Pak-Iran Trade Expansion: The Irritants & Policy Challenges

Jahangir Achakzai* Abstract Although the economic ties between Pakistan and Iran date back to centuries the progress achieved in this respect remained marginal because of different political and economic reasons. Despite these political and economic breakdowns between Pakistan and Iran, trade between them continued without much interruption. While Pakistan has had trade imbalances with Iran in the ten years period of 1996-2005, yet there is a fluctuating trend both in the growth of exports as well as in imports. There has been increasing trend in the growth of exports in eight years, while the 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 five years, while rests of the years were registered with fall in imports. Yet the growth rate in imports is higher 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. The average growth rate of exports was 48% while that of imports was 40%, showing that the rise in the average growth rate of exports was 20% more than the average increase in the growth of imports. It is a good sign for Pakistan and indicates that there is greater potential for its exports to grow much more than its imports from Iran. Introduction This paper is a sequel to the previous paper where a gravity model of trade was used to assess the bilateral trade potential between Pakistan and Iran. The result of the model confirmed that Iran is a potential country for Pakistani exports but only one tenth of the bilateral trade potential is being exhausted between Pakistan and Iran. This low level of trade is not indicative of a paucity of opportunities, but rather a reflection of several trade-inhibiting factors, which must be overcome before Pakistan has a chance of expanding its trade with Iran to a meaningful level. The present paper is an effort to bring to light the factors working as obstacles in the way of exhausting the inherent potential of bilateral trade between the two countries. The role of international trade in the development process of a country is vital. It works as Engine of growth in the economy . On the one hand, it promotes growth through cooperative environment and on the other hand, it is a source of generation of surplus for further acceleration of the economy. Furthermore, the international trade works as a transmission belt for the transfer of the benefits of industrialization and modern technology from the developed to under developed countries . In recent years the trade with industrial countries is no longer an engine of growth for the developing countries as was earlier understood. The industrial countries have been increasingly adopting protectionist policies against the export of developing countries. Such restrictions are likely 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

the best alternative. Many developing regions, therefore, have initiated the scheme of economic cooperation with the foremost objective of enhancing trade among themselves. Pakistans dependence on foreign trade has increased over the passage of time. Increasing dependence of the economy on foreign trade underlines the significance of this sector for the whole 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 that trade is revolving around very few items. Exports are of very limited nature. About 60 percent of the exports are cotton based. Moreover, the trade sector is characterized by geographic concentration. Throughout in the history of Pakistan, it has relied on few countries as its major trade 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 and economic affinities. It is not only geographical proximity that binds the two countries, but a deeper basis for the relationship is provided by their shared faith and belief in the eternal values of Islam. The affinities of sentiment, policy and stand between the two countries are reflected in there working hand in hand in the organizations of the Islamic conference, United Nations, the Non Aligned Movement, RCD and ECO. Close ties between the Muslims of the sub continent and the people of Iran exist since centuries. After independence of Pakistan these ties were further strengthened. Iran lent full, unconditional moral and material support to Pakistan, and also stood by the side of Pakistan in the hour of need. These deep-rooted bonds of friendship between 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 the industrial, 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 and the caravans carrying goods from Indus to Persia and then, bringing in return consumable goods to this area . So both the countries had been trading with each other since centuries on the basis of barter trade. As a part of their endeavors to expand trade relations, the two countries have been 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 treaty several projects were completed. The revival of RCD under the new name of ECO (Economic Cooperation Organization) has institutionalized the traditional relations. Under ECO several bilateral trade agreements have been signed which will increase the volume of trade relations between the two countries.

Bilateral Trade
Trade with Iran is conducted in convertible currency in terms of the Long Term Trade Agreement signed on 19th April 1982. However, transactions are made through the Asian Clearing Union (ACU) arrangement to which Iran and Pakistan are also members. Under this arrangement accounts are settled after every two months . During the 80s, bilateral trade took a quantum jump when Pakistan began purchasing oil from Iran the latter responded by purchasing a number of its import requirements from Pakistan during Gulf War. The surge in Iranian demand was due to closure or under utilization in many Iranian industries whose production was dependent on import of raw material and spares from Europe and America. This resulted in the increase of volume of trade to $ 538 million in 1983-84 and Iran 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 on deferred payment basis, the volume of trade started declining and the balance of trade (the difference between the monetary value of exports and imports of output in an economy over a certain period) became favorable to Iran. The bilateral trade again showed improvements after the 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 increased to $ 23.5 million in the year 1997 registering a growth rate of 48%. However, the increasing trend 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 improvement of 67% when it increased from 14.4 million dollars to 24.0 million dollars. The exports further increased to $ 29.2 million during the next year. A sharp increase was recorded in the exports to Iran during the next five years period of 2000-05. During these five years there was a continuous rise in the exports to Iran finally showing a record increase of $ 188 million in the year 2005.

