pak-iran trade expansion

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Pak-Iran Trade Expansion:The Irritants & Policy Challenges

J ahangir Achakzai*

Abstract

Although the economic ties between Pakistan and Iran date back to centuries the progressachieved in this respect remained marginal because of different political and economic reasons.Despite these political and economic breakdowns between Pakistan and Iran, trade between themcontinued without much interruption. While Pakistan has had trade imbalances with Iran in theten years period of 1996-2005, yet there is a fluctuating trend both in the growth of exports aswell as in imports. There has been increasing trend in the growth of exports in eight years, whilethe remaining two years are reported with fall in exports. But the growth rate is higher than that

of fall in exports. Similarly an increasing trend was observed in the growth rate of imports in fiveyears, while rests of the years were registered with fall in imports. Yet the growth rate in importsis higher than that of fall in imports. Moreover, if we compare the average growth rate of exportswith the average growth rate of imports, Pakistan stands in an advantageous position. Theaverage growth rate of exports was 48% while that of imports was 40%, showing that the rise inthe average growth rate of exports was 20% more than the average increase in the growth ofimports. It is a good sign for Pakistan and indicates that there is greater potential for its exportsto grow much more than its imports from Iran.

Introduction

This paper is a sequel to the previous paperwhere a gravity model of tradewas used to assess thebilateral trade potential between Pakistan and Iran. The result of the model confirmed that Iran isa potential country for Pakistani exports but only one tenth of the bilateral trade potential is beingexhausted between Pakistan and Iran. This low level of trade is not indicative of a paucity ofopportunities, but rather a reflection of several trade-inhibiting factors, which must be overcomebefore Pakistan has a chance of expanding its trade with Iran to a meaningful level. The presentpaper is an effort to bring to light the factors working as obstacles in the way of exhausting theinherent potential of bilateral trade between the two countries.The role of international trade in the development process of a country is vital. It works asEngine of growth in the economy. On the one hand, it promotes growth through cooperativeenvironment and on the other hand, it is a source of generation of surplus for further accelerationof the economy. Furthermore, the international trade works as a transmission belt for the transferof the benefits of industrialization and modern technology from the developed to underdeveloped countries.In recent years the trade with industrial countries is no longer an engine of growth for thedeveloping countries as was earlier understood. The industrial countries have been increasinglyadopting protectionist policies against the export of developing countries. Such restrictions arelikely to become even more stringent in future under the World Trade Organization (WTO)regime. Therefore, the enhancement of mutual trade among developing countries appears to be
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the best alternative. Many developing regions, therefore, have initiated the scheme of economiccooperation with the foremost objective of enhancing trade among themselves.Pakistans dependence on foreign trade has increased over the passage of time. Increasingdependence of the economy on foreign trade underlines the significance of this sector for thewhole economy. But the trade sector has limitations of its own. These limitations are in the form

of commodity and geographic concentration. By commodity concentration it is meant thattrade is revolving around very few items. Exports are of very limited nature. About 60 percent ofthe exports are cotton based. Moreover, the trade sector is characterized by geographicconcentration. Throughout in the history of Pakistan, it has relied on few countries as its majortrade partners. Any shift in political relations can have serious concerns for the whole economy.

Pak-Iran Relations

Iran situated in the west of Pakistan is characterized by common historical, cultural andeconomic affinities. It is not only geographical proximity that binds the two countries, but adeeper basis for the relationship is provided by their shared faith and belief in the eternal valuesof Islam. The affinities of sentiment, policy and stand between the two countries are reflected inthere working hand in hand in the organizations of the Islamic conference, United Nations, theNon Aligned Movement, RCD and ECO. Close ties between the Muslims of the sub continentand the people of Iran exist since centuries. After independence of Pakistan these ties werefurther strengthened. Iran lent full, unconditional moral and material support to Pakistan, andalso stood by the side of Pakistan in the hour of need. These deep-rooted bonds of friendshipbetween Pakistani and Iranian people remain stable and in fact have continued to grow. During

the recent few-years both the countries have come closer to each other and are cooperating in theindustrial, energy, cultural and economic sectors.

