The State Bank of Pakistan (SBP) and Central Bank of Iran (CBI) are likely to sign a Banking and Payment Arrangement (PBA) soon to enable exporters of both the countries to settle their claims through the two state banks. Sources said that a summary for approval of the agreement was put up to a meeting of the Cabinet on February 17, 2017 by the Finance Division for its approval. The Cabinet is stated to have given the go ahead, but minutes of the meeting are awaited. This was disclosed to a meeting of the Senate Standing Committee on Finance held recently.
As soon as the approval of the Cabinet is received, the SBP will sign the arrangement with the Iranian bank. The SBP has been in co-ordination with the Central Bank of Iran to devise a trade settlement mechanism to restore and encourage trade between the two countries since the lifting of economic sanctions on Iran. Sanctions imposed by the United Nations Security Council (UNSC), the United States of America and the European Union (EU) had disrupted the trade volume between Pakistan and Iran, which squeezed to $319.1 million in fiscal year 2016 from $1,321 million in 2009.
The official brief on the mechanism of settlement of trade with Iran reveals that though economic sanctions on Iran have now been lifted, trade between the two countries has not been restored to its previous levels owing to non-availability of settlement mechanism, as no correspondent bank is willing to clear payments favouring an Iranian bank.
Currently, a proposal for a mechanism to settle bilateral trade transactions by entering into a bilateral Banking and Payment Arrangement is at an advanced stage of finalisation. As per the modus operandi under the proposed BPA: (i) Central Bank of Iran and State Bank of Pakistan will open a euro and/or Japanese yen (JYP) denominated account of each other in their books which will be used for settlement of permissible transactions between two countries; (ii) and grant one another a reciprocal credit facility of aggregate two-hundred and fifty million euros or equivalent in JPY in each respective special account. The said credit facility will only be used to settle (trade) transactions authorised under the proposed BPA.
The mechanism to settle bilateral trade transactions under the proposed BPA will be that: (i) the importer''s commercial bank will credit the account of its central bank with the amount (euro or JPY) to be paid to exporter in other country; (ii) the central bank on receiving the amount from the importer''s bank will instruct the corresponding central bank to debit its special account with the given amount for onward credit to the exporter through exporter''s commercial bank; (iii) the outstanding balance of special account, at the end of each three month period, will be settled by the debtor''s central bank in favour of the creditor''s central bank in euro and/or JPY within one month after the end of respective period. On August 29, 2016, the Economic Co-ordination Committee of the Cabinet granted approval to the SBP for starting negotiations with BMJII on the proposed BPA.
Before signing BPA both the central banks will have to find a correspondent bank acceptable to both the central banks and which is willing to settle the periodic foreign exchange payments. In case of JPY, this correspondent relationship has already been established while in case of euro the same is in process. Subsequent to signing of BPA with Iran, the SBP will issue necessary instructions to inform the market about the BPA and the modus operandi for the banks to settle the transactions under BPA with Iran. The SBP will invite banks to become authorised institutions to conduct trade transactions under the BPA.
In 2015, the Central Bank of Iran had proposed that both central banks may open account of one another in respective local currencies to settle claims on bilateral trade transactions. However, the proposed mechanism could not be established due to issues of convertibility of both countries'' currencies, non-availability of trade related facilities in local currencies and significant exposure to exchange rate risk in taking exposure in Iranian riyal.