Trade – low hanging fruit in Af-Pak ties – I
Afghanistan has been a key exporting destination for Pakistani goods for two decades. Downsliding in trade has been seen only recently
Afghanistan has been a key exporting destination for Pakistani goods since two decades. Some downslide has been seen in trade only recently. Pakistan’s exports to Afghanistan have come down from USD 2.6 billion in 2011 to USD 1.2 billion in 2016. Reasons for this include heightened security protocols on Pakistani side; improved manufacturing facilities in Afghanistan; rise in Afghanistan’s trade with Iran and other regional economies; and increase in informal trade.
In March 2017, the most popular commodities that found their way to Afghanistan from Pakistan included rice, wheat flour, cane and beet sugar, sucrose, sugar confectionary, household articles, and plastics. Among the export of services, Pakistan provided business- and government-related services, telecommunications, information technology and transport, and health services. During the same month Pakistan’s major imports from Afghanistan were coal and cotton.
Pakistan has also been a key supplier of transit trade and its related services to Afghanistan. Like trade in locally-produced goods and services, its flow has also reduced from 75,000 containers in 2010 to a little under 49,000 containers in 2016. There are several explanations for this reduction. The most important are: reduced demand of North Atlantic Treaty Organisation (NATO) for transit services; recent slowdown in Afghanistan’s economy; and higher flows of transit via Iran and Central Asia.
In a paper written in 2015, we had established that transit and commercial trade with Afghanistan is most important for the large portion of Pakistan’s population employed in trade, transport, warehousing, and communication sectors. During the years 2004-2011, employment increased in these sectors in Balochistan and Khyber Pakhtunkhwa. The study also stated that this increase in employment was particularly significant in the poorest quintiles.
We also have evidence from recent literature that any slowdown in transit or transit-related reform measures leads to a reduction in commercial bilateral trade between the two countries. The same studies reveal that recently experienced reduction in Pakistan’s trade and transit flows with Afghanistan were a result of slow pace of tax, transport and trade facilitation reforms on both sides. This less than desired pace of reform in formal trade also explains the increased informal trade across the border.
A 2016 survey found that among other things that cross-border traders were worried about security of merchandise and inadequate banking facilities
While security cooperation between the two countries may continue to remain a challenge, we believe that cooperation in trade is a low hanging fruit, given the powerful business community on both sides. We also have a clear identification of issues which business community is facing. And, given this identification, solutions should be easier to find. For example in 2016, in a survey of over 200 enterprises involved in Afghanistan-Pakistan trade, the business community was particularly worried about: securing merchandise across borders, inadequate cross border banking facilities, weak road and rail linkages between the two economies, uncertainty of air cargo, missing border-related trade infrastructure, and continuous resort to manual custom clearance leading to time delays and cost overruns.
While addressing the above-mentioned issues remains important, these are not the only hurdles in scaling up trade between the two countries. A critical study of official documents on both sides, particularly the minutes of Joint Economic Council (JEC) meetings, reveals that several mutually-agreed decisions have yet to be implemented. For instance, both sides had promised to open more trade and transit routes. This needs to be implemented in letter and spirit. Both countries had also agreed to streamline visa-related facilities at the border; multiple long term visas for business persons were promised. More frequent meetings were promised to discuss Afghanistan-Pakistan Transit Issue Contract Agreement (APTICA). A need was also felt to harmonise ECO and SAARC tariff codes.
Apart from the need to have a more expanded network of Pakistani banks in Afghanistan, there are challenges in finance and insurance sectors preventing growth of trade. These include exorbitant insurance cost — over 100 percent — for Pakistan transit goods to central Asia which increases overall cost of trade. Besides, insurance remains a significant issue in transport of high-value goods from Pakistan to Afghanistan. There are no formal money exchange companies at border points, thus, for any payment related discrepancy small- and medium-scale traders have to go larger cities to procure foreign exchange.
In a recent interaction with Balochistan-based business persons, we were reminded of the importance of Chaman for trading across the border. However Chaman-based traders also faced area-specific challenges which include delay of several months in processing of letters of credit. These letters carry financial limits and therefore need to be broken into smaller denominations.
Finally, businessmen resort to the Hawala system since there are no bank branches or formal money exchange companies near Chaman border point.
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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.