Re-examining Pak-Afghan trade arrangements

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Re-examining Pak-Afghan trade arrangements​

ARTICLE (May 19 2009): Pakistan has two types of trade ties with Afghanistan. One is bilateral trade set-up as it has with the rest of the world. The other is exclusive under Afghan Transit Trade Agreement (ATTA). In this article, I have tried to highlight policy flaws, anomalies and recommendations to overcome malpractices, cropped up by mishandling trade under ATTA.

This write-up will shed light on triangular aspects of trade, focusing ATTA, Pakistan-Afghanistan bilateral trade arrangement and Iran-Afghanistan-India trade bloc. In March 1965, under the pressure of the World Bank, the so-called Afghan Transit Trade Agreement (ATTA) was signed between Pakistan and Afghanistan.

The agreement had the contents that negated the concept of trade, ensures inflow and outflow of goods. Under the said arrangement Pakistan had to offer unilateral concessions to the landlocked Afghanistan in the name of transit facilities.

The imports of Afghanistan had been exempted by the custom duties coupled with a "sympathetic consideration" regarding service charges, port levies and handling fees. Under the Article-III of ATTA 1965, primarily two routes - Peshawar-Torkham and Chaman-Spin Baldak - were agreed upon for the smooth movement of goods from Pakistan to Afghanistan.

Perhaps it was never imagined at that time that such trade mechanism would hurt infant economy of Pakistan incalculably by rerouting the merchandise in Pakistan depriving it from billions worth of revenue besides damaging the local industry. As the trade volume started rising Bara Bazaars sprang up like mushrooms in Peshawar, Khyber Agency, Chaman, Quetta, and Rawalpindi. For more than three decades this trend continued.

In 1996, the Government of Pakistan, on the hue and cry of local business unions and federations, placed 17 items on the negative list by banning their import under ATTA. This left a very positive impact on the economy of Pakistan. In 1996-97 the production of TV sets jumped from 72,000 to 288,000 in 1999-2000 enhancing industry revenue from Rs 290 million to Rs 550 million in the same period alone in just one sector.

In the year of 2001 this list was revised upward and the transportation of seven more items were declared illegal. Mainly negative list included electrical appliances, chemicals, motor cars, tobacco and spare parts. On the request of Afghan government, the Government of Pakistan in March 2004 slashed this list to six items only. In August 2005 again, the size of the list was further cut to three items (tobacco, cooking oil and auto parts). However, cooking oil was also removed in 2006.

According to the high-ups in Pakistan's ministry of commerce, Afghanistan is not satiated with such favours hence, is clamouring for the removal of remaining two items from the negative list, demanding access to the Karachi ports and wagha border through its own transport, no such provision is permitted under ATTA.

Already Pakistan is providing a host of concessions for the movement of Afghan Transit Trade, including 50% concessions on port charges. Sindh Government has withdrawn cess and enhanced window for waiver of demurrage and other charges on ports.

The trade volume of Afghan Transit Trade rose 71.45% from Rs 15.06 billion to Rs 25.763 billion from the period July-December 2008 to the corresponding period. Analysis of the data shows that there many goods are not needed in Afghanistan. Rather these are being plunged in the Pakistani markets illegally at the cost of local industry and national exchequer.

Last year an increase of 192% was registered in just two commodities of electronics and machinery worth Rs 4.027 billion. Import bill for steel and iron jumped up by 40%. Imported fabrics increased 29% costing Rs 5.143 billion. Food items cost Rs 4.76 billion. Motor vehicles worth Rs 933.70 were imported showing an increase of 78%. Items like plastic, chemicals; tiles and other household goods were imported at a cost of Rs 9.684 billion.

There is no denying the fact that Afghan markets cannot absorb such luxuries when its 53% population is living below the poverty line. Is there any use of electronic gadgets and machinery in Afghanistan when people's access to electricity is just 9% plus electricity consumption per capita is 43kwatt with practically no road system.CIA Fact Book further puts a gloomy picture with its electricity generation ranking at 147th out of 210 countries.

Import items worth Rs 25.763 billion can be utilised in the Afghan markets where 80% of its labour force is working in agricultural sector, 10% in industry and 10% in services sector with 40% unemployment rate? Afghanistan is 174th out of 178 countries of the world with UNDP maintained Human Development Index and it raises more questions on the usage of Afghan Trade under transit mechanism through Pakistan.

The Customs sources confirm that a large number of containers carrying goods destined to Afghanistan come back in the area of ports within hours by unloading merchandise in the godowns of powerful mafia of Karachi, a clear violation of the article-II of the ATTA and the concept of "traffic in transit".

Now we examine Afghan-Pakistan bilateral trade scenario. It is important to note that under this accord, total trade volume has increased from $169.932 million in 2000-01 to $1235.013 million in 2007-2008. Pakistan's exports skyrocketed from just $140.404 million in 2000-01 to $1143.663 million in 2007-08. Althogu it fell down 40% in 2006-07.

Even imports from Afghanistan are growing but the balance has always been in favour of Pakistan. Imports from Afghanistan have gone up by almost three times from just $29.528 million in 2000-01 to $91.350 million in 2007-08. Presently, Pakistan's current favourable balance of trade was more than $1 billion.

According to the IMF data, Pakistan is still the largest trade partner of Afghanistan followed by EU and USA 37.5%, 15.9% and 12.5% respectively. Though India is trying to elbow others, it has just 6.4% as Afghan trade partner.

A close examination of the bilateral Pak-Afghan trade for the last four years shows that out of 82 trading items hardly 8 items of Pakistani exports have shown persistence in rising. Mainly these are, dairy products, fruit and fruit preparations, alcoholicand non-alcoholic beverages, petroleumand petroleum products, animal fats, oil and vegetables, pharma and medical products, cork and wood, construction materials, including cement and glasswares.

