Pakistan and Iran: Neighbors Forever

                Majyd Aziz

(Former President Karachi Chamber of Commerce and Industry)

Presentation at the Panel Discussion on “Pakistan’s Relations with Regional Countries (Afghanistan, Iran, and CARs)” At National Institute of Management, Karachi, July 02-2012

Preamble:

PAKISTAN’S policymakers, economists, politicians, and even the business community, when talking or explaining the nation’s relations with other countries, especially China and Islamic countries, usually begin by highlighting the rich history of religious or strong friendly bilateral ties since the creation of Pakistan. With China, the relationship is deeper than the ocean and higher than the mountain. With Islamic countries, Pakistan shares a common religion and the relationship is fraternal and brotherly. This is the diplomatic way of saying that we pray together, we assist one another, we meet often, and so we must do a lot for each other.

PAKISTAN’S diplomatic speak is well taken and acknowledged but the litmus test is the status of trade and investment that counts in today’s global environment. The name of the game is money, translated into investment, imports and exports, trade incentives, trade and investment treatment, and cooperation through trading blocs or regional blocs. However, the economic side is not the only criteria in favorable bilateral relations. Being a neighbor, or adhering to the same religion, or being a member of the same bloc are also taken into consideration when defining the contours of a bilateral relationship. The political implications are paramount too, especially when there are issues that emerge either at a global level or those that are primarily two-sided controversial. More often than not, the political, security and diplomatic ramifications weigh heavily on the relationship and thus impact negatively by making trade and investment hostage to these factors.

PAKISTAN’S neighbors have all experienced, accepted, and are frequently evolving their bilateral relations with Pakistan. China, India, Iran, Afghanistan have in recent years, due to their own national interests, exigencies, or the changing world environment, are focusing their attention on Pakistan and, in the process, have gradually brought economic issues into the forefront. Although this revisit may not immediately bring about the transformation from a sensitive or aggressive posture to peace and economic prosperity for Pakistan, the projections and outlook point towards a positive development in Pakistan’s relations with neighbors.

Pakistan-Iran: The Trade Scenario:

PAKISTAN’S bilateral trade with Iran is, to say the least, dismal. The two nations, with a 900 km common border, with population of 190 and 75 million, with full membership in Economic Cooperation Organization, had a bilateral trade of only $ 357 million in 2011. Pakistan exports were $ 153 million while imports were $ 304 million. Of course, the informal or undocumented trade is flourishing despite avowed statements by officials of both countries to control smuggling. Trade through Dubai is also not taken into account in the official figures. Notwithstanding these, the fact remains that Iran’s total exports in 2011 were $ 102 billion and imports were $ 54 billion while Pakistan-Iran bilateral trade is less than 0.7%.

The depressing fact is that Pakistan’s exports to Iran in 2008 were $426 million, in 2009 were $252 million, and in 2010 were $ 182 million. On the other hand, Pakistan’s imports from Iran also witnessed a decline. In 2008, imports were $738 million, in 2009 were $956 million, and in 2010 imports fell further to $ 883 million. Within one year, there has been a deep dive by over $ 580 million.

It is a fact that over 80% of Iran’s exports are petroleum and petroleum products while fruits, nuts, and carpets make up most of the other exports. It is also a fact that Iran’s major oil customers are China, Japan, India, Turkey and Korea. Inspite of economic sanctions, Iran managed to increase exports by 21% in 2011 on a year-to-year basis, i.e., from $ 84 billion to $ 102 billion. Of course, Iran’s main exports are petroleum and petroleum products.

Pakistan’s major exports to Iran consist of cereals and make up nearly 50% of total exports. Meat, edible meat offal, edible fruit, nuts, citrus fruits, melons and mangoes have a share of 20% of total exports. Pakistan exports less than $ 2 million worth of textiles to her neighbor.

The top state hierarchies of both the countries routinely come up with grandiose statements urging an increase in bilateral trade. However, the main focus of talks between the two nations revolves around the energy sector while emphasis is seldom given to other sectors that could enhance bilateral trade. The United Nations trade embargo on Iran has further put pressure on Pakistan to conduct a more meaningful trade relationship with Iran.

