The recent US-Iran nuclear deal has positive implications for the global as well as regional economy. Pakistan, as a major regional player, will also benefit from the easing of sanctions on Iran, especially to cover up its energy needs.
The recent US-Iran nuclear deal has positive implications for the global as well as regional economy. Pakistan, as a major regional player, will also benefit from the easing of sanctions on Iran, especially to cover up its energy needs.
The country can hope to materialise around $5 billion trade volume with Iran, which was not possible without this deal. Though Pakistan had not put any direct sanctions on Iran, but as a member of the international community was compelled to follow others.
Iran was facing sanctions since 1979, initially imposed by the United States following the Iranian revolution. It was further tightened in 1995 by including US firms dealing with Iranian government. Iranian economic horizon faced further challenges when the Security Council of the United Nations passed a resolution in 2006 to impose sanctions following Tehran’s refusal to suspend its uranium enrichment programme. The sanctions targeted banking and insurance transactions etc.
The conflict eased after a nuclear deal was reached with Iran and a group of six nations led by the US in mid of July this year. The deal limits Iran’s nuclear ability in return for lifting international oil and financial sanctions.
Though formal agreement will take time and lifting of sanctions will also phase out gradually, it has started impacting the global economy due to its top 10 rank amongst oil producing countries in the world. Sensing the changes on Iran issues, Pakistan has already started work to increase its bilateral trade.
In April 2015, a delegation from Pakistan and Iran met in Tehran and reviewed the present trade level of both countries. The delegation agreed to formulate a five-year facilitation plan to increase bilateral trade from the current level of $1 billion to $5 billion. From the Pakistan side, Commerce Minister Khurram Dastgir Khan headed the delegation, while the Iranian side was led by Minister for Industry, Mines and Trade Mohammad Reza Nematzadeh.
The meeting agreed to form a working group to devise a substantial widening of the 2006 Pak-Iran Preferential Trade Agreement. The two sides also reiterated the need for joint investments in agro-food processing and infrastructure, particularly for establishing an effective rail, road and sea link between the two countries.
The two sides were optimistic about the gas pipeline, as Khurram Dastagir assured Pakistan will arrange construction of the remaining portion of the gas pipeline from Gwadar to Iran, thus paving way for import of Iranian gas. The Iranian side also assured that hurdles and obstacles in the way of bilateral trade would be removed through effective measures.
The country profile shows that Iran became an Islamic republic in 1979, after monarchy was overthrown by clerics during its Islamic Revolution. Iran’s art, music, architecture, poetry, philosophy, traditions, and ideology have made it an important nation in the global community.
The important driver of Iranian economy is crude oil that benefited the country due to high price in the world market. The sanctions have caused Iran to replace the dollar in its oil trade with China, India, and Japan with the respective currencies of its trading partners. In January 2012, Iran and Russia also replaced the US dollar with their national currencies for bilateral trade.
The key agriculture products of Iran include wheat, rice, grains, sugar beets, sugarcane, fruits, nuts, cotton, and dairy. While, petroleum, petrochemicals, fertilisers, caustic soda, textiles, cement and other construction materials, food processing, ferrous and non-ferrous metal fabrication, and armaments are the major industries of Iran.
The major exporting commodities of Iran consist of 80 percent of petroleum products and the remaining 20 percent are chemical/petrochemical products, fruits/nuts, carpet etc. The exporting partners of Iran are China 21.4 percent, Japan 9.1 percent, Turkey 8.8 percent, India 8.1 percent, South Korea 8 percent and Italy 5.3 percent. The commodities imported by Iran include industrial raw material and intermediate goods, capital goods, food stuff, other consumer goods, technical services, and military supplies.
The import partners of Iran are UAE 30.9 percent, China 17.4 percent, South Korea 7.1 percent, Germany 4.8 percent and Turkey 4.2 percent. Pakistan contributed only 0.2 percent in Iran's total imports in 2012 due to compulsion of sanctions on the country.
The recent decision to ease financial and economic sanctions imposed on Iran will boost the economic relations between the two countries, which have already witnessed some improvement during the past few years.