Table 1: Growth Rate in Exports (Million $)

Years

1996 1997 1998 1999 2000

Exports 15.9 23.5 14.4 24.0 29.2

Growth Rate 47.8 - 38.7 66.6 21.7

2001 2002 2003 2004 2005

41.9 82.0 102.2 177.9 188.0

43.4 95.7 24.6 74.1 5.7

Source: UN Commodity Trade Statistics (2005) Database (COMTRADE), UN Statistics Division. The table shows that taking the exports of the year 1996 as base there is an increasing trend in the 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 growth of exports reaching to a record figure of 188.8 million. The above data shows that except the year 1997 when the export fell to 14.4 million dollars, there has been rising trend in the growth of exports. There are years (2001 to 2002) when the growth rate in exports is almost double of the 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 the Pakistani exports.
Pakistans Imports from Iran

Pakistans imports from Iran in the year 1996 were to the tune of $ 286 million. During 1997 imports 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 in the year 1999. The year 2000 showed a decrease in the imports to the level of $ 157 million. The two years period of 2001-02 reported a rise in the imports to $ 205 million and $ 301 million respectively. 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 in imports to $ 450 million.

Table 2: Growth Rate of Imports

( Million $) Imports Years 1996 1997 1998 1999 2000 2001 285.9 157.9 130.3 370.6 157.4 204.7 - 44.7 - 17.5 64.8 - 57.5 30.1 Growth Rate

2002 2003 2004 2005

301.4 271.7 362.7 449.9

47.2 - 9.9 33.5 24.0

Source: UN Commodity Trade Statistics (2005) Database (COMTRADE), UN Statistics Division. Taking 1996 imports as base, the growth rate in imports depicted a decreasing trend during 1997 showing a fall of 45%. In the year 1998 the imports further decreased showing a negative growth of -18%. The year 1999 reported a remarkable growth rate of 65% in the imports from Iran. In the next year 2000 the growth rate of imports was again in negative registering a - 58% fall in imports. The two years period of 2001-02 showed a rise in the growth of imports to 30% and 47% respectively. A down ward trend was reported in the growth of imports during the year 2003. The year 2004 and 2005 reported a growth rate of 34% and 24% respectively in the imports. It indicates that 5 years were registered as rising growth rate of imports, where-as rest of the years was reported with a fall in the growth of imports. But the average rise (40%) is higher than the average fall (32.4%) in the growth of imports, which is not a good sign for Pakistan showing the countrys dependency on imports and deficit in its trade balance. The above comparison reveals that although Pakistan has had trade imbalances with Iran in the ten years period of 1996-2005, yet there is a fluctuating trend both in the growth of exports as well as in imports. There has been increasing trend in the growth of exports in eight years, while only two years are reported with fall in exports. So the growth rate is much higher than the fall in exports. 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 is higher 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. The average growth rate of exports was 48% while that of imports was 40%, showing that the average rise in the growth of export was 20% more than that of imports. It is a good sign for Pakistan and indicates that there is greater potential for her exports to grow much more than her imports from Iran. Irritants of Pak-Iran Trade Expansion Pakistans trade with Iran has never exceeded 3 percent. This seemingly insignificant level of trade does not indicate the lack of prospect, but rather portray several trade-inhabiting factors that 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 sanctions against it and the European Export Credit Agencies (ECAs), Japan, Canada and others have considerably reduced the Export Credit cover to Iran. The short-term funding, on which Iran had become 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 essential items is processed early, others are deliberately delayed. This has reduced import orders from Iran. ii) For most of the imports, Iranian importers are being advised by the Iranian Bank to seek

usance. Previously, one years (360 days) usance @ 4.8% interest per annum (p.a) was acceptable 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 does not allow usance period beyond 120 days. Therefore, Pakistani exporters are unable to supply goods 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) between Iran and Pakistan at Mirjaveh (Pak-Iran Trade; 1997). Establishing common border markets with 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, as it is located in the area of rugged terrain of mountains, desert with low population density and lack of communication facilities especially on Pakistani side. On Iranian insistence the proposed site was inspected but not found a feasible proposition. The Government of Baluchistan and the Quetta Chamber of Commerce & Industry have also not supported the Iranian proposal for the above-mentioned reason. The matter is still under consideration 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 Iran and mostly because of their foreign exchange problems, which have aggravated due to decrease in their non-oil exports and repayment of foreign debts. In spite of certain strict measures taken by the Iranian government, disparity still exists between Iranian Rials official and open market exchange rates. In order to support their currency, the Iranian government has taken the following 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 some cases of two to three other Ministries. The procedure for obtaining approval for non-essential food items is quite cumbersome. (b) Import has also been linked with export of oil as the National Iranian Oil Co. is facing problems in marketing the oil, which was previously being imported by the American companies. (v) In 80s, bilateral trade took a quantum jump when Pakistan began purchasing oil from Iran and the latter responded by purchasing a number of its import requirements from Pakistan during Gulf War. The surge in Iranian demand was due to closure or under utilization of many Iranian industries whose production was dependent on import of raw material and spares from Europe and America. This resulted in the increase in volume of trade and Iran 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 on deferred payment basis, the volume 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 from Iran (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 leather manufactures, cotton yarn, cotton fabrics, cotton bags, iron & steel manufactures, cutlery, ships and 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 currentaccount surpluses, which could then allow for servicing Irans newly rescheduled debt. Import