The Positive Results:

Pakistan is facing a severe energy crisis. Loadshedding has played havoc with the lives of the citizens and massive riots against loadshedding have become a daily feature. In some cities and towns, power is off for most of the day. Trade and industry is suffering this menace too. All government efforts to ensure regular supply of power have come to naught. At the same time, the circular debt scenario has further exacerbated the crisis. Moreover, Pakistan is running out of natural gas. The impact on industries, especially in Punjab, has been atrocious. Last year, industries were without gas for about 180 days. The ensuing result has been reflected in the decline in textile exports as compared to last year. The crisis has been further aggravated by the unbridled issuance of licenses for CNG stations and the lack of discipline in this sector. Officially, these stations consume nearly 9% of the total gas supply while it is alleged that about 3% further supply is made to unscrupulous station owners through an undocumented process by corrupt officials in SNGPL and SSGC. Whatever may be the case, the indiscriminate utilization of natural gas through CNG stations also reflects the distorted priorities of the policymakers in government.

Thus, the news about the agreement to build the Iran-Pakistan Gas Pipeline was widely acclaimed. The project would supply 750 mcft daily through its 1700 km length. It is estimated that atleast 4000 mw of electricity could be generated through the use of Iranian gas. Iran has nearly completed the 900 km pipeline upto the border while Pakistan, as always, is still trying to find someone to lay the pipeline. The estimated cost of the project on the Pakistani side is estimated at $1.2 billion. It is possible that a Chinese company may commence work on the pipeline unless external pressures put a damper on the project. The venture is a tall order but a doable alternate source of supply of gas. The dice is, however, loaded against Pakistan, primarily the United Nations trade embargo as well as the strong opposition from Washington. Inspite of the signing of the TAPI agreement that would be another alternate source of gas supply and inspite of covert disapproval even from Saudi Arabia, various daring statements emanating out of Islamabad reflect the government’s determination to go ahead with the project. It is to be seen how much support Pakistan receives from China in this project. Notwithstanding the Tehran offer to finance upto $500 million of the construction of the pipeline in Pakistan, the threat of economic sanctions looms heavily over the project.

Pakistan has inked an agreement with Iran for importing 1000 mw electricity at 10 cents per unit. This project would be commissioned in about four years. Iran is willing to export more than 5000 mw to Pakistan and has indicated that a new power plant can be set up exclusively for Pakistan. Iran is also willing to provide financing with $800 to $900 million for constructing the infrastructure.

The solution for the perennial energy shortages, although should be addressed internally, the fact of the matter is that Pakistan’s policymakers have let things go out of hand. Construction of dams has been sacrificed due to political or provincial constraints. Hard-nosed efforts have never been made in renewable alternate energy. Corruption, theft, obsolence, and mismanagement in utilities-providers are endemic. Thus, the thinking is to rely on external sources of supply to maintain the nation’s economic progress. With this in view, the offer of supplies of gas and power by Iran seems a realistic alternative.

The Roadblocks:

The United States and Israel have launched a campaign to deter Iran from going nuclear while Iran is determined to achieve nuclear technology capability. United Nations has placed a trade embargo asking members not to deal with Iran. Pakistan is between the devil and the deep blue sea in trying to strike a balance between observance of the global decision and in maintaining relations with the Western neighbor. On the one hand, Pakistan is strongly committed to fulfilling its obligations regarding the Iran Pakistan Gas Pipeline and the expected supply of electricity, while on the other hand, there have been restrictions imposed by State Bank of Pakistan. Although the UN sanctions do not apply to foodstuffs, cereal, and packaging material for packing of food, the Pakistani banks are not prepared to issue e-forms or open Letter of Credit for deals made with Iran. The SBP has decreed cessation of trade with Iran also. Thus, there is a need to utilize alternate banking channels to circumvent the SBP directives. One deterrent is that there are no branches of banks in respective countries. This has led to a reliance on informal channels, such as transit trade through Dubai, resulting in adding cost to the consignments.

A recent casualty of the trade embargo has been the mango export to Iran. Pakistan generally exported more than 30,000 tonnes of mangoes worth over $10 million and now this market has been lost. At the same time, Kinnow exports that were in excess of 60,000 tonnes per year have dwindled to less than 6,000 tonnes. Rice exports have been impacted negatively too. Pakistan used to export upto $230 million worth of rice to Iran but in the current year the rice exports have been less than $75 million. Due to the banking restrictions, smuggling, and under-invoicing, official exports have considerably reduced and now rice is mostly sent via Dubai. Recently, an agreement was signed under which Pakistan plans to export one million tons of wheat and 0.2 million tons of rice to Iran in lieu of oil and other goods under barter trade arrangements. However, the plan has not yet been finalized.

