Friday, December 12, 2014

Pakistan-Afghanistan Trade: Business Perspective on Trade Policies: What Businesses Need?

Majyd Aziz
Former President Karachi Chamber of Commerce and Industry
Presented at
“Afghanistan Reconnected: Businesses Take Action to Unlock Trade in the Region”
Meeting in Istanbul, Turkey, November 26-27, 2014
Organized by EastWest Institute, (EWI), Brussels, Belgium
In cooperation with
The Union of Chambers and Commodity Exchanges of Turkey (TOBB)


PAKISTAN has a very limited export trade base. Exporters usually are content with addressing the North American or European markets where, to some extent, the Pakistani exports are in a focused framework. The decades of reliance on textiles has narrowed this trade base. Although leather, surgical goods, sports equipment as well as rice, cement and other sundry items do have a share of the pie, the fact is that a surge in export figures is something that is a matter of consternation. Export figures move in a leisurely manner instead of a desired leap. Regional trade has never been a prominent factor on the export radar. The potential is formidable but the impetus is lacking. This is the prime reason why Pakistan’s vision of hitting the $50 billion export target continues to be a blur instead of a clear horizon.

PAKISTAN is always touted as being in an ideal geo-strategic location, endowed with abundant natural resources and possessing potent human capital. The ingredients are an envy of many countries and thus sincere and forceful efforts should justify encashment of these bounties. Four countries, Afghanistan, China, India and Iran border with Pakistan. Despite volatility, despite belligerence, despite distrust, despite national exigencies, and despite accusations, the fact is that trade, and at times investment, does find its way in a mutually favorable manner. This then is the narrative that requires contemplation and understanding, especially with reference to Afghanistan-Pakistan bilateral trade relations.

PAKISTAN and AFGHANISTAN bilateral relationship is like that of twin brothers who are fighting who is the eldest among them. The relationship evolved into a distrust scenario, especially during the Global War on Terrorism. This disconnect continued all through the Karzai regime despite frequent interaction between the key decision makers. The advent of the new government in Kabul under President Ashraf Ghani promises a revisit of the animosity and egregious emphasizing that had clouded the neighborly relationship. The pronouncements coming out of his office are comforting and encouraging. The withdrawal of USAF forces, the Zarb-e-Azb Operation conducted by Pakistan Army against foreign and local terrorists in North Waziristan Agency, the recent visit of Pakistan Army Chief, General Raheel Sharif to Kabul and his offer of training Afghan soldiers, the high profile visit of President Ghani to Pakistan, are all positive elements that would bring a paradigm shift in the relationship.

PAKISTAN and AFGHANISTAN must now restructure the bilateral trade and investment regime in order to take mutual advantages, benefits, and opportunities so that, besides political, diplomatic and military issues, the economic sector is pragmatically addressed while pending or future issues are decided and resolved.

AFGHANISTAN is one of the 48 landlocked countries in the world, including partially recognized states. The access to sea is either through Pakistan or Iran. Pakistan is a more pragmatic option and therefore, even though there have been major ups and downs between the two neighbors, Afghanistan has been accorded the transit facility unhindered. Pakistan has accepted and applied the United Nations Convention on the Law of the Sea that gives a landlocked country a right of access to and from the sea without taxation of traffic through transit states. More importantly, Pakistan has provided priority to goods destined for Afghanistan even when detrimental to domestic commerce and industry.  Afghanistan has been in a win-win situation through the Afghanistan Pakistan Transit Trade Agreement since the conditionalities of this Agreement has many advantages and there is a need to optimize its execution. APTTA enables Afghanistan to utilize the Pakistan-based facilities and at the same time, the country has access through Iran to the Chabahar Port. Although many safeguards to protect Pakistan’s industry have been incorporated in the APTTA, the fact is that most of these have not been implemented, much to the chagrin of Pakistan’s domestic trade and industry.