Pak-Iran Trade Relations

Iran and the areas which are now known as Pakistan, used to have trade relations in the past andthe caravans carrying goods from Indus to Persia and then, bringing in return consumable goodsto this area. So both the countries had been trading with each other since centuries on the basisof barter trade. As a part of their endeavors to expand trade relations, the two countries havebeen examining the possibilities of special trade agreements. The establishment of RCD(Regional Cooperation for Development) in 1964 was a step towards this end. Under this treatyseveral projects were completed. The revival of RCD under the new name of ECO (EconomicCooperation Organization) has institutionalized the traditional relations. Under ECO severalbilateral trade agreements have been signed which will increase the volume of trade relationsbetween the two countries.
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Bilateral Trade

Trade with Iran is conducted in convertible currency in terms of the Long Term TradeAgreement signed on 19th April 1982. However, transactions are made through the AsianClearing Union (ACU) arrangement to which Iran and Pakistan are also members. Under thisarrangement accounts are settled after every two months.During the 80s, bilateral trade took a quantum jump when Pakistan began purchasing oil fromIran the latter responded by purchasing a number of its import requirements from Pakistan duringGulf War. The surge in Iranian demand was due to closure or under utilization in many Iranianindustries whose production was dependent on import of raw material and spares from Europeand America. This resulted in the increase of volume of trade to $ 538 million in 1983-84 andIran was the major trading partner of Pakistan. However, as a result of the shift in Iranian Policy

of linking its imports from the countries importing oil from Iran and offering supplies to Iran ondeferred payment basis, the volume of trade started declining and the balance of trade (thedifference between the monetary value of exports and imports of output in an economy over acertain period) became favorable to Iran. The bilateral trade again showed improvements afterthe year 2000 and finally reached to 638 million US dollars in 2005.

Pakistans Exports to Iran

During the year 1996 total exports of Pakistan to Iran were valued at $15.9 million. It increasedto $ 23.5 million in the year 1997 registering a growth rate of 48%. However, the increasingtrend cannot continue and the exports fell to $14.4 million showing a negative rate of growth of -

39%. The growth rate in exports improved in the next year to come by depicting an improvementof 67% when it increased from 14.4 million dollars to 24.0 million dollars. The exports furtherincreased to $ 29.2 million during the next year. A sharp increase was recorded in the exports toIran during the next five years period of 2000-05. During these five years there was a continuousrise in the exports to Iran finally showing a record increase of $ 188 million in the year 2005.

Table1: Growth Rate in Exports

(Million $)

Years Exports Growth Rate

1996 15.9 -

1997 23.5 47.8

1998 14.4 - 38.7

1999 24.0 66.6

2000 29.2 21.7
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2001 41.9 43.4

2002 82.0 95.7

2003 102.2 24.6

2004 177.9 74.1

2005 188.0 5.7

Source: UN Commodity Trade Statistics (2005) Database (COMTRADE), UN StatisticsDivision.

The table shows that taking the exports of the year 1996 as base there is an increasing trend inthe exports during the year 1997. The exports fell by 38.7% in 1998, followed by a rise of 66.6%during the next year of 1999. The succeeding six years recorded a continuous rise in the growthof exports reaching to a record figure of 188.8 million. The above data shows that except theyear 1997 when the export fell to 14.4 million dollars, there has been rising trend in the growthof exports. There are years (2001 to 2002) when the growth rate in exports is almost double ofthe previous year. The growth rate in exports during the year 2005 was more than ten times if

compared with the figure of the first year 1996. It shows that Iran has got great potential for thePakistani exports.

Pakistans Imports from Iran

Pakistans imports from Iran in the year 1996 were to the tune of $ 286 million. During 1997imports fell to $ 158 million. It further decreased to 130 million dollars in the next year to come.The import from Iran showed a remarkable improvement when it increased to $ 371 million inthe year 1999. The year 2000 showed a decrease in the imports to the level of $ 157 million. Thetwo years period of 2001-02 reported a rise in the imports to $ 205 million and $ 301 millionrespectively. Imports again fell to $ 272 million in the next year. A rise to $ 363 million was

observed in the imports during the year 2004. The year 2005 came with a further increase inimports to $ 450 million.

Table2: Growth Rate of Imports

( Million $)

Years

Imports Growth Rate

1996 285.9 -

1997 157.9 - 44.7

1998 130.3 - 17.5

1999 370.6 64.8

2000 157.4 - 57.5

2001 204.7 30.1


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2002 301.4 47.2

2003 271.7 - 9.9

2004 362.7 33.5

2005 449.9 24.0

Source: UN Commodity Trade Statistics (2005) Database (COMTRADE), UN StatisticsDivision.

Taking 1996 imports as base, the growth rate in imports depicted a decreasing trend during 1997showing a fall of 45%. In the year 1998 the imports further decreased showing a negative growthof -18%. The year 1999 reported a remarkable growth rate of 65% in the imports from Iran. Inthe next year 2000 the growth rate of imports was again in negative registering a - 58% fall inimports. The two years period of 2001-02 showed a rise in the growth of imports to 30% and47% respectively. A down ward trend was reported in the growth of imports during the year2003. The year 2004 and 2005 reported a growth rate of 34% and 24% respectively in theimports.