The Future:

Pakistan and Iran have to sincerely look towards the future. Iran, while facing sanctions, has to rely on neighbors to maintain economic sanity. Pakistan offers the ideal set up for Iranians in many aspects. Iran’s foreign exchange reserves are estimated to be in excess of $100 billion and inspite of the economic embargo, Iran has been able to export oil to China, India, Japan, Korea and Turkey. It is proposed that Pakistan and Iran should rely on payment of goods in each other’s currency as India is doing with Iran for oil.

Iran can participate in setting up an Iran-specific Special Economic Zone in Pakistan that would primarily cater to the Iranian market. Rice and fruit processing plants can be easily set up in the SEZ. Iran, taking advantage of border with Balochistan, is rightly placed to invest in mineral exploration as well as oil exploration. This would provide an edge as well as protect Iranian interests in the region. Iran can also focus on Barite mining that is essential for drilling oil.

It is time Iran revisited her trade policy with Pakistan. It is to Iran’s advantage that preferential treatment be given to Pakistanis products and services. Apart from rice, wheat, fruits, etc, Iran can procure textiles, leather, and other commodities from Pakistan. Moreover, Iran can invest in agriculture and livestock that would cater to the Iranian consumers’ needs.

Pakistan is facing a severe financial crisis. The foreign exchange reserves are gradually depleting. SBP Governor Yasin Anwar, in an interview with Wall Street Journal, warned that the foreign exchange reserves are under pressure. Moreover, due to the economic downturn, the Treasury would not be able to meet the targeted revenue. Pakistan is still waiting for reimbursement of the Coalition Support Fund. Etisalat is still not coughing up the $800 million that is due for PTCL. Even IMF has closed its portals for the Pakistani Finance Minister. China recently has parked a substantial amount of resources to boost up the Forex reserves. Iran can also be approached to support the eastern neighbor with financial resources to strengthen Pakistan’s monetary position in the short term.

Role of Business Community:

The onus lies on the business community of both Iran and Pakistan to initiate a Track II approach to bring change in the trade and investment environment. Pakistani and Iranian businessmen are also vigorously trying to persuade respective governments to make the Joint Ministerial Commission pro-active by holding frequent consultative meetings. The Pakistan Iran Joint Business Council, a business initiative, is at present dormant due to Iranian lack of interest.

There has been lot of talk about single country exhibitions in each other’s territory. Progress was made to hold one exhibition in Iran. The Pakistani side desired it to be held in Mashad while the Iranians were keen on Zahidan. The decision is awaited. There is also discussion about setting up a Business Forum of shipping companies of both countries.

Pakistani exporters have also lobbied to reduce the import duties on textiles. So far, there is no headway in this matter. Since there are no bank branches, this is also affecting smooth official trade as well as channelizing trade in an official mode.

Pakistani Chambers and Associations should also extensively lobby with United Nations to exempt Pakistan from conditionalities of the trade embargo and treat Pakistan as a nation that needs Iranian gas and electricity. Pakistani businessmen should also lobby through Economic Cooperation Organization (ECO) as well as Organization of Islamic Countries (OIC) so that mutually beneficial regional cooperation is ensured.

There is an imperative need to increase the number of trade delegations since direct contacts can create new business opportunities and also enhance the bilateral trade figures. Although trade delegations routinely visit each other’s country and there is plenty of interaction at various forums, the trade and investment figures are negating all such initiatives. It is also essential that undocumented trade be discouraged and opposed. This must be the priority of FPCCI in motivating businessmen who trade with Iran. Moreover, it is also important that financing of the gas pipeline is envisaged through private sector participation and involvement.

Conclusion:

Pakistan and Iran have to be economically and politically bonded since both desire more regional trade and investment, especially under the banner of ECO of which both are leading members. Pakistan should also endeavor to commence work on the Iran Pakistan Gas Pipeline on a fast track basis. In future, a direct oil pipeline should also be planned so that Pakistan is assured of its petroleum needs. Pakistan and Iran have no choice but to be neighbors in the real sense.