Hamza Amin, Intern
Trade is one of the most viable means to connect peoples, states, and societies. Pakistan and Iran, despite being neighboring countries and having historical, cultural, geographic, religious, and ethnic linkages, have not been able to realize their trade potential fully. This is evident from the current volume of formal bilateral trade between Pakistan and Iran, which stands at $2.3 billion, whereas the actual trade potential is expected to be above $5 billion. Pakistan’s foreign minister also stressed the need “to tap the vast scope in Pak-Iran trade” during his meeting with the Iranian counterpart in May 2022. A historical overview of economic ties between Iran and Pakistan is mentioned below:-
Major hurdles in enhanced trade cooperation between Pakistan and Iran include trade imbalance, US sanctions on Iran, smuggling, and lack of a credible payment mechanism. In 2022, Iran’s exports to Pakistan stood at $1.448 billion, while Pakistan's exports to Iran were $842.8 million. During the past 24 years, Iran’s exports to Pakistan have increased at an annual rate of 13.5% while Pakistan's exports to Iran have decreased up to 44% on an annual basis.
US sanctions on Iran have negatively affected trade ties between Pakistan and Iran. The Iran-Pakistan gas pipeline is a classic case study in this regard. In 2011, Iran completed construction of its part of the project. On Pakistan’s side, the construction work was supposed to be completed by the end of 2014. However, Pakistan suspended construction of the gas project owing to threats of heavy sanctions by the US. Consequently, these sanctions adversely impacted Pakistan’s energy imports from Iran. Regarding the gas pipeline, as per the media reports, Iran has warned Pakistan to either complete part of the project or face a penalty of $18 billion.
Smuggling and other illicit activities from across the border also hamper Pak-Iran trade. A report submitted to the Prime Minister's office on the smuggling of Iranian oil revealed that annually, 2.802 billion liters of oil is smuggled to Pakistan, incurring 60 billion rupees of revenue loss. The limited number of legal crossing points is one of the primary reasons for increased smuggling, as only three legal crossing points exist, i.e. Mirjaveh-Taftan, Gabd-Rimdan, and Mand-Pisheen corridors. Similarly, the lengthy documentation process, inordinate delays in customs clearance, and corrupt practices of officials incentivize illegal activities like smuggling.
In 2017, Pakistan and Iran trade negotiating committees held two rounds of discussions and projected trade volume to increase to $5 billion by 2021. However, it didn’t materialize mainly due to the non-availability of any credible payment mechanism without formal banking channels. Consequently, Hawala and Hundi systems and other informal means are being used as instruments of financial dealings.
In order to enhance Pak-Iran bilateral trade, it is imperative, in the first place, to formalize the free trade agreement. This will help reduce tariffs and ensure greater market access to goods and services of both countries. Pakistan’s Prime Minister mentioned the acceleration of work on the free trade agreement between Pakistan and Iran during his visit to Gwadar in May, 2023, but no tangible steps have been taken so far. Addressing non-tariff barriers, such as Iran's phytosanitary measures on commodities like citrus, mango, rice, poultry, and meat, is also necessary.
To avert US sanctions, alternate financial channels must be explored, given the absence of formal banking ties. Barter trade and trade in local or third-country currency may be suitable alternatives. In June 2023, Pakistan notified a business-to-business barter mechanism. A rupee-riyal arrangement where Iran deposits a certain portion of its oil revenues in Pakistani banks to purchase goods can also strengthen economic links. Likewise, initiating the registration of Special Purpose Vehicle (SPV) focused on commerce and trade could also aid bilateral trade expansion.
It is in Pakistan’s strategic interests to diversify its oil and gas sector imports. The foreign office needs to diplomatically engage the US to secure waivers for trade in oil and gas with Iran. Such waivers were granted to 8 countries, including China, Italy, Greece, Turkey, Taiwan, Japan, South Korea and India in 2018. In a recent meeting of the National Assembly Standing Committee on Foreign Affairs, concerns were raised about Pakistan's inability to seek waivers for oil trade with Iran, urging the Ministry of Foreign Affairs and Ministry of Commerce officials to pursue options to aggressively secure such waivers. Opening border markets is also significant to reduce smuggling and increase formal bilateral trade between Pakistan and Iran. On May 18, 2023, the Iranian President and Pakistan’s Prime Minister jointly inaugurated a border market linking Pishin in southeast Iran to Mand in Pakistan’s southwest. This market is one of six being constructed together by Pakistan and Iran.
Lastly, including Iran in BRI can go a long way in expanding Pak-Iran trade ties. CPEC, the flagship project of BRI, primarily has two major components, i.e. infrastructure development and energy cooperation. Iran, being an energy-abundant country with greater capacity for infrastructural development, can effectively fulfil Pakistan's energy requirements and improve regional connectivity for enhanced trade. During a meeting at Pak- Iran joint Chamber of Commerce and Industry, the Iranian ambassador to Pakistan also reiterated Iran’s willingness to contribute to this “giant project”.
In a nutshell, the Pakistan-Iran trade has great potential to improve. Various challenges, including sanctions on Iran, the smuggling problem, and high tariffs on multiple commodities, hamper the optimal utilization of trade potential. Nevertheless, these challenges can be overcome if both sides have solid political will to improve trade ties.