It indicates that 5 years were registered as rising growth rate of imports, where-as rest of theyears was reported with a fall in the growth of imports. But the average rise (40%) is higher thanthe average fall (32.4%) in the growth of imports, which is not a good sign for Pakistan showingthe countrys dependency on imports and deficit in its trade balance.The above comparison reveals that although Pakistan has had trade imbalances with Iran in theten years period of 1996-2005, yet there is a fluctuating trend both in the growth of exports aswell as in imports. There has been increasing trend in the growth of exports in eight years, whileonly two years are reported with fall in exports. So the growth rate is much higher than the fall inexports. Similarly, an increasing trend was observed in the growth rate of imports in five years,while rest of the years was registered with fall in imports. Yet the growth rate in imports ishigher than that of fall in imports. Moreover, if we compare the average growth rate of exports

with the average growth rate of imports, Pakistan stands in an advantageous position. Theaverage growth rate of exports was 48% while that of imports was 40%, showing that theaverage rise in the growth of export was 20% more than that of imports. It is a good sign forPakistan and indicates that there is greater potential for her exports to grow much more than herimports from Iran.

Irritants of Pak-Iran Trade Expansion

Pakistans trade with Iran has never exceeded 3 percent. This seemingly insignificant level oftrade does not indicate the lack of prospect, but rather portray several trade-inhabiting factorsthat hamper the expansion of trade between the two countries. These constraints include:

i) Iran is passing through a difficult financial phase. The US has imposed economic sanctionsagainst it and the European Export Credit Agencies (ECAs), Japan, Canada and others haveconsiderably reduced the Export Credit cover to Iran. The short-term funding, on which Iran hadbecome increasingly dependent, has been largely withdrawn. As a result, the Bank Markazi(Central Bank of Iran) has tightened its control on the opening of LCs. While LCs for essentialitems is processed early, others are deliberately delayed. This has reduced import orders fromIran.ii) For most of the imports, Iranian importers are being advised by the Iranian Bank to seek


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usance. Previously, one years (360 days) usance @ 4.8% interest per annum (p.a) wasacceptable but now usance for two years (720 days) with 5.5% interest p.a. is being insisted(Pak-Iran Trade; 1997). While the usance rate is unattractive, the State Bank of Pakistan doesnot allow usance period beyond 120 days. Therefore, Pakistani exporters are unable to supplygoods to Iran on usance (two years credit basis). This has adversely affected Pakistans export

of cotton yarn and fabric cloth to Iran.iii) The Iranian Government had proposed to set-up a Common Border Market (CBM) betweenIran and Pakistan at Mirjaveh (Pak-Iran Trade; 1997). Establishing common border marketswith various neighboring countries is a part of Iranian national policy to curb smuggling.However, the site proposed for the said market on Pak-Iran border is not suitable for Pakistan, asit is located in the area of rugged terrain of mountains, desert with low population density andlack of communication facilities especially on Pakistani side.On Iranian insistence the proposed site was inspected but not found a feasible proposition. TheGovernment of Baluchistan and the Quetta Chamber of Commerce & Industry have also notsupported the Iranian proposal for the above-mentioned reason. The matter is still underconsideration and is likely to be discussed with Iran during the meeting of the Bilateral Trade

Committee.(iv) Iran is faced with a difficult economic situation partly because of US sanctions against Iranand mostly because of their foreign exchange problems, which have aggravated due to decreasein their non-oil exports and repayment of foreign debts. In spite of certain strict measures takenby the Iranian government, disparity still exists between Iranian Rials official and open marketexchange rates. In order to support their currency, the Iranian government has taken thefollowing non-tariff measures, which have reduced Irans imports.(a) Imports of all type of commercial and industrial goods except essential food-items (i.e. rice,wheat, cooking oil and sugar) require the approval of the Ministry of Commerce and in somecases of two to three other Ministries. The procedure for obtaining approval for non-essentialfood items is quite cumbersome.(b) Import has also been linked with export of oil as the National Iranian Oil Co. is facingproblems in marketing the oil, which was previously being imported by the Americancompanies.(v) In 80s, bilateral trade took a quantum jump when Pakistan began purchasing oil from Iranand the latter responded by purchasing a number of its import requirements from Pakistan duringGulf War. The surge in Iranian demand was due to closure or under utilization of many Iranianindustries whose production was dependent on import of raw material and spares from Europeand America. This resulted in the increase in volume of trade and Iran was the major tradingpartner of Pakistan. However, as a result of the shift in Iranian Policy of linking its imports fromthe countries importing oil from Iran and offering supplies to Iran on deferred payment basis, thevolume of trade started declining and the balance of trade became unfavorable to Pakistan.(vi) Balance of trade remained unfavorable for Pakistan due to heavy imports of petroleum fromIran (Pak-Iran Trade; 1997). Pakistans exports had fallen from $ 143.8 million in 1991-92 to $19 million in 1993-94, because Iran had reduced its import of rice, leather and leathermanufactures, cotton yarn, cotton fabrics, cotton bags, iron & steel manufactures, cutlery, shipsand boats, machinery & parts, road motor vehicles & parts, medical instruments, sports goods,office stationery, etc. from Pakistan.(vii) The debt crisis forced Iran to the introduction of import curbs in order to generate current-account surpluses, which could then allow for servicing Irans newly rescheduled debt. Import


