Pakistan’s authorities have issued a directive for the implementation of barter trade with Iran, Russia and Afghanistan without the use of currency to facilitate and develop mutual trade, the head of the Organization for Investment Economic and Technical Assistance of Iran said.
In a letter to Economy Minister Ehsan Khandouzi, Ali Fekri added that this directive officially allows the economic players of Iran, Russia and Afghanistan to engage in barter trade with the Pakistani side without using the US dollar or any other currency or financial instruments, the news portal of Tehran Chamber of Commerce, Industries, Mines and Agriculture reported.
“The Pakistani government has specified a list consisting of four categories of commodity groups for this mechanism, according to which private and public institutions can export 26 commodity groups to Afghanistan, Iran and Russia, and import 10 commodity groups from Iran and Afghanistan and 11 commodity groups from Russia,” he added.
According to the official, Iranian exporters can export 10 commodity groups to Pakistan in the form of barter. These commodities include fruits, nuts and dried fruits, vegetables, spices, minerals and metals, coal and its byproducts, crude oil, liquefied gas, natural gas, chemical products, fertilizers, plastic and leather products, raw hide, virgin wool and iron and steel products.
Left with barely enough foreign exchange reserves to cover one month's imports, Pakistan's government is struggling to manage a balance of payments crisis and bring inflation under control after it hit a record of nearly 38% last month, Reuters reported earlier in June.
The Pakistani government measure is called the Business-to-business (B2B) Barter Trade Mechanism 2023 and dated June 1.
Sajid Amin, deputy director of the Sustainable Development Policy Institute, said Pakistan could gain particularly from oil and energy imports from Russia and Iran without adding to dollar demand. He added that the barter opportunity is important, considering the dollar shortage in the countries.
"While it may not solve currency smuggling, particularly at the Afghanistan border, it can discourage smuggling of goods from Iran, such as diesel, and Afghanistan which is hurting the economy," Amin added.
After Pakistan's first purchase of discounted Russian oil in April, petroleum minister Musadik Malik told Reuters that Pakistan would only be buying crude, not refined products, under the deal.
There was no confirmation about how payment would be made but Malik said purchases could rise to 100,000 barrels per day if the first transaction went smoothly.
Last year, Pakistan imported 154,000 bpd of crude oil, little changed from 2021, data from analytics firm Kpler showed.
In May, the Pakistan Petroleum Dealers Association complained that up to 35% of the diesel sold in Pakistan had been smuggled from Iran.
Pakistan's government has also ordered a clampdown on smuggling of flour, wheat, sugar and fertilizer to Afghanistan.
Pakistani Business Community Welcomes Move
The Pakistani business community has welcomed the government decision of allowing barter trade with Russia, Iran and Afghanistan, Pakistan Observer reported.
Lahore Chamber of Commerce and Industry has thanked State Bank of Pakistan (SBP) and the Ministry of Commerce for issuing two circulars that would promote regional trade and ease burden on depleting foreign exchange reserves.
LCCI President Kashif Anwar and other office-bearers expressed hope that the import of oil and energy from Russia would help reduce the cost of petroleum products and strengthen energy security.
Under the barter trade arrangement, the principle of “import followed by export” will be followed, ensuring that exports match the value of imported goods.
LCCI officer bearers said the implementation of this barter trade mechanism would significantly reduce the cost of doing business and stabilize Pakistan’s economy. It will ease burden on foreign reserves, address the country’s balance of payments crisis, reduce the reliance on dollar transaction, and bring much-needed relief to businesses, thereby enhancing the overall business environment.
SBP has granted banks permission to acquire US dollars from the interbank market. This short-term measure aims to alleviate pressure on exchange companies and enable customers to benefit from lower exchange rates. The permission granted to banks will remain valid until July 31.
Previously, customers conducting card-based cross-border transactions were subjected to the open-market USD rate, resulting in a considerable disparity between the interbank and open-market rates. By allowing banks to purchase dollars from the interbank market, this circular has effectively reduced the open-market dollar rate by Rs20-25. This step will not only reduce the cost of cross-border transactions, but will also narrow the gap between the interbank and open-market rates.
