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Strengthening banking channels with friendly countries

In wake of the US move against a Pakistani bank in New York, Pakistan needs to establish and strengthen its banking channels with friendly countries including China, Iran, Turkey and Malaysia. The banking Channels play an important role in enhancing the trade of a country with its major trading partners. In the Asian economies, the investors and businesses are looking for more supportive financial services, with a demand for financing solutions, hedge funds, and asset-based securities.

Pakistan needs a jump start to enhance the trade volume and diversify its exports to China and other countries. It would be a colossal job for the Pakistani exporters to bridge the wide gap, which would not be possible without the help of the Chinese. In 2006, Pakistan and China facilitated integration of their economies for mutual benefit by signing FTA covering goods, investment and services. Industrial and Commercial Bank of China (ICBC), one of the leading Chinese banks, has already begun operations in Pakistan with the opening of two branches in the country. The entry of the Chinese banking giant into Pakistan’s financial market is immensely important at a time when the Western financial institutions are scaling back their presence in the country. Analysts believe that the move by the ICBC – the world’s biggest bank by capitalization to start operations in the country would have a significant impact on the financial sector.

China’s investment in the country has expanded from resources, home appliances to communications and finance. The presence of a Chinese bank in Pakistan will provide financial support to Chinese companies, which are exploring investment opportunities or engaged in infrastructure development and financial business in the country. The two countries have signed a Memorandum of Understanding (MoU) between China Banking Regulatory Authority and State Bank of Pakistan. Under the first deal, ICBC will open two branches in Pakistan, while the National Bank of Pakistan would open a branch in China. Under another deal, Chinese missions would visit Pakistan for talks to remove trade imbalance between the two countries.

Iran is our neighbor. Banking channels between Iran and Pakistan are essential to enhance bilateral trade volume. At the same time, the two neighbors need to take a number of steps for the business community to facilitate trade between the two neighboring countries. Steps for the businessmen include multiple visas, exemption from medical tests, exemption from freight amount, insurance policy for vehicles, abolition of attestation of phyto-sanitary certificate and National Logistic Corp’s border terminal at Taftan.

The bilateral trade between Iran and Pakistan has been on the decline since 2008, when the UN imposed sanctions on Iran. It fell from $1,170 million in 2009-10 to $586 million during July-March 2011. Currently it stands at $1 billion to $1.5 billion per year. A few years back, Pakistan and Iran decided to enhance bilateral trade through barter trade at a time when Iran was facing crippling sanctions from the US and EU over its nuclear program.

The trade between Pakistan and Turkey is less than $2 billion a year. The trade volume will increase with the establishment of banking channels between the two countries. The two sides have worked to negotiate a preferential trading agreement, aiming to considerably increase trade and investments, especially in transport, telecommunications, manufacturing, tourism and other industries. While Pakistan exports rice, leather, textiles and fabrics sports goods, and medical equipment, Turkey exports wheat, diesel, lentils, chemicals, transport vehicles, machinery and energy products to Pakistan. Many private firms from Turkey have also invested significantly in industrial and construction projects developing highways, pipelines and canals in the south Asian country. The two countries have already agreed to move forward on timeline basis for signing of Preferential Trade Agreement (PTA) and abolition of visa for businessmen between the two countries.

Turkey and Pakistan are the founding members of the Economic Cooperation Organization (ECO), which is the only forum with representation of all the countries bordering Afghanistan. Free trade is central to regional economic integration as it can unlock latent energies and transform socio-economic landscapes. Pakistan has served as a route for international trade of ECO countries. During the cold war period and after the collapse of the Soviet Union, this route remained disrupted for political instability and security crisis in Afghanistan. It is because of the prevailing situation in Afghanistan that economic, trade and cultural relations could not be revived between the newly independent states in Central Asia and other Asian countries.

In 2007, Pakistan signed Free Trade Agreement (FTA) with Malaysia, a third pact after Sri Lanka and China. The treaty, which covers trade in goods, services and investment etc., on preferential basis, came into operation from January 1, 2008. Under the agreement, Malaysia would scale down tariff to zero percent on Pakistan’s 78 percent tariff lines including textile products except garments by the year 2012. While Pakistan would reciprocate the same on 36 percent tariff lines including palm oil. Under the FTA, Pakistan has offered market access on services to Malaysia with equity of 60 percent in mode 3 (commercial presence). In the financial services, the equity limit would be 49 percent. Compared with our multilateral commitments of Uruguay Round, Pakistan’s offer to Malaysia is WTO plus.

Pakistan is the third largest importer of palm oil from Malaysia after China and the EU. Malaysia is currently the largest producer and exporter of the world. Malaysia and Pakistan are exploring more downstream business partnership in areas such as advanced food applications, eleo-chemicals, animals’ food, energy, telecommunication and many more sectors. The establishment of Malaysia-Pakistan joint ventures in bulking installation, refinery and the liquid jetty, indicate mutual understanding between the two countries. Malaysian companies are presently eyeing vast investment.

Malaysia in its schedule of commitment for ‘services’ has offered a WTO plus package by opening more sectors and sub-sectors and increasing equity limits for investment in the field of services. The most important concession secured from Malaysia is in the field of banking, Islamic Banking, insurance and Takaful. Under the treaty, Malaysia has also allowed 100 per cent equity to Pakistan in these sub-sectors.

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