ZARDARI SHOWS HIS VISION

MFN MAY LEAD TO CURRENCY SWAPS IN THE REGION.

AMANULLAH BASHAR
(feedback@pgeconomist.com)
Nov 7 - 20, 20
11

Although it is too late to reciprocate to the Indian move of granting most favored nation (MFN) trade status to Pakistan back in 1996, it is better late than never. Prime Minister Syed Yousuf Raza Gillani is expected to make a formal announcement regarding MFN status to India in the SAARC Summit scheduled on November 10-11, in Maldives. The cabinet already approved the decision last week.

The decision of the cabinet having a full support from President Zardari has provoked a volley of negative as well as positive remarks on the expected fallouts on the bilateral trade between the two countries. It may be noted that trade balance is heavily tilted in favor of India so far as of total trade volume of around two billion dollars, Indian exports form majority.

In fact, trade and industry or financial pundits are measuring the MFN decision in terms of monetary gains or losses but ignoring the fact that normalizing trade relations especially with an immediate neighbor country are far beyond monetary gains and losses.

In fact, the scheme of normalizing trade relations with the neighboring countries was the brain child of President Zardari with a vision to pull the depressed local currency out of the pressures of international currencies especially US Dollar as the current account deficit always triggers the balance of payment crisis.

President Zardari initiated the step of currency swap arrangement with a friendly country Turkey recently under which the two countries can trade in local currencies worth one billion dollar. The idea of providing a relief to the Pak rupee through currency swap arrangement has already been inked as an official agreement between Pakistan and Turkey and the same arrangement is in the pipeline with China, Iran, Sri Lanka, and Bangladesh.

The normalization of trade between Pakistan and India after MFN decision would also pave the way for trade in local currency between the two major member countries of the SAARC region. If the things go uninterrupted, trading in local currencies with the regional countries would certainly provide a major relief to Pak rupee going forward.

CURRENCY SWAP ARRANGEMENT WITH TURKEY

Under the arrangement, Pakistan and Turkey would finance two-way trade in Rupee and Lira worth one billion dollar per annum, which is being viewed as a trendsetter in the bilateral trade with regional countries.

A bilateral currency swap arrangement (CSA) was signed between the State Bank of Pakistan (SBP) and the Central Bank of the Republic of Turkey (CBRT) in a ceremony held on 01 November, 2011 in Istanbul, Turkey by Governor SBP Yaseen Anwar and Governor CBRT Erdem Basçi in presence of the President Asif Ali Zardari and President Abdullah Gul of Turkey.

Tenor of the agreement will be three years. Core objective of the CSA is to finance bilateral trade in respective local currencies of the two countries.

This is a landmark transaction executed between the two central banks; and is the first time either country has executed such an arrangement. It is expected that bi-lateral trade will grow between Pakistan and Turkey as a result of this agreement, further augmenting the economic ties of the two countries. This agreement will make a significant contribution in further strengthening the close and special relationship between the two countries.

Announcement of the CSA will give positive signal to the market on the availability of liquidity of the other country's currency on the onshore market. As a result, it will promote bilateral trade denominated in Turkish Lira and Pak rupee.

MFN STATUS TO INDIA

Indian commerce minister, Anand Sharma, has indicated that the government was looking to allow freer imports by pruning the negative list of products under the south Asia free trade agreement.

As a result of this arrangement, there will be fewer products in which trading will be restricted.

Trade experts in India were of the view that the move would essentially benefit export from across the western border since Pakistan, Sri Lanka and Maldives are developing country members under Safta.

Sri Lanka has a free trade agreement with India, which entitles it to a more liberal regime, and Maldives also enjoys special benefits. "So, whatever benefit will be offered will essentially accrue to Pakistan," said a trade analyst.

Apart from Pakistan, Sri Lanka, and Maldives, three other signatories of Safta-Bangladesh, Nepal and Bhutan-are treated as least developed countries and enjoy special treatment, while Afghanistan is a new entrant.

The pruning the negative list may have to wait for a few months. India and Pakistan are expected to finalize easier business visa rules later this month, which will enable businesspersons to enjoy longer duration stays, multiple entry visas, and access to more cities.

The need for enhancing the infrastructure at Wagah-Attari for trade, progress on the negative list issue, establishing reciprocal banking channels, and the problems faced by the Pakistani business community in getting Indian visas, are the issues being discussed at the moment both at government level.

Experts say MFN status for India will boost trade in south Asia. In addition, it is seen as one of the biggest confidence building measures that will boost diplomatic and political relations with Pakistan.

Mohammad Irfan Moton, Chairman SITE association of industry said that it is good for business. It is good for commerce and most importantly, it increases confidence on the economic front that both Pakistan and India are committed to moving the social and trade agenda forward.

He, however, asserted that this agreement should be implemented on equal footing so that Pakistan could also gain benefits by granting MFN trade status to India. In support of his stand, he said that as per official statistic of the $1.4 billion in trade recorded in 2009/10, Indian exports to Pakistan stood at $1.2 billion while Pakistan exports to India totaled $268 million. This wider economic disparity is just a stark. However, in order to achieve the cherished goal, India's will is required to remove the non-tariff barriers as it still practices import licensing, import quotas (infrequently), government or government mandated import monopolies, and a variety of other non-tariff barriers.

The major non-tariff barriers include (i) visa and travel restrictions, (ii) inter-provincial movement of goods, (iii) limited number of ports and inland custom posts for imports, (iv) customs clearance and customs valuation, (v) state trading enterprises, excessive use of trade defense measures, (vii) tariff rate quotas and (viii) technical standards and regulations.

India maintains very high tariffs on agriculture commodities (average tariff 90 percent) and at the same time composite duties (ad valorem + specific duty) on textile manufactures which in some cases exceed 100 percent as sources said.

The informal trade between India and Pakistan is estimated in the range of $500 million to $10 billion according to a study conducted by the World Bank.