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spending had been halved, allowing a return to substantial surplus on the current account. Thissurplus has since been maintained, despite the dent in exports a the result of the currencyrestrictions, partly because of growth of payments for outward travel also contributed to thedeterioration of the current account in the early 1990s (Profile of Iran; 1997-98). For the controlof imports, especially those of luxury and consumer goods, a deposit payment as a pre-requisite

for order registration was announced. Accordingly, the surrender requirements for the imports ofmachineries for productive units, essential goods, raw materials and spare parts required by theindustries, and consumer goods, were determined at 10,20, 50 and 100 percent on the basis offloating rate of the CIF value.(viii) Pakistan isfacing crippling shortage of electricity and gas, while Iran is ready to provide gas through Iran-Pakistan gas pipeline project but the pro- American policies is proving a stumbling block in theway of the implementation of the project in Pakistan.

Recommendations

Following recommendations are made for the promotion of Pak-Iran trade.1) The Irans import policy presently is very strict. This is adversely affecting Pakistansexports to Iran in spite of the fact that Iran is a fairly good market for our non-traditional items.The reciprocal export credit of US/S 50 million signed between the two countries to increase theexport of non-traditional items could not be utilized. The main reason for under-utilization of thiscredit is non-tariff barriers imposed by the Iranian government. To make proper use of thiscredit, it is proposed that Iranian side may be pursued to sign a bilateral agreement with Pakistanlisting the exportable items, which may be traded from both sides under this credit, and thereshould be no restriction on the import of the same. Such arrangement is must to ensure theimport of non-traditional items from Pakistan by the Iranian businessmen from private sector. Atpresent Bank Markazi of Iran is not encouraging their private sector to make use of this credit.2) The Iranian government may be asked to issue necessary instructions to their Central Banknot to insist on usance credit beyond 120 days for imports from Pakistan. Such an action on thepart of Iran would greatly help the Pakistani exporters to increase their exports to Iran. Theyhave agreed to 180 days usance for Sri Lanka as compared to 360 days.3) The Ministry of Commerce may consider the Iranian proposal for establishment of commonborder market at Mirjaveh or any other mutually agreed place at Pak-Iran border as the same willhelp in reducing the volume of informal trade which presently exists between the two countries.4) Pakistan should promote the use of barter as an alternative to hard currency in its trade withIran. Pakistan has amassed considerable experience in barter trade. The governments of Pakistanand Iran have already finalized a swap deal, under which Pakistan will supply Iran one sugarplant and one cement plant in exchange for 1000 bulldozers.5) In order to reduce its trade imbalance with Pakistan, Iran may be persuaded to import morerice from Pakistan on long-term basis. Iran has doubled import duty on Pakistani rice as a result,the rice exporters may lose a big market share in Iran. The Chairman Rice Exporters Associationof Pakistanis met Iranian Consul General in Karachi to share his concerns regarding Pakistanirice exporters problems in the wake of duty increase by Iranian government.Other items to be imported by Iran includes; leather, yarn, cotton fabrics/garments, cotton bags,tents and tarpaulin and sports goods from Pakistan.6) Inadequate information on trade-related laws, regulations and procedures apart, their


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complexity serves as a deterrent to expanded trade. Hence, simplification and standardization ofimport-export licensing and clearance procedure, quality control and pre-shipment goodsinspection procedures, port and shipping formalities, tender documents, Performa invoiceshanding, transport and insurance documents, procedures for opening of letters of credit and bankdocumentation, etc. may boost trade.