Customs Challenges:

PAKISTAN and AFGHANISTAN bilateral trade still faces numerous challenges. The blatant misuse of APTTA, the deficiency of multiple infrastructure facilities, the ever-increasing and non-institutionalized mode of business transactions, the non-availability of banking and insurance facilities within proximity, the dangerous law and order situation, and the Afghanistan-Iran-India nexus are some disturbing factors. This combination has dampened the formal trade statistics and frequency, thus ensuing into a precarious direction. Hence, there is a need to highlight these complexities and reflect on the solutions and positive progress of the trade regime.

The objectives of APTTA can best be summarized as follows:
o    Safeguarding the strategic national interests of Pakistan
o    Ensuring compliance of prescribed International Protocols
o    Protecting the concerns of Pakistan’s commerce and industry
o    Discouraging undocumented trade
o    Guaranteeing optimum revenue for government
o    Facilitating efficient traffic of goods

The formal trade and industry in Pakistan has appropriate reservations as well as apprehensions about APTTA. The prime reservation is that this Agreement is not being enforced in letter and spirit since the ground realities are neither conducive nor is there a streamlined periodic review of the various facets of APTTA. Some relevant points include the non-availability of tracking devices in the transportation vehicles. This gives rise to concerns about the goods crossing into Afghanistan or not. A case in point is the “missing containers” issue that even Supreme Court of Pakistan took notice. Although there have been denials and accusations, the fact remains that containers went missing. The intensity of the misuse of APTTA can also be gauged from the fact that a large number of containers destined for Afghanistan have been missing after clearance from the two Ports of Karachi. So much so, even containers for NATO/ISAF lost their way and never crossed the Durand Line. According to FBR official data, a total of 157,736 containers of United States destined for Afghanistan before November 26, 2011 never reached there and disappeared inside Pakistan. Even Pakistan’s Customs does not have any record of 77,884 containers from the above missing figures. Pakistan’s Treasury reportedly lost over Rs 55 billion in revenue due to this chicanery.

Another issue is that until the end of 2013 there was no system of Customs-to-Customs sharing of data and information in place. This is the loophole that was grossly violated by unscrupulous traders and forwarders of goods. The Electronic Data Interchange (EDI) is being implemented in stages and hopefully the entire process of releasing financial security will shift from manual documentation to EDI messaging system. EDI also will be used for entire bilateral trade in order to expedite the clearance process at the customs stage.  One more reason why there is undocumented trade is that there is need for encashable financial guarantees of an equivalent of Pakistan duties and taxes that would be refunded after arrival of goods in Afghanistan.

The trade and industry community proposes that to in order to ensure national interests,  especially from revenue point of view, and to provide a level playing field, it is imperative that the quantities importable under APTTA should be based on qualified  determination of consumption rather than unrestricted imports. In fact, the agreed quantities and their movement should be determined by seasonal factors. It is also being suggested that a Customs Union be formed between the two countries so that all complications in APTTA could be avoided and formal trade is encouraged and facilitated.  

Recently, the Pakistani government has decreed that all Letters of Credit would be open in US Dollars. It is, therefore, suggested that even freight and forwarding expenses should also be remitted in US Dollars instead of payment in Pakistani Rupees. The Pakistani trade and industry, being major stakeholders, should be consulted in order to prepare a comprehensive list of goods allowed under APTTA.

Business Facilitation:
It is a good augury that the Afghan government has taken cognizance of the demand of Pakistan Afghanistan Joint Chamber of Commerce and Industry and has agreed to provide six-months, multiple entry visas to Pakistani businessmen on a reciprocal basis. It is ironic that the thousands of Pakistanis cross over to Afghanistan on a daily basis and return back to their homes at night. Predominantly, no one checks their documents and they have unhindered access across the border. Genuine business people, unfortunately, are subject to formal travel documentation. There is an Indian proposal to introduce a SAARC card in the future in order to allow easy and convenient mobility within SAARC countries. Till the SAARC card becomes a practical reality, it is proposed that some such arrangement should be considered for members of trade and industry of both countries.

