusalem study each other intensely,
here’s an inside look at the strategic
calculations on both sides—and at how,
if things remain on the current course,
an Israeli air strike will unfold.
It is possible that at some point in the
next 12 months, the imposition of
devastating economic sanctions on
the Islamic Republic of Iran will
persuade its leaders to cease their
pursuit of nuclear weapons. It is also
possible that Iran’s reform-minded
Green Movement will somehow
replace the mullah-led regime, or at
least discover the means to temper
the regime’s ideological extremism. It
is possible, as well, that “foiling
operations” conducted by the
intelligence agencies of Israel, the
United States, Great Britain, and other
Western powers—programs designed
to subvert the Iranian nuclear effort
through sabotage and, on occasion,
the carefully engineered
disappearances of nuclear scientists—
will have hindered Iran’s progress in
some significant way. It is also possible
that President Obama, who has said
on more than a few occasions that he
finds the prospect of a nuclear Iran
“unacceptable,” will order a military
strike against the country’s main
weapons and uranium-enrichment
facilities.
But none of these things—least of all
the notion that Barack Obama, for
whom initiating new wars in the
Middle East is not a foreign-policy
goal, will soon order the American
military into action against Iran—
seems, at this moment, terribly likely.
What is more likely, then, is that one
day next spring, the Israeli national-
security adviser, Uzi Arad, and the
Israeli defense minister, Ehud Barak,
will simultaneously telephone their
counterparts at the White House and
the Pentagon, to inform them that
their prime minister, Benjamin
Netanyahu, has just ordered roughly
one hundred F-15Es, F-16Is, F-16Cs,
and other aircraft of the Israeli air
force to fly east toward Iran—possibly
by crossing Saudi Arabia, possibly by
threading the border between Syria
and Turkey, and possibly by traveling
directly through Iraq’s airspace,
though it is crowded with American
aircraft. (It’s so crowded, in fact, that
the United States Central Command,
whose area of responsibility is the
greater Middle East, has already asked
the Pentagon what to do should Israeli
aircraft invade its airspace. According
to multiple sources, the answer came
back: do not shoot them down.)
In these conversations, which will be
fraught, the Israelis will tell their
American counterparts that they are
taking this drastic step because a
nuclear Iran poses the gravest threat
since Hitler to the physical survival
of the Jewish people. The Israelis will
also state that they believe they have
a reasonable chance of delaying the
Iranian nuclear program for at least
three to five years. They will tell their
American colleagues that Israel was
left with no choice. They will not be
asking for permission, because it will
be too late to ask for permission.
23

I am not engaging in a thought
exercise, or a one-man war game,
when I discuss the plausibility and
potential consequences of an Israeli
strike on Iran. Israel has twice before
successfully attacked and destroyed
an enemy’s nuclear program. In 1981,
Israeli warplanes bombed the Iraqi
reactor at Osirak, halting—forever, as
it turned out—Saddam Hussein’s
nuclear ambitions; and in 2007, Israeli
planes destroyed a North
Korean–built reactor in Syria. An
attack on Iran, then, would be
unprecedented only in scope and
complexity.
…..But, based on my conversations
with Israeli decision-makers, this
period of forbearance, in which
Netanyahu waits to see if the West’s
nonmilitary methods can stop Iran,
will come to an end this December.
Robert Gates, the American defense
secretary, said in June at a meeting of
NATO defense ministers that most
intelligence estimates predict that Iran
is one to three years away from
building a nuclear weapon. “In Israel,
we heard this as nine months from
June—in other words, March of
2011,” one Israeli policy maker told
me. “If we assume that nothing
changes in these estimates, this
means that we will have to begin
thinking about our next step
beginning at the turn of the year.”
The Netanyahu government is
already intensifying its analytic
efforts not just on Iran, but on a
subject many Israelis have difficulty
understanding: President Obama.
The Israelis are struggling to answer
what is for them the most pressing
question: are there any circumstances
under which President Obama
would deploy force to stop Iran from
going nuclear? Everything depends
on the answer.
Tracking Opportunity & Risk Related Developments
….Peres went on to explain what he
saw as Israel’s true interest. “We don’t
want to win over the president,” he
said. “We want the president to win.”
WILL ISRAEL BOMB IRAN?
Slate, By Fred Kaplan – August 11, 2010
A close reading of Jeffrey Goldberg's
Atlantic article.
Jeffrey Goldberg's article in the latest
Atlantic, on whether Israel will (or
should) attack Iran's nuclear facilities
in the coming months, is the best
article I've read on the subject—
shrewd and balanced reporting
combined with sophisticated analysis
of the tangled strategic dilemmas.
Whatever you think should be done
about the Iranian program to build an
A-bomb (and Goldberg describes his
own position as one of "deep,
paralyzing ambivalence"), read his
piece before thinking about it much
more.
Based on interviews with dozens of
Israeli, Arab, and U.S. officials,
Goldberg puts the odds of an Israeli
strike by next July—involving 100
or so F-15E, F-16I, and F-16C aircraft
dropping munitions on the uranium-
enrichment facilities at Natanz and
Qom, the nuclear-research center at
Esfahan, and maybe the Bushehr
reactor, among other sites—at "better
than 50 percent."
…One thing Goldberg writes is
definitely true: Obama may soon be
facing a defining moment, similar to
John F. Kennedy's with the Cuban
Missile Crisis but more complex, in
that Kennedy had just Nikita
Khrushchev to deal with, while
Obama would have not only the
(much more unpredictable) Iranians
but also the Israelis and a slew of
regional players to confront,
accommodate, bargain with, or who
knows what.
WAR IS ON THE WAY
World Affairs, Joshua Muravchik – August
6, 2010
For generations, the Lebanese army
has been among the world’s most
timid. It went through the motions of
fighting Israel briefly in 1948 and took
no part in subsequent Arab-Israel
wars. It has consistently been a non-
factor, or rather non-actor, in
Lebanon’s civil wars these past 35
years, bringing to mind the old quip
about the Soviet satellite states: that
they were so neutral they did not even
intervene in their own internal affairs.
Why the sudden daring? Because
Hezbollah now largely controls
Lebanon, and Iran owns Hezbollah,
and both are feeling their oats.
Initiating the skirmish with Israel was
of a piece with the boast by
Ahmadinejad’s chief of staff just three
days earlier that Iran could build a
nuclear bomb. According to a
semiofficial Iranian news agency, the
chief of staff elaborated: “Today . . .
we are presented with an opportunity
to alter world management.”
Some reports say Iran wants to avoid
a new war between Hezbollah and
Israel for now, preferring to keep the
vast arsenal it has placed on Israel’s
borders at the ready for retaliation
against any strike on Iran’s nuclear
facilities. This makes sense, and if it
is true, it makes this week’s events all
the more ominous.
…In the end, the US is likely to fight,
and Israel certainly will. The steady
growth of the radicals’ self-
assuredness, stoked by Obama’s
appeasement, will end in a big
blow-up.
24