Though trade between Pakistan and Afghanistan has increased substantially from $0.83 billion to $2.38 billion during the last seven years, yet owing to a number of tariff and non-tariff barriers (NTBs) mutual trade between the two countries in the first quarter of financial year (FY) 2014 has fallen by 15 per cent annually.

After talking to traders, exporters, local manufacturers and Khyber Pakhtunkhwa Chamber of Commerce and Industry (KPCCI) members, it seems Pak-Afghan trade target of $5 billion set for the 2015 is a remote possibility when it comes to tariff and non-tariff barriers NTBs.

The most recent of these barriers, termed as one of the reasons for sharp decline in mutual trade, is the ban on exports to Afghanistan in the local currency (rupee) that has taken effect from March 17.

Delay in the refund processing orders (RPOs) to the exporters is also one such reason of decline in exports as noted by Senator Ilyas Bilour, who said that exports of edible oil to Afghanistan has come to a standstill as the local traders have not been issued their refund processing orders (RPOs) for the last nine month.

"They have no money to import palm oil for their factories and to export their value-added product to Afghanistan," he said.

As shown in a recent study of Pakistan Afghanistan Joint Chamber of Commerce and Industry (PAJCCI) that referred to data compiled by Pakistan Bureau of Statistics and State Bank of Pakistan the total trade between the two sides is estimated to have reached $2.38 billion in the financial year 2013, while this growth is encouraging, given the two consecutive year-on-year declines since FY2011. However, the $5 billion total bilateral trade target initially set for 2015 is likely to be missed.

Renowned manufacturer and member of the Khyber Pakhtunkhwa Board of Investment (KPBOIT), Muhammad Ishaq, said the mutual trade still included the $2.3 billion transit trade component, otherwise bilateral trade between the two countries has dropped to less than one billion dollar.

Ziaul Haq Sarhadi, director PAJCCI and Customs Clearing Agent associated with Afghan transit trade, however, said Pak-Afghan trade balance will continue to be in Pakistan’s favour as it is still Afghanistan’s principal supplier of goods. And this trend may continue in the near to medium term, given Afghanistan’s weak export potential, he said.

Afghanistan’s total exports are projected at $2.71 billion for the Afghan fiscal year ending December 2014, which as mentioned in the PAJCCI study, is only a marginal improvement over $2.52 billion recorded in the twelve months ending March 2009.

Pakistani exports to Afghanistan, however, have fallen in the last two years and Afghanistan is now the 6th biggest export destination for Pakistan, from 2nd biggest destination in FY2011, according to calculations of the PAJCCI based on the data compiled by the State Bank of Pakistan. The SBP data also shows that total bilateral trade in the first quarter of FY14 has fallen 15 per cent year-on-year.

Muhammad Ishaq said fall in Pakistan’s exports is intriguing, when in fact Afghanistan’s total annual imports have been increasing and it may still keep rising in the months to come.

The exporters and traders underlined a number of factors for this decline and a majority of them held increase in informal trade across the border as one of the reasons for decline in Pakistan’s export to Afghanistan.

Pakistani traders and businessmen believe some TBs and NTBs are responsible for decline in exports to Afghanistan. Ishaq said the Afghan government had imposed 18 per cent duty on Pakistani exports which is discriminatory while the rate of customs duty was also highest in the region.

The incentives given to Indian and Iranian exporters also contributed to the rise of their exports that has shrunk market for formal export of Pakistani goods, he informed.

A trade observer said Afghan markets are flooded with Pakistani textile products, such as cloth and readymade garments, but the same is not visible in official data. And Pakistani textile exports to Afghanistan, according to the SBP, stood at $28 million in FY12, making up for only 1.2 per cent of total Pakistani exports to the country.

The other plausible reason, he said, is the increase of Iran’s exports to Afghanistan and during the last ten years Iranian exports to Afghanistan have increased due to which Pakistani exports to the country have started falling for the last three years. Pakistan had a bigger share of Afghanistan’s total trade, but Iran’s exports to Afghanistan reportedly stood at $1.18 billion in the current financial year.

Ziaul Haq Sarhadi said Afghans still see their country as an attractive market for Pakistan on account of long borders, demand for Pakistani products and their dominant position vis-a-vis competitors. However, our study has made it plain that Pakistan is currently facing huge challenge from Iran which may continue to become more intense in the future, he added.

He said that trade financing facilities are very low between Afghanistan and Pakistan. Afghan traders have a different perception of the Pakistan’s banking system requirements, which may definitely be appropriate for an emerging economy like ours, but for Afghan importers, who largely operate informally; these seem to be an obstacle.

"They still saw bank statement, letter of credit and insurance guarantees and other customs procedures and facilities as barriers," he said.

The Afghan traders have even rejected the new Afghanistan Pakistan Transit Trade for these banking and procedural instruments, Ziaul Haq said. "Only two days ago our delegation led by PAJCCI president Khan Jan Alkozai called on Nangarhar governor, Maulvi Attaullah Lodin, to inform him of our observations regarding the online clearance and transactions that cause decline in mutual trade."

Zahidullah Shinwari referred to the decision of the government that payments against exports to Afghanistan would be no longer in Pak rupee saying, "It (trade) would now be in convertible currency (US dollar) and this trading regime has been applied with effect from March 17."

"The government itself admits that trade with Afghanistan in Pakistan rupee estimated to be 50 per cent of the total exports of $2.38 billion which will stop now," he said.

"This measure will mar the export of perishable and food items as normal banking channels are not available for swift transactions between the two countries at Torkhum or other border crossing," he said.

Shinwari said the exporters have to come all the way to Peshawar or elsewhere to receive Form-E for conversion of currency for advance payment. It takes a lot of time and, at times, their consignments parish out costing them million of rupees, he said, adding that it is going to cause a sharp decline in exports to Afghanistan.