Pakistan and Afghanistan political hierarchy must endeavor to promote enhanced economic cooperation, both in the context of bilateralism but also for the long term objective of regional economic integration.  There is a need to develop cross-border infrastructure projects to facilitate trade and at the same time these would have social benefits for the denizens living and working near the borders. It is, therefore, proposed that the Pakistan China Economic Corridor from Gwadar in Balochistan to Xinjiang, in Northern China should have a route to Afghanistan too. This is crucial because of the Chinese desire to enhance its exposure in Afghanistan and thus there would and should be a Chinese-led trilateral arrangement. Moreover, the Central Trade Corridor is a 705 km-strategic road link to facilitate trade between the two countries. This would be a major booster to revive, directly and indirectly, the local economy in the tribal areas as well as other urban and rural towns of KPK Province.  At the same time, regional cooperation projects have been envisaged that are potentially imperative for developing the advantages such as economies of scale, economic complementarities, as well as economic externalities, such as foreign investment, economic multiplier impacts, forging joint participations, and common approaches at international levels. CASA-1000 and TAPI gas pipeline are two examples of regional cooperation primarily for the economic benefit of the citizens of countries.

A very serious drawback in the bilateral trade relations is the lack of financial establishments in each other’s territory. There are no branches of Afghan banks in Pakistan whereas two Pakistani banks are operating in Afghanistan. Regretfully, HBL has only one branch in Kabul while Bank Al Falah has one each in Kabul and Herat. This is a manifestation of the disinterest exhibited by financial institutions of both nations. On one hand, President Ashraf Ghani in his maiden visit to Pakistan hoped for bilateral trade to cross over $ 5 billion by 2017. However, on the other hand, the Central Banks have not yet worked out a planned business model to enable more direct banking rather than relying on third country banking system. At a recent policy meeting, it was decided that an internal meeting comprising of State Bank of Pakistan, National Bank of Pakistan, Finance Division, FBR, Ministry of Commerce and Banking Association will be convened by the Finance Division in order to ensure that not only the National Bank provides foreign exchange facility at Border Crossing Points but other private commercial banks would also be encouraged to set up foreign exchange desks, particularly at Chaman.

Removing Cobwebs:
There will be a huge peace dividend if trade relations are strengthened. When two countries trade with each other, people develop an interest in maintaining peace, so that the flow of goods and services is not disrupted. When countries are trading with each other, they tend to avoid conflicts. If there are any disputes, as is likely to happen, they use dialogue to resolve them. The Afghan-Pakistan case is at a different plateau. Trade, both official and undocumented, goes on at full steam but at the same time, the distrust factor is over-bearing.

Afghanistan and Pakistan leaders must be candid and pragmatic in their diagnosis of the bilateral issues faced by both the countries. It seems they probably want to continue the futile exercise of obsolete rhetoric ignoring the gravity of its consequences. There should be no strategic policy misunderstanding and both the leaders must take calculated decisions on issues that are not only fundamental to their own national interests but also from the core regional interests too. The incessant fulminations of erstwhile President, Mr Hamid Karzai, were provocative and aggressive and often resulted in repeated denials and reiteration of Pakistan's principled positions by official spokespersons. US Ambassador Richard Olson recently stated that “An increasingly stable Afghanistan that is at peace and enjoys productive relations with its neighbors will be an effective counter-weight against extremism. A stable Afghanistan is also conducive to economic development in South and Central Asia.”  Words of wisdom.

Hence, all eyes and ears are on the approach President Ashraf Ghani initiates to strive for a peaceful environment. The withdrawal of ISAF personnel, while the war against terrorists rages on, gives urgency to the need for improving friendly relations.  It is time to change course and adopt a saner path for a peaceful and prosperous future. Ziad K Abdelnour, an American author and financial entrepreneur, very wisely said that “I wish politicians the world over would stop claiming credit for economic growth that happens despite them, not because of them.” The aspirations of trade and industry of both countries is that if a new beginning is undertaken by the political leadership of Afghanistan and Pakistan, then without any doubt, peace and economic progress would definitely be due to the visionary ingenuity of President Ashraf Ghani and Prime Minister Nawaz Sharif.

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