KHYBER Pakhtunkhwa has long enjoyed the advantage of being located at the apex of Pakistan’s north-south economic corridor, linking the port of Karachi and Pakistan’s economy to Afghanistan and beyond to Central Asia and China.

Afghanistan has drawn nearly a quarter of its imports from Pakistan in recent years, though its trade with other neighbours is increasing.

Those steering KP’s trade policies want to increase the province’s share in the country’s export earnings. They believe that the province’s share and overall national exports can be enhanced if the federal government takes KP on board in its current talks on trade issues with Afghanistan.

Also read: Pakistan for enhanced intra-OIC trade

A lot depends on how quickly Islamabad resolves these issues by bringing necessary changes in policies and developing the required infrastructure to facilitate regional trade. To unleash KP’s potential as a regional hub for trade, traders say Islamabad needs to shift its policy perspective from a security-centred one to an economic one — from ‘guns to butter’.

Pakistan’s major exports to Afghanistan include rice, petroleum products, cement, pharmaceuticals, vegetables, fruits, machinery, household items, footwear, leather products, textile and wheat. KP produces a wide range of goods that have potential markets in Afghanistan.

Meanwhile, Pakistan’s top export destinations in 2014-15 were the United States ($3.59bn), China ($3.16bn), Afghanistan ($2.32bn), the United Arab Emirates ($1.76bn) and Germany ($1.42bn).

According to an official report of the KP planning department, manufacturing in the province is quite diverse. The province produces cigarettes, cement, ceramics, sanitary-ware and wall tiles, cotton textiles, blankets and fabrics, electric bulbs, fertilisers, pharmaceuticals, matches, paper and board products, maize, sheet glass, paints and varnish, beverages, sugar and starch.

The processed food industry, including vegetable ghee and cooking oil products, also has a considerable presence in KP and contributes over 30pc to the country’s total ghee production. It also produces 30pc of the country’s cigarettes and 27pc of cement.

Pharmaceutical exports to Afghanistan also have the potential to grow significantly. But the ad-hoc rules controlling drug prices are an impediment. The strict price control leaves a minimal room for pharmaceutical companies to invest and export to international markets, including Afghanistan.

Similarly, KP produces 23pc of the country’s limestone. Investors say the provincial government needs to offer land at subsidised rates to facilitate investment in cement production near limestone deposits in the province.

Finally, there is tremendous potential for trade in services in fields like healthcare, education and information technology between Afghanistan and KP. The similarity of language and culture can also facilitate trade.

Any change in federal policy can hurt or facilitate trade from a province. Traders complain that the ill-advised changes in the trade regime with Afghanistan have led to a substantial fall in export proceeds.

After a big increase in export proceeds to Afghanistan over a decade, the exporters were required to switch over from trading in rupees to the dollar in January 2014. This impacted the province’s trade with Kabul.

In the 2015-16 budget, the government restored exports of horticulture products to Afghanistan from KP and Balochistan in rupee terms. However, traders say there is a need to revert to rupee transactions for all goods.

Pakistan was the first choice of landlocked Afghanistan for its transit trade, but it has lost that position to Iran due to faulty policies. The high cost of handling charges at Pakistani ports and for onward transportation has induced Kabul to turn to Iran.

Consequently, Pakistan has lost its share in Afghan transit trade, as the number of cargo containers declined from 75,288 in 2009-10 to 49,507 in 2014-15.

At the same time, imports under the Afghan transit trade can also be substituted by Pakistan’s exports to Afghanistan if effective measures are taken in this direction.

The risk to Pakistan is the diversion of trade to Afghanistan’s other neighbours. Afghanistan has signed more than 36 trade agreements and protocols with different organisations and countries in recent years, including Iran, India, Tajikistan, Turkmenistan and Uzbekistan.

KP needs to invest in a strong export-oriented manufacturing base to serve the Afghan and regional markets, and also improve its connectivity and logistical infrastructure. Substantial investment is also required in roads, truck ports and storage capacities on both sides of the Afghanistan-Pakistan border.

Published in Dawn, Business & Finance weekly, December 14th, 2015