Commerce Ministry has restarted consultative process for a barter trade deal with Iran as normal bilateral relations are not possible between the two countries till removal of US sanctions.
For this purpose, Prime Minister's Advisor on Commerce, Industries and Production and Investment, Abdul Razak Dawood, on Thursday presided over an internal meeting meant to formulate a comprehensive strategy for this purpose.
Recently, Pakistan's embassy in Tehran had communicated Iranian concerns regarding delay in fulfillment of Pakistan's commitment for finding a workable solution to US sanctions against Iran by establishing a mechanism for transactions and resumption of banking channels.
In this regard, Pakistan's embassy in Tehran has proposed the following: (i) establishing credible banking channels by opening bank branches of non-sanctioned Iranian banks in Pakistan and vice versa; (ii) signing of Free Trade Agreement (FTA); and (iii) trade mechanism as proposed by the Iranian side to settle outstanding payments for electricity being imported by Pakistan. The Iranian side is willing to import Pakistani rice (and other commodities) against cost of electricity being imported from Iran in Balochistan.
Official sources told Business Recorder that the meeting presided over by the Prime Minister's Advisor on Commerce discussed different scenarios with respect to commencement of bilateral trade through land route and sea.
However, the main issue being faced is non-availability of payment mechanism due to which trade is negligible. Nevertheless, informal trade is continuing which is hurting local industry.
The sources said it has been decided to convene another meeting which will be attended by the Ministry of Finance, State Bank of Pakistan, Federal Board of Revenue (FBR), Federation of Pakistan Chamber of Commerce and Industry (FPCCI) and Quetta Chamber of Commerce and Industry so that the decision on barter trade should be taken after due diligence with the stakeholders.
Previously due to security issues along the Pakistan-Iran border, negative public statements against Pakistan emanated from Iran, and the government, as part of its principled approach to strengthen its relations with neighbouring countries, is eager to explore all avenues of strengthening bilateral relations with Iran particularly in the economic areas.
The sources said Pakistan has pursued a policy of balanced engagement with Iran vis-à-vis Arab countries for the past several years. Given Pakistan's financial compulsions, recent warming of its relations with Saudi Arabia and UAE has created an impression of a tilt in this balanced approach towards the Arabs, at the expense of Iran.
The sources said Pakistan can apply for waiver on the following grounds: (i) Pakistan's economy is highly dependent on import of oil while Iran is an oil producing country and can offer oil to Pakistan at a comparatively cheaper price; and (ii) there has always been demand of medical/surgical instruments and of Pakistani rice and fruits in Iran. Pakistan is quite capable of meeting Iranian needs for these products by improving the requisite logistics/infrastructure in this regard.
According to sources, in case legal means of trade are not explored between Iran and Pakistan, the population in border areas is likely to be involved in exploring illegal means/channels of trading goods, which may ultimately give rise to the greater risks of money-laundering and terror financing.
Iranian authorities are charging a fee from Pakistani drivers and business community of Rs3,750 as compared to Pakistan visa fee of Rs2,750 being charged by Pakistan from Iranian citizens. The visa fee and visa can be cancelled any time by Iranian authorities without assigning any reason.
The export consignments from Pakistan to Iran are required to be attested by the consulate of Iran at Quetta with attestation fees of Rs100,000 for consignment of million tons of rice and it takes around 2-4 days.
Pakistan has not imposed any such condition on Iranian imports. Load tax is charged at the rate of 10 percent of the fare of the transport company. If a truck is charged Rs40,000 for travel from Quetta to Zahedan the transporter has to pay Rs4,000 even though the distance from Taftan border to Zahedan is 80 kms.
According to sources, there is a wide difference between trade data released by Iran Customs and Pakistan Bureau of Statistics. The Iranian customs data shows that the bilateral volume crossed $1 billion in 2017 while data reported by FBR shows the total trade of $392 million. Pakistan will emphasize the need of reconciliation of trade data.
The government of Iran has imposed a ban on import of a number of agricultural goods including fruits and vegetables, seasonal ban on rice and the country specific ban on wheat from Pakistan. The ban on import of kinoos since 2011-12 is seriously affecting Pakistani fruit exporters and Pakistan is losing on average $30 million per annum.
Talking about Pak-Iran Free Trade Agreement (FTA), the sources said, in order to finalize the Free Trade Agreement (FTA) with Iran, three or four meetings of the Technical Negotiating Committee (NNC) have been held since 2016. The third meeting of the TNC was held in Tehran in 2017. Draft of FTA in goods and Mutual Recognition Agreement (MRA) on Technical Barriers to Trade (TBT) and sanitary and phytosanitory have been shared.
US sanctions on Iran were categorized into primary sanctions and secondary sanctions. The primary sanctions prevented US citizens or entities from engaging in transactions with Iran and its government. The secondary sanctions were applicable on non-US persons and entities.
After GCPOA, the USA lifted the secondary sanctions on Iran with effect from January 26, 2016 while primary sanctions remained enforced. However, following US decision to withdraw from JCPOA, the secondary sanctions were re-introduced partly on August 7, 2018 and partly on November 5, 2018. The US issued 180-day waivers for relaxation of some of the sanctions with effect from November 5, 2018.
Recently, the US imposed further sanctions on Iran after tensions rose between the two counties over killing of Iranian General Qasem Soleimani in Iraq.
The secondary sanctions pertain to the following: (i) financial and banking institutions; (ii) insurance related issues; (iii) Iran's energy and petrochemical sectors; (iv) shipping sector; (v) trade in gold and other precious metals; and (vi) supply of goods and services related to the auto sector.
In order to trade with Iran in the presence of US sanctions, countries have employed different methods. Countries including China, Japan and South Korea have been granted a waiver by the US for import of oil as the economies of these countries are largely dependent on oil imports from Iran. Similarly European countries have devised a Special Purpose Vehicle (SPV) for trade with Iran. SPV facilitates European-Iran trade while reducing the need for transactions between the European and Iranian financial systems. It will do this by allowing European exporters to receive payments for sales to Iran from funds that are already within Europe and vice versa. Further details are being worked out. However, this mechanism will include only trade in food and medicines. Petroleum products will be kept outside this mechanism.
The sources further stated that Pakistan is also considering various options for engaging in trade with Iran. Currently, trade with Iran is conducted mainly through Dubai. According to the State Bank of Pakistan, although a Memorandum of Understanding (MoU) was signed between SBP and Bank Markazi Jamhouri Islami Iran (BMJII) on April 13, 2017 in Tehran, Pakistani banks are still reluctant to do business with the Iranian banks and have adopted a risk averse approach. Another reason is comparatively low volume of trade with Iran compared with USA.
A committee under the chairmanship of the then Minister of State for Revenue, Hammad Azhar, comprising public and private sector (Quetta Chamber of Commerce and Industry) representatives had been constituted.
SBP, however, maintains that since the entire banking sector is under sanctions, it is not possible to open branches of Iranian banks in Pakistan. Following deliberations, the committee has come up with the following proposals to overcome the payment problem with Iran: (i) seek waiver from the US on sanctions; (ii) establish a mechanism for barter trade; and (iii) set up a dedicated bank to do business with Iran.
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