Pakistan and Iran have decided to strike a deal on trade despite slow or no progress regarding the implementation of a payment mechanism and the Iran-Pakistan pipeline project.

Both sides have decided to finalise the proposed free trade agreement (FTA) before November 2017.

The trade negotiating committee of the two countries has already held two rounds of discussions on the FTA and is scheduled to meet by November to put the final touches to the agreement. It is projected that the agreement will increase 2016’s $300 million bilateral trade to $5 billion by 2021.

The non-availability of a payment mechanism casts a shadow on the viability of the much-awaited trade agreement

“We have almost finalised the draft of FTA,” a trade officer of the commerce ministry said, adding that the next meeting is expected to reach an understanding on the remaining issues.

The non-availability of a payment mechanism casts a shadow on the viability of the much-awaited agreement.

In April 2017, SBP’s deputy governor visited Iran and signed a banking payment agreement. Under this agreement, the central banks of the two countries will have to authorise banks for undertaking trade transactions.

On the Pakistani side, the SBP has already issued a circular in this regard but not a single bank so far has showed interest in opening a branch in Iran; the plausible reason being a fear of US sanctions on the country. Not a single bank has applied so far to the SBP to open its branch in Iran, an official source in the central bank said.

The Iran-Pakistan PTA was signed on March 4, 2004. The agreement came into force on Sept 1, 2006 and has been operational since then.

Under the existing PTA, Pakistan utilised concessions on 17 tariff lines out of 334 tariff lines in 2016. Due to this poor utilisation, Pakistan has provided a wish list of 153 tariff lines to Iran and requested deepening the margin of preferences (MoP) on 22 items which are already in the PTA.

To reciprocate, Iranian also provided a wish list of 80 items seeking a MoP from Pakistan.

Looking at Pakistan’s exports to Iran, rice has the highest trade potential. In 2009, rice exports comprised 80 per cent of Pakistan’s total exports to the country. But in 2016, these exports fell substantially owing to international sanctions.

Iran’s rice imports from the world are $517m, 97pc of which are coming from India, since India circumvented the sanctions by using a barter trade model.

Other products with a high trade potential are medical instruments, cotton fabric and woven fabric of cotton. Iran imports these products from other countries while Pakistan’s exports of these products are non-existent.

There is also discrepancy in the bilateral trade data of the two countries. The data compiled by Pakistan showed exports worth $36m and imports of $284m. Contrary to this, the data compiled by Iranian customs showed Pakistani export in the range of $300m-$350m while imports worth $600m-$700m from Iran.

The only justification that came from the ministry of commerce was that it could be on account of indirect trade via Dubai, smuggling, unregistered trade from border areas via a land route.

Currently, hundi and hawala are the most popular mode of payment used for trade between the two countries.

Until the regular banking channel is established for mode of payment, the target to increase trade to $5bn in the next four years will remain only on paper, a senior officer of the commerce ministry said. “If there is no payment mechanism, then there is no importance of such an agreement.

Both sides under the strategic plan agreed to try to open two more crossing points on the Pak-Iran border, preferably by the end of 2016. Two potential crossing points are at Gabd (Pakistan)–Reemdan (Iran) and Mand (Pakistan)–Pishin (Iran).

No tangible progress was seen on this account as well. Both sides also agreed to ensure international standard border compliance for trucks i.e. standard shield, tent, seal and fuel tanks; along with exchange of customs related information and electronic trade data sharing.

An official of the energy division said that no progress was seen on the issues of the Iran Pakistan Pipeline project. He listed several bottlenecks including a disagreement on price.

However, there has also been no commitment on the part of the government to seriously negotiate the issue, apparently due to the imposition of American sanctions.

Another issue is the huge investment on the LNG terminal at Port Qasim to meet the growing energy demand through import of the fuel from Qatar. “You cannot rule out the Qatar factor in delay of finalisation of the pipeline project with Iran”, the official said.

Published in Dawn, The Business and Finance Weekly, October 9th, 2017