Pakistan’s pursuit for trade openness
The Ministry of Commerce in Pakistan recently announced barter trade with Iran, Afghanistan and Russia. This development has the potential to reduce the pressures on foreign exchange reserves, reliance on the US dollar, and at the same time facilitate import requirements of commodity producing sectors. The action could also provide diversified sources of Pakistan’s energy supplies from abroad which is beneficial, particularly in times of volatile commodity markets.
Economists had advocated for Pakistan’s barter trade with Afghanistan and Iran with a view to promote livelihoods of border communities. This step however goes even further and allows registered traders across Pakistan to trade with western neighbors. Earlier advocacy on this subject had not met with much success. So, what has changed this time? Or, why was this decision a win-win this time?
In the case of Iran, the country had faced economic sanctions imposed by various countries, limiting its access to international banking systems and hindering its ability to engage in conventional trade. Barter trade provides alternative means to obtain essential goods and services without relying on traditional monetary transactions.
It is important for government to understand that trade openness is a state in which you don’t discriminate. For example, UAE’s trade and financial channels remain open even for countries with whom they have political differences.
In the case of Afghanistan — a landlocked country with limited infrastructure and ongoing security challenges, smooth financial transactions have not been possible. Barter trade is a practical solution, allowing the exchange of local resources or agricultural products directly for goods and services from abroad, bypassing various financial barriers.
In the case of Russia, it uses barter agreements to counter economic sanctions imposed by other nations. This also helps in keeping Russian currency stabilized at a time when Russia-Ukraine tensions are no way nearing an end.
For Pakistan, manufacturing industries are facing a shortage of essential inputs. Barter trade can be attractive to Pakistan at a time when making payments for imported inputs through conventional financial channels is becoming difficult. However, it is important for the government to understand that trade openness is a state in which you don’t discriminate. For example, UAE’s trade and financial channels remain open for countries with whom they have political differences. In this regard, it is important to imagine how trade with eastern neighbors and particularly select members of the South Asian Association for Regional Cooperation (SAARC) can be convinced to enter into similar barter arrangements. For example, Sri Lanka may be very keen on this given its own forex pressures.
The announcement regarding the barter trade also resulted in concerns from some quarters. From example, the formal businesses who respect border and customs procedures, do not want this to be another avenue for smuggling, under or over-invoicing which could result in unfair competition which hurts legitimate businesses.
Second, countries which have imposed sanctions on Russia should be taken into confidence. For example, the European Union (EU) has a position on Russia-Ukraine tensions which is not going to go away anytime soon. Closer economic times between Pakistan with Russia should not result in threatening Pakistan’s renewal of GSP+ status which allows preferential entry to Pakistani exports in EU markets. Pakistani authorities will also need to be careful that no administrative arrangements related to barter should have negative implications on the review by the Financial Action Task Force (FATF).
Going forward, Pakistan will need to be more imaginative if opportunities in barter have to be extended in the longer term. For example, experts have already argued that the list of products allowed should be expanded, enabling several other agriculture, livestock, and manufacturing industries to benefit. Services in exchange of goods and vice versa may also be explored. This is linked to opening new road and rail linkages between these countries and Central Asian nations. Pakistan should push for deeper trade agreements even Free Trade Agreements (FTAs) with these economies.
Barter trade of course has its limitations. Only innovations in formal global trade payments could result in more volumes going in and out of a certain country. For example, Arab countries trading with Russia are already using multiple payment mechanisms including China UnionPay, India Unified Payment Interface, PayPal, and Bitcoin. Pakistan’s central bank also needs to step up its efforts to reimagining payment mechanisms with the rest of the world. Even for with-in country transactions, there are limitations on peer-to-peer systems, or even blockchain based payments. Despite their complexities, central banks around the world are studying new mechanisms with a view to make payments more secure, transparent, efficient, and accessible.
- Dr. Vaqar Ahmed is an economist and former civil servant. He tweets @vaqarahmed