spending had been halved, allowing a return to substantial surplus on the current account. This surplus has since been maintained, despite the dent in exports a the result of the currency restrictions, partly because of growth of payments for outward travel also contributed to the deterioration of the current account in the early 1990s (Profile of Iran; 1997-98). For the control of 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 of machineries for productive units, essential goods, raw materials and spare parts required by the industries, and consumer goods, were determined at 10,20, 50 and 100 percent on the basis of floating rate of the CIF value. (viii) Pakistan is facing crippling shortage of electricity and gas, while Iran is ready to provide gas through IranPakistan gas pipeline project but the pro- American policies is proving a stumbling block in the way 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 Pakistans exports 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 the export of non-traditional items could not be utilized. The main reason for under-utilization of this credit is non-tariff barriers imposed by the Iranian government. To make proper use of this credit, it is proposed that Iranian side may be pursued to sign a bilateral agreement with Pakistan listing the exportable items, which may be traded from both sides under this credit, and there should be no restriction on the import of the same. Such arrangement is must to ensure the import of non-traditional items from Pakistan by the Iranian businessmen from private sector. At present 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 Bank not to insist on usance credit beyond 120 days for imports from Pakistan. Such an action on the part of Iran would greatly help the Pakistani exporters to increase their exports to Iran. They have 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 common border market at Mirjaveh or any other mutually agreed place at Pak-Iran border as the same will help 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 with Iran. Pakistan has amassed considerable experience in barter trade. The governments of Pakistan and Iran have already finalized a swap deal, under which Pakistan will supply Iran one sugar plant 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 more rice 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 Association of Pakistanis met Iranian Consul General in Karachi to share his concerns regarding Pakistani rice 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

complexity serves as a deterrent to expanded trade. Hence, simplification and standardization of import-export licensing and clearance procedure, quality control and pre-shipment goods inspection procedures, port and shipping formalities, tender documents, Performa invoices handing, transport and insurance documents, procedures for opening of letters of credit and bank documentation, etc. may boost trade. 7) Closer cooperation between public and private sector institutions dealing with regional trade and commerce issues, with a view to identifying and eradicating the impediments to intraregional trade, is essential for expanding Pakistans trade with Iran. 8) Efforts should be made to increase the visits of Iranian and Pakistani businessmen between the two countries. 9) Multiple entry visa valid for six months may be issued to the Iranian/Pakistani businessmen on 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 government normally allows sale for the single-country exhibitions, this will help to introduce our nontraditional items in Iranian market. Iran has already organized single-country exhibitions in Pakistan. 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 the sale of its iron ore for the Pakistan Steel Mills. It has already sent some shiploads of its iron ore to Pakistan. Similarly, Iran is showing interest in exporting cars and agriculture machinery besides goods and passenger wagons. Pakistan would do well not to miss the opportunity to benefit from the Iranian offer. b) Regional trade incentives play a vital role in expanding intraregional trade. In the case of Pak-Iran bilateral trade this important area is not paid due attention. It is suggested that the federal 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 trade mostly imposed by the Iranian government. Iran may be asked to remove these tariff and nontariff 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 institutions and businessmen of both the countries to promote trade. e) Special attention may be paid by Pakistan Government to improve the infrastructure like roads, railways etc f) Private sector may be encouraged by both the countries to come forward and invest in joint venture schemes. g) Starting of direct flights from Quetta to Mashhad and Karachi to Tehran is the long time demand of the exporters of Pakistan. The issue should be resolved in the interest of the business communities of both the countries. h) In order to save hard earned foreign exchange, steps may be taken to expand bilateral trade transactions in the currencies of both Pakistan and Iran. i) Both the countries have been granting tariff concessions on 650 items under preferential trade Agreement (PTA). The items enjoying tariff concessions may be increased to expand bilateral trade.

j) Iran may be requested for the provision of crude oil to Pakistan on the basis of three to four months 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 sold and many other are still finding their way in the local markets, through smuggling. If these products 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 stop smuggling of petrol from Iran, which is causing a huge loss to country. Steps must be taken for developing a legal mechanism for the transportation of petroleum products by road from Iran to Pakistan. 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. In this 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, Pakistan Government may avail of this offer. 4. In order to achieve the export target, Pakistan should focus on export through land route 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 Iran and Central Asian Republics. 6. Import duty at the nominal rate of 2 to 3 percent may be levied on the import of primary goods imported from Iran through Common Border Market as these items may be utilized/consumed in Bordering Areas where the goods, if transported from Sindh/other province are costlier. 7. Manufactured Goods imported from Iran, may be subject to normal import duties and other levies. 8. In order to assess the factual position at Pak-Iran Border a team of experts may visit the border in order to physically ascertain the facilities/requirements/infrastructure already available or needs to be developed. 9. In this connection Government of Baluchistan has to play a major role as highways up to bordering area has to be built by them for which sufficient fund should be earmarked by the Federal Government. 10. Iranian government may also be requested to depute their officer to visit Pakistan side of borders where the CBM is to be established.