Sanctions-scarred banks reluctant to resume transactions with Iran

KARACHI: Pakistani banks are wary of establishing links with their Iranian counterparts to settle bilateral trade payments as US pullout from nuclear deal refueled fear of economic sanctions on the neighbouring Iran, senior bankers said on Thursday.

A banker told The News that the prospects of setting up alternative payments mechanism for trade with Iran turned less likely in anticipation of new US sanctions on Iran following the American withdrawal from the nuclear deal.

“It would become harder for Pakistani banks to deal in trade transactions with Iran under the proposed settlement mechanism as the banks are part of international economic system,” the banker said on condition of anonymity.

Currently, trade payments and settlements between Pakistan and Iran are carried out by Asian Clearing Union while there is no direct connection between the banks of the two neighbouring countries. Trade also takes place through barter or on cash. Bilateral trade remained very low, amounting to $300 million in the fiscal year of 2017. Pakistan’s exports to Iran stood at $29 million in FY2017, while imports from Iran were $271 million, according to the central bank data.

In April last year, the two countries signed an agreement to provide a trade settlement mechanism to promote bilateral trade.

“As all US$ clearing for banks take place in New York, no bank which deals in US$ would take risk to breach US imposed sanctions,” the banker said. “However, if the EU (European Union) and Iran trade continues to do businesses with Iran, there will be some prospects that other countries might use that channel.”

Analysts believe the chances of currency swap agreement between the two countries also turned dim. The trade settlement agreement has not been implemented for the last one year.

The Stat Bank of Pakistan’s (SBP) chief spokesman said the central bank issued a circular in May last year to inform the market about the proposed settlement mechanism after signing the banking and payment arrangement (BPA) with Iran. SBP invited banks to participate in the payment mechanism. “The operational details on the implementation of BPA are being worked out,” the spokesman added.

Industry officials said banks were not interested in establishing any payments mechanism with Iran even after its old sanctions were lifted in 2016.

“There has not been any progress made by banks regarding the BPA,” another banker said. “The SBP has been waiting for the banks’ feedback on how and when the devised payments system goes live.”

Ehsan Malik, chief executive officer of Pakistan Business Council said the reluctance of Pakistani banks to deal in trade transactions with Iran should be seen in the context of their reliance on the US based- Society for Worldwide Interbank Financial Telecommunication (SWIFT) clearance system.

“Whilst transactions in currencies other than US$ do not go through SWIFT and potentially Euro or other currency trade with Iran would bypass it, Pakistani banks do have to rely on the SWIFT system for their transactions with the rest of the world,” he said. “The number and value of the latter far outweighs the potential of transactions with Iran. The SBP and the government of Pakistan is aware of this and has to date not been able to come up with viable alternatives, one of which could be barter.”

The SBP said the BPA would be available as an additional mode and does not restrict the use of other permissible mechanisms for the settlement of trade transactions.

Transactions eligible for the settlement under this mechanism will be denominated in the euro or yen and based only on documentary letters of credit (LCs). As per the mechanism, the importer’s bank in Pakistan will credit the foreign exchange in the Nostro account of the SBP for onward payment to the exporter in Iran and inform the SBP about the same.

“Participating banks shall ensure that transactions conducted under this mechanism are not proscribed and do not involve individuals/entities proscribed under international sanctions,” said the SBP.