Mar 19 - 25, 20

Smuggling of gram and pulses from Pakistan to Iran is reportedly thriving due to high demand and attractive prices following sanctions imposed by the European Union and US on Iran. It has not only caused shortage of these commodities in the local market but also mounted the demand for dollars for higher imports and less inflows. Local importers have resorted to book more quantities of gram and pulses raising the demand of US dollars.

Gram and pulses are being smuggled to Iran by road via Zahidan route through Taftan, Pakistan-Iran border town in Balochistan. Trade has been taking place for long from illegal channel as barter under which gram and pulses were smuggled to Iran for spices in exchange. Smuggling of gram and pulses to Iran gained momentum in 2005, when the federal government had imposed 35 percent regulatory duty on pulses export. The importers of gram and pulses fear that smuggling to Iran of these commodities could cause a shortfall in the local market within a month. The analysts argue that shortages of gram and pulses in the market would increase prices of these commodities, which are largely the food of poor in the country.

The country meets 50 per cent requirement of gram through imports each year but this year it will have to import 65 to 70 percent because a large quantity of gram is being smuggled out to Iran.

The increase in imports will continue to enhance the demand of US dollar in the market where rupee is continuously weakening against the greenback. The market analysts predict further depreciation of rupee in coming months. The rupee has already weakened by 5.3 percent against the dollar in the past eight months of current fiscal year.

Pakistan and Iran decided to enhance bilateral trade through barter trade at a time when Iran is facing crippling sanctions from the US and EU over its nuclear program.

The decision came in the wake of the meeting in mid-February between President Asif Ali Zardari and the visiting President Mahmoud Ahmadinejad in Islamabad in which the two leaders decided to raise bilateral trade to $10 billion a year through the barter trade.

The barter system is beneficial to both counties at a time when both nations are trying hard to save their foreign exchange reserves. Iran faces a decline in its income from oil exports after the EU and US sanctions, while Pakistan has to repay $8 billion International Monetary Fund (IMF) loan but it has no additional source of revenue and foreign inflows have almost dried up.

The decline in Pak-Iran trade is mainly attributed to banking restrictions imposed by the UN and the Western countries on Iran's financial institutions. This affected Pakistani exports, as Pakistani banks no longer accept letters of credit opened by Iranian banks. The sanctions have promoted the informal 'havala' system for the financial transactions between the two countries.

The bilateral trade between Iran and Pakistan had 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 $1billion to $1.5 billion per year. New sanctions imposed on Iran this year have greatly reduced its ability to pay for key imports, especially food.

The barter system provides a legal channel and export opportunity to Pakistan with a surplus stock of commodities such as wheat and rice. A barter trade deal is currently being negotiated between Pakistan and Iran. Under the deal, Pakistan could import oil from Iran on export of wheat and sugar.

The barter trade deal was decided in a meeting between federal water and power minister Syed Naveed Qamar and visiting Iranian deputy commerce minister Abbas Ghobadi on February 24 in Islamabad. The meeting was a follow up of a decision on trade expansion taken by President Zardari and his Iranian counterpart during a two-day trilateral summit of leaders of Iran, Afghanistan, and Pakistan in Islamabad concluded on February 17.

Pakistan has a surplus stock of two to three million tons of wheat following a bumper season. The government has increased support price for wheat over the past three years. It increased support price this season by 10 per cent to Rs1050 per ton, which was Rs650 in 2008, to win over farmers ahead of elections.

The country hopes to harvest more than 25 million tons of wheat this season while domestic consumption stood at 22 million tons. The country sees in barter trade deal an opportunity to offload surplus stocks to reduce storage and maintenance cost, particularly at a time when international prices for wheat are extremely low.

During the two-day 18th session of Pakistan-Iran Joint Economic Commission (JEC) in September 2011, the two countries signed three memoranda of understanding (MoUs) to enhance economic and technical cooperation, set up a joint Pakistan-Iran investment company and cooperate in electronic media and also agreed to minimize tariff and non-tariff barriers to exploit bilateral trade potential.

During the JEC meeting, the two sides also discussed the proposal for opening a branch of Iran's Bank Melli in Pakistan, which is likely to arouse the US concerns and anger against Islamabad.

Bank Melli, which has 18 overseas branches in 11 states, is accused by the West of allegedly supporting Iran's nuclear program. UN Security Council Resolution-1929 adopted in 2010 prohibits member states from "opening of Iranian banks" in their territory. The establishment of the Bank Melli's branch could raise eyebrows in the West, particularly in Washington. Islamabad's primary consideration for the proposal relates to its declining trade volume with Tehran.

Iran has also sought transit facility for transportation of Iranian goods through Pakistani territory to India through Wagah border. Tehran's proposal for a transit route from Taftan to Wagah border is expected to enhance bilateral trade volume between India and Iran. This will be the second such transit facility if accepted by Pakistan, after signing of Afghanistan-Pakistan transit trade agreement that came into force last year. The analysts however identify the poor infrastructure and worst security situation particularly in Balochistan as the main obstacles in opening the proposed transit route for Iran-India trade through Pakistan.

Tehran has however offered financial assistance to cash-strapped Pakistan for the upgradation of railway line and road from Taftan to Quetta, the capital of Balochistan.