Afghanistan: SBP proposes massive changes in trade regime

The State Bank of Pakistan (SBP) has proposed massive changes in trade regime with Afghanistan, including relating to settlement of export proceeds in Pak Rupees, sources close to Prime Minister's Adviser on Finance told Business Recorder. These proposals came from the incumbent governor SBP, Dr Reza Baqir, who believes that the current trade facilitation mechanism with Afghanistan is one of the reasons for the stress on Pakistan's exchange rate.
Conveying SBP's concerns on Afghanistan-Pakistan trade related issues due to which Pakistan is facing a significant risk the governor SBP has asserted that Pakistan has been accommodating the trade related activities of Afghanistan since long in view of the geo-political situation in the region. Accordingly, to be in line with government's policies, the SBP allowed the settlement of Pakistan's exports to Afghanistan in cash US dollars over the counter of banks. Pakistan's average exports to Afghanistan, through formal channel, during last five years, were $ 1.4 billion and almost 45 percent of this amount was settled in cash.
The Ministry of Commerce and Textile has also allowed settlement of export of certain perishable goods, eg, fruits, vegetables, dairy products and meat to Afghanistan in Pak rupees. Pakistan extended such facilitation due to the fact that Afghanistan is a land-locked country and lacked well-established banking/financial systems. Therefore, almost 50 percent of Afghanistan's trade is routed through Pakistan under Afghan Transit Trade Agreement. However, Pakistan is paying a huge cost for this facilitation for quite some time.
The Governor argued that it has been highlighted at various fora that a significant part of exports destined for Afghanistan using Pakistan's land route are smuggled into Pakistan. This on the one hand hampers the growth of local industries and on the other causes loss to exchequer on account of duties, taxes etc. The third detrimental impact in the payment for such goods is that they are arranged through illegal channels (Hundi/Hawala).
The Central Bank asserts that the current mechanism causes unwarranted demand of foreign exchange in the local market and also places a stress on Pakistan's exchange rate. Secondly, this has also resulted in rampant smuggling of currencies to and from Afghanistan which carries the risks of financing various illegal activities including terrorism, money laundering, illegal trade practices etc. This risk has been highlighted by Asia Pacific Group as well in its recent assessment of Pakistan.
According to the governor SBP, the Bank has also raised this matter at various fora in the past starting from January 2016. In this backdrop, following proposals have been submitted to Finance Ministry: (i) revisiting of existing policy in settlement of Pakistan's exports to Afghanistan through banking system instead of settlement in cash US dollar over counter of banks whereby all the exports proceeds should be realized; (ii) reviewing current policy of the government (Ministry of Commerce and Textile) on settlement of exports of perishable goods from Pakistan to Afghanistan in Pak Rupees and resumption of normal process for repatriation of export proceeds through banking channels; and (iii) putting in place an effective control mechanism through a consultative process to curb the smuggling of goods into Pakistan under the garb of APTTA.
Prime Minister's Adviser on Commerce, Textile, Industries and Production and Investment, Abdul Razak Dawood is also against prevalent trade regime with Afghanistan which he has pointed out is hurting domestic industry more than benefiting the country.
According to IMF's staff report Pakistani authorities have informed the Fund that National Executive Committee (NEC) is monitoring and coordinating efforts to implement the FATF action plan. The Asia Pacific Group on money laundering is expected to discuss Pakistan's mutual evaluation report in August 2019. Pakistan has also sought technical assistance from providers, including the IMF, to support its efforts to complete action plan and further strengthen the effectiveness of the AML/CFT regime.
Recently, Prime Minister Imran Khan also presided over a meeting on smuggling which was attended by different stakeholders including the army and discussed different options to deal with this issue. Afghan delegation which was in Islamabad a few days ago urged Pakistan to also tighten control on its side to curb smuggling.