ISLAMABAD: Cross-border transactions between Pakistani and Iranian banks are yet to begin almost six months since Tehran and Islamabad reached a deal as the former has still not permitted its banks to resume connection, officials said on Friday.
“The ball is in Iran’s court,” an official said. “We are awaiting the Iranian central bank go-ahead to their banks to implement banking and payment arrangement signed between the two countries in April this year.”
Early last year, the State Bank of Pakistan (SBP) allowed all commercial banks and financial institutions to do business with neighbouring Iran after the US government reached a nuclear deal with the latter, paving the way for lifting of sanctions.
Global transaction network the Society for Worldwide Interbank Financial Telecommunication (SWIFT) resumed links of Iranian banks to permit them to conduct cross-border transactions with foreign banks. They were disconnected from SWIFT in March 2012 following sanctions on Iran.
In February, government approved a bilateral trade settlement mechanism and subsequently the SBP and Iranian central bank Bank Markazi Jomhouri Islami Iran (BMJII) signed a banking and payment arrangement (BPA) in April and issued a circular on trade settlement mechanism under the BPA in May.
Non-availability of settlement mechanism with no correspondent bank willing to clear payments in favour of Iranian banks keeps the bilateral trade potential untapped and makes smuggling of petroleum products from Iran very lucrative.
Main exports from Pakistan to Iran are rice, plastics, paper and oranges, and key import items include liquefied petroleum gas, petroleum products, electric transformers and dry fruits.
Trade between the two countries got disrupted in the wake of economic sanctions on Iran by the United Nations Security Council, US and European Union. But, economic sanctions were lifted after signing of truce agreement between the last US Administration and Iran.
Bilateral trade slid to $431.76 million in 2010/11 following the sanctions from $1.32 billion in 2008/09.
Officials said SBP advised banking and financial sector to continue deal with at least non-sanctioned items and non-prescribed individuals.
Currently, there are no restrictions on undertaking export/import transactions or accepting/opening of letter of credit from/to Iran traders, they added.
Officials said SBP coordinated with BMJII to devise a trade settlement mechanism.
A SBP’s document said currently BMJII is in consultation process with their banks to issue a circular for their market regarding modus operandi of the settlement mechanism under BPA. “In order to proceed further, SBP is waiting for BMJII to issue the circular in their country to implement the BPA.”
The SBP is, however, optimistic that the issues will be resolved in near future to create a workable trade settlement mechanism.
Under the BPA, SBP and BMJII will open euro- or Japanese yen-denominated account of each other in their books, which will be used for settlement of permissible transactions between the two countries.
Both the countries will grant a reciprocal credit facility of aggregate euro 250 million or an amount equivalent in yen. The facility will only be used to settle trade transactions authorised under the agreement. Importer’s commercial bank will credit the account of its central bank with the amount to be paid to the exporter in other country. The central bank, on receiving of the amount, will instruct the corresponding central bank to debit its special account with the given amount for onward credit to the exporters through exporter’s commercial bank.
The outstanding balance of special account, at the end of each three-month period, will be settled by the debtor central bank in favour of the creditor central bank in euro or yen within one month after the end of respective period.