Among neighbours, China is the all-weather friend, India is the all-weather enemy, Afghanistan is the frenemy and Iran is just there. Never a significant trade partner, trade post US sanctions tapered of to a paltry $30 million in FY17. However, even at its peak in FY10, bilateral trade just crossed the $1 billion mark when Pakistan imported $800 million worth of oil and exported $163 million of rice.

This has not prevented officials to eye $5 billion bilateral trade by 2021, for which the draft text of a Pak-Iran FTA has been finalised. Not an impossible task if one is to consider that Pakistan imported more than $11 billion worth of oil in FY17 from GCC countries. As per ITC data, Pakistan paid on average $493 per tonne for oil that was not crude and $283 per tonne for crude oil. (There are a little over 7 barrels of oil in a tonne) If the FTA facilitates enhanced trade and Pakistan can bring down its oil bill which is among the essential imports causing the ballooning trade deficit, then that would be an accomplishment indeed.

However, negotiating the FTA without having banking channels in place is a case of putting the cart before the horse. Maria Kazi, deputy secretary at the Ministry of Commerce confirmed that debating and negotiating the trade agreement is a moot point if there does not exist a mechanism through which payments can be made and received. Pakistan and Iran has had a PTA since 2006 which has been mostly defunct due to banking hurdles, she added.

Lack of banking channels and US sanctions may have hampered trade with Iran but not prevented it. For example, India is one of Iran’s top trading partners for its oil exports. During the years of US sanctions, it circumvented restrictions by opting for a pseudo-barter system in which oil payments were made to Tehran in the form of Indian Rupee through a small state bank, UCO Bank. Indian companies were then able to receive payments for goods exported to Iran using the oil money held in non-convertible rupee balances at UCO. Since the lifting of the sanctions, India has approved oil payments in Euros as preferred by Iran. While India also faces banking challenges, it has not prevented it from continuing its oil imports.

Pakistan has been working on resolving the banking problem. A Banking and Payment Arrangement was signed between SBP and Iran’s central bank, Bank Markazi Jomhouri Islami Iran (BMJII) in April to provide a trade settlement mechanism. Currently, a delegation from Iran is visiting Pakistan to continue talks regarding setting up of banking channels, Kazi informed.

Though progress has been made on paper, it has not resulted in implementation which is why trade figures remain stagnant post lifting of sanctions. Instead of spending time and resources on a trade agreement that will not be fruitful without effective modes of payment, more effort needs to be made to resolve the banking issue. Without an effective and efficient channel of payment, no amount of talks for FTA will be able to promote bilateral trade.