Iran's decision regarding opening its commercial bank in Pakistan and the availability of letter of credit facility with it, are important steps towards enhancing economic relations. The formal land-route trade between the two countries is Quetta-Taftan located at Pak-Iran border. The goods imported by Pakistan from Iran include petroleum, oil and iron/steel products, organic chemicals, ores, slag, ash, and plastic. Pakistan exports various items to Iran including rice, hand-made filament/yarn, cotton yarn/woven fabric, ships/other floating structures, surgical instruments. Rice is a major export item of Pakistan.
In fiscal year 2014, Pakistan exported goods worth $ 54.52 million and imported $0.66 million, with a trade surplus of $53.86 million.
Pakistan and Iran have various bilateral trade agreements, which include:
(1) Preferential Trade Agreement (PTA): Pakistan signed a PTA with Iran on March 4, 2004 and the agreement became operational from September 1, 2006. Under the agreement, Pakistan offered concessions to Iran on 338 tariff lines, whereas Iran gave concessions on 309 tariff lines. Preferences granted by both countries to each other cover around 18 percent of MFN tariff of both countries.
(2) Pakistan-Iran Bilateral Agreement on Road Transportation: This agreement on road transportation was signed in 1987. Initially, it covered movement of goods; however, transportation of passengers was added through an amendment in 1992. The route for Pakistan to Iran is Mirjaveh to Zahidan, while route from Iran to Pakistan is Taftan to Quetta. Meetings of Pak-Iran Joint Transportation Commission are held alternatively in Pakistan and Iran every year.
(3) Pak-Iran International Transport of Passengers and Goods Agreement: The agreement was signed in June 2008 at Tehran. Pakistan has completed the ratification process, however Iran is yet to ratify this agreement. It would enable Pakistani traffic to move up to Turkey through Iran while Iranian goods and passengers can have access to China via Pakistan, thus resulting in enhancing mutual trade activities considerably.
According to a research conducted by Karachi Chamber of Commerce and Industry (KCCI), the frequent changes in the import regime of Iran are the major bottlenecks in the expansion of Pak-Iran trade. These bottlenecks have been identified as high import tariff applied on exportable items from Pakistan and indirect trade through Dubai. Pakistan has also hurdles in export of wheat to Iran as part of ‘wheat for fertiliser’ barter trade arrangement due to pricing issues.
Pakistan Iran gas pipeline is a landmark project which can change the energy situation in Pakistan. The project was inaugurated in March 2013 by head of states of the two countries. The 1,600 km pipeline would enable Iran to export of 21.5 million cubic meters of natural gas per day to Pakistan. However, sanctions imposed by US, EU, UK and Canada on expanding relations with Iran have caused a number of countries to back off from financing the IP pipeline project. Pakistan has recently decided to stall the $7.5 billion IP gas pipeline project, until the international community lifts sanctions against the Islamic Republic.
International sanctions on Iran also compelled Pakistan to take measures under which the State bank of Pakistan (SBP) restricted commercial banks from accepting letter of credits opened by Iranian banks, thus making trade difficult for the two countries. Due to such sanctions, Iranian goods found alternate ways for export to neighbouring countries via Dubai.
Pak-Iran bilateral trade is therefore being routed via Dubai, but it has increased the cost of doing business for the Pakistani traders. The payment problems have also made Pakistani traders reluctant to do business with Iran as Western sanctions pile pressure.
However, the lifting of sanctions on Iran will increase the economic activities and business contacts between the Pakistani and Iranian markets.
Pakistani businesses have identified opportunities in Iranian sectors of dairy, livestock, meat, and beverages. Pakistan can also take benefit of Iran's petrochemical sector. Development of a joint trade committee can also play its role in expanding bilateral trade. The two countries should sort out infrastructural constraints to enhance bilateral trade via the Quetta-Taftan land route.
The lifting of oil and financial sanctions on Iran will also help in curtailing informal trade between Islamabad and Tehran, especially in the case of oil smuggling. Some estimates reveal that Iranian oil found ways into Pakistan through illegal channels and the quantity is about 30 percent of Pakistan’s need. This has been causing losses worth billions of rupees in terms of duty and taxes to the national exchequer.
The writer is a staff member