“There is vast potential in energy and food sectors under the Pakistan-Iran barter trade,” says Shahzad Ali Malik, former president of LCCI.
The veteran industrialist says his group plans to launch business relations in collaboration with other local companies, The News International reported.
Speaking to a select group of journalists on Wednesday, Malik said Iran has been a big market for Pakistani basmati rice, on which India’s supremacy was gradually established due to multiple factors.
Primarily, high cost of production rendered Pakistani rice uncompetitive in Iran against low cost imports from India. However, due to the better strategy of the current government, favorable competition has become possible for local exporters to trade the best type of basmati rice from Pakistan under barter trade.
Rice trade between India and Iran has been on decline lately due to various factors, he said, adding that negotiations with a local company for the import of LPG from Iran in exchange for rice have reached an advanced stage.
Malik expressed hope that due to barter trade with Iran, Russia and Central Asian states as well as locally developed high yielding hybrid rice seed, there was a possibility of doubling Pakistan’s rice exports to $5 billion in the next five years.
He explained that the total export of rice currently stands around $2.5 billion and with favorable trade policies and the introduction of new varieties of hybrid rice by the private sector, the total trade volume of rice export could reach $5 billion in the next five years.
Talking about the role of Gard Agricultural Research and Services, he said the local hybrid rice seed production has increased from 10% to 55% in the last 10 years and it is expected to reach 60% next year.
The yield of hybrid non-basmati rice has increased to 100 maunds per acre (1 maund approximates 3 kg). Whereas the production of basmati in Pakistan is also better than in India where it is barely 40 to 50 maunds.
The industrialist described the steps taken for the improvement of agriculture in the federal budget as a welcome step, which has granted duty exemption on agricultural machinery. But he called for allotting land on lease for seed research and manufacturing companies at the local level.
Malik said there is a substantial increase in the production of hybrid seeds of various crops, so there is a need to focus on their research and development.
Pakistan exports paper and paperboard, rice and stationery products to Iran while it imports LPG, other mineral fuels and electrical energy from Iran.
Trade potential between the two countries is immense with the top 20 high potential export items for Pakistan having a potential of $1.9 billion.
According to a report, total annualized demand of LPG in Pakistan is estimated to be around 1.5 million tons, of which around 850,000 tons are produced locall, and the balance needs to be imported from neighboring countries.
Local demand of LPG is on increase constantly, while its local production is stagnant. So, with the increase in local demand, import would tend to increase. Pakistan is importing LPG through sea from Middle Eastern countries and land route from Iran.
Free Trade Talks to Start in September
Iran and Pakistan will start direct talks for a free trade deal in September, according to a senior Iranian trade official who says an agreement may be possible until the end of the current Iranian year in March 2024.
“If we can agree on free trade with this country this [fiscal] year, it will be a major accomplishment,” Hadi Talebian, who leads South Asia Department of Iran’s Trade Promotion Organization, said on Tuesday.
Talebian said a free trade deal with Pakistan will have its own complications because the balance of trade between the two countries is largely in Iran’s favor, Mehr News Agency reported.
He, however, said that such a deal will contain “special arrangements” and will be much more beneficial to Iran than a barter mechanism proposed by some businesses and government officials in Iran and Pakistan.
Iran is currently in a preferential trade agreement with Pakistan, under which the two countries have reduced tariffs on exports and imports of certain commodities.
The two countries have also defined a strategy to launch six major border markets to allow free trade between people living along their frontiers.
Earlier in June, Pakistan issued an order allowing barter trade with Iran, Russia and Afghanistan for certain goods, including petroleum and natural gas.
TPO figures show annual trade between Iran and Pakistan reached nearly $2.4 billion in the year to March, of which some 1.8 billion were Iran’s exports to Pakistan.
The Iranian government agency expects bilateral trade with Pakistan to increase by up to 20% in the year ending March 2025.