7) Closer cooperation between public and private sector institutions dealing with regional tradeand commerce issues, with a view to identifying and eradicating the impediments to intra-regional trade, is essential for expanding Pakistans trade with Iran.8) Efforts should be made to increase the visits of Iranian and Pakistani businessmen betweenthe two countries.9) Multiple entry visa valid for six months may be issued to the Iranian/Pakistani businessmenon reciprocal basis on the recommendation of respective Chamber of Commerce and Industry.10) Pakistan should organize a single-country exhibition in Iran. As the Iranian governmentnormally allows sale for the single-country exhibitions, this will help to introduce our non-traditional items in Iranian market. Iran has already organized single-country exhibitions inPakistan.

Miscellaneous Proposals

Following proposals are made for promotion of trade on balanced basis:a) In case of exports from Iran to Pakistan, besides other items, Iran has great potential for thesale of its iron ore for the Pakistan Steel Mills. It has already sent some shiploads of its iron oreto Pakistan. Similarly, Iran is showing interest in exporting cars and agriculture machinerybesides goods and passenger wagons. Pakistan would do well not to miss the opportunity tobenefit from the Iranian offer.b) Regional trade incentives play a vital role in expanding intraregional trade. In the case ofPak-Iran bilateral trade this important area is not paid due attention. It is suggested that thefederal chamber of commerce in both the countries may be consulted to take up the issue.c) Tariff and non-tariff barriers work as a stumbling block in the expansion of bilateral trade.There still exist a number of tariff and non-tariff barriers in the case of Pak-Iran bilateral trademostly imposed by the Iranian government. Iran may be asked to remove these tariff and non-tariff trade barriers in order to achieve the inherent potential of trade between the two countries.d) The framework of Asian Clearing Union (ACU) may be used by the financial institutionsand businessmen of both the countries to promote trade.e) Special attention may be paid by Pakistan Government to improve the infrastructure likeroads, railways etcf) Private sector may be encouraged by both the countries to come forward and invest in jointventure schemes.g) Starting of direct flights from Quetta to Mashhad and Karachi to Tehran is the long timedemand of the exporters of Pakistan. The issue should be resolved in the interest of the businesscommunities of both the countries.h) In order to save hard earned foreign exchange, steps may be taken to expand bilateral tradetransactions in the currencies of both Pakistan and Iran.i) Both the countries have been granting tariff concessions on 650 items under preferentialtrade Agreement (PTA). The items enjoying tariff concessions may be increased to expandbilateral trade.


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j) Iran may be requested for the provision of crude oil to Pakistan on the basis of three to fourmonths interest free deferred payment to resolve the problem of shortage of oil in Pakistan.k) Iranian products have larger demand in Pakistan as large numbers of these were already soldand many other are still finding their way in the local markets, through smuggling. If theseproducts were exported to Pakistan through proper channels, the quantum of trade would have

risen to a level equally beneficial for the local traders involved in the import export business.l) The government of Baluchistan has to take strict measures and tighten vigilance to stopsmuggling of petrol from Iran, which is causing a huge loss to country. Steps must be taken fordeveloping a legal mechanism for the transportation of petroleum products by road from Iran toPakistan.m) Government of Baluchistan may be advised to start planning for providing infrastructure i.e.roads to Mirjaveh/Taftan and Turbat so that Common Border Markets (CBMs) may be set up. Inthis connection the following steps need to be taken;

1. In CBMs only Made in Pakistan and Made in Iran products should be traded.2. A mechanism should be developed so that smuggling should be curbed and the

items freely moving to and from Pakistan to Iran should be traded through CBM.3. Government of Pakistan has got no proper infrastructure up to Border Areas.Since the Iranian Government has shown its willingness to provide electricity,water, gas etc., it has to be built on the Pakistan side of the border, PakistanGovernment may avail of this offer.

4. In order to achieve the export target, Pakistan should focus on export through landroute and CBMs may be one of the major out let for achieving export target.

5. Through these CBMs Pakistan would be able to increase export manifold to Iranand Central Asian Republics.

6. Import duty at the nominal rate of 2 to 3 percent may be levied on the import ofprimary goods imported from Iran through Common Border Market as theseitems may be utilized/consumed in Bordering Areas where the goods, iftransported from Sindh/other province are costlier.

7. Manufactured Goods imported from Iran, may be subject to normal import dutiesand other levies.

8. In order to assess the factual position at Pak-Iran Border a team of experts mayvisit the border in order to physically ascertain thefacilities/requirements/infrastructure already available or needs to be developed.

9. In this connection Government of Baluchistan has to play a major role ashighways up to bordering area has to be built by them for which sufficient fundshould be earmarked by the Federal Government.

10.Iranian government may also be requested to depute their officer to visit Pakistanside of borders where the CBM is to be established.

pak-iran trade expansion

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