However, there are some items which have shown overflucuations and decline. These are rice, cereals, refined and raw sugar, paints, tyres and tubes, cosmetics, coal, machinery and parts, sanitary plumming, footwear, hosiery and so on. These are the items which Pakistan is losing in Afghan market steadily in favour of India, China and Iran. It is not a joke that Pakistan is importing raw cotton from Afghanistan that soared from $1 million in 2004-05 to $10 million in 2007-08.

Now for the last leg of this summary which gives insight into the phenomena how Iran-India-Afghanistan troika is emerging for trade and commercial interests, setting aside their dependence on Pakistan as a channel for Afghanistan. Iran-India trade relations took a surprising movement when in 1995, the then president of Iran Hashmi Rafsanjani proposed that Iran, India and Afghanistan should constitute a trade bloc to the mutual benefit of each partner.

In January 2003, the troika made a historic agreement in Tehran to construct a road that could link Afghanistan with Iran and Iran will construct a sea port at Chah Bahar a few hundred kilometres from Pakistan seaport Gwadar to use it for the mutual benefit of all three countries exclusively.

In the last week of January 2009, this project once completed, was formally opened by the Afghan President Hamid Karzai and Indian Foreign Minister Paranab Mukherjee. The 220-km long road costs $150 million, borne by India. It is one of the projects of total $1.1 billion which India is funding in Afghanistan.

This road will connect Afghanistan through Delaram in Nimroze province to Zaranj of Iran further leading to Iranian sea port Chah Bahar. In Afghanistan this artery is linked with the Herat-Kabul-Kandahar garland. Iran will let India transport its goods through this conduit bound to Afghanistan and the Central Asian States at a preferential treatment.

Muhammad Ishaq, Vice President of Sarhad Chamber of Commerce and Industry opines that it will hurt Pakistan trade interests significantly. For exports to Afghanistan, 90% discount rate on port fee plus a 50% on warehouse charges will be offered by Iran government at Chah Bahar port. Afghani transport can enter Iran to the point of port too.

None of these facilities has been given by the government of Pakistan to Afghanistan under ATTA. India has already transit agreements with Iran, Turkemisnistan and Uzbekistan. Now the operation of Chah Bahar will make this trade with more ease. India will get all concessions from Iran as given to Afghan goods at Chah Bahar.

Although Afghan transit trade through Pakistan is replete with anomalies, however, it generates Rs 1 billion to Pakistan Railways through its freight services annually besides hundreds of millions for NLC with thousands of employment to the locals. India is reluctant either to use Wagha border linkage for its merchandise into the CAS and agreeing with Iran and Pakistan for the proposed gas pipeline.

India fears that in both cases, Pakistan will be at most advantageous position. Pak-Afghan trade cannot flourish unless problems like poor conditions of road networks, lack of capacity of service providers, insurgency in tribal areas, Nato forces in Afghanistan, less availability of railway wagons and high transport costs of NLC as an alternative. 44% of road from Karachi to Peshawar is in poor condition, making 25 kilometres speed p/h on an average.

In the past couple of years both Pakistan and Afghanistan have taken some steps for boosting bilateral trade. Both states:

a) Agreed to review transit agreement. The Government of Afghanistan has handed over its draft which is under consideration of Pakistan Cabinet for approval. The Ministry of Commerce has proposed inclusion of two more sea ports - Port Qasim and Gwadar.

b) Signed an investment protection treaty to create an investment friendly environment.

c) Signed an MOU for the construction of highways in Afghanistan.

d) Agreed to open branches of banks in each other's country.

e) Signed an agreement to construct a railway line between Chaman and Spin Baldak and between Chaman and Kandahar to uplift trade. It gives some satisfaction to note that Pakistan has done more as compared to Afghanistan.

NOTABLY, PAKISTAN HAS:

i) Reduced negative list of 24 items to just 2, at the cost of its own economy.

ii) Agreed to open more routes from NWFP subject to the security situation.

iii) Converted $100m loan into grant

iv) Established nine additional Customs Stations in the border areas.

v) Donated $100m for the renovation of schools and hospitals.

vi) Set up better and well-equipped warehouses, vehicle terminals and established screening systems for containers.

It is pertinent to mention that though Iran has offered its port services for both India and Afghanistan and granted them free zone like services, even then Chah Bahar port is not as suitable to India and Afghanistan as that of Karachi. From this perspective, Iran's isolation at international level compelled it to eat a "bitter candy" by extending such generosity to India and Afghanistan.

When Pakistan will tighten Afghan Transit trade by more strict regulations for smuggling Afghan imports through Iran will not be able to reach Afghanistan and will creep back into Iranian markets, inflicting the same loss to Iran economy as has been the case of Pakistan for last more than four decades.

Pakistan must revitalise SAFAT that enshrines South Asia as a free trade bloc. For the future periods too, Afghanistan will continue to depend on Pakistan, especially for food items. Adjacent to its own border, Torkham suits best. For India, in order to avail its CAS exploration, it will have to cover hundreds of miles more for reaching Chah Bahar port as compared to Wagha border.

Indian Punjab produces food items for most parts of India and for exports. To bring such consignments to Mumbai and then to Chah Bahar for exporting to the CAS, it will have to bear enormous costs like transportation and other services that will deprive Indian items from competitiveness. Naturally, Chinese products will be the most useful items from the consumers point of view of CAS. Good relations with neighbours never have been so important for Pakistan as they are now.

Pakistan must actively engage India to use its route for trade in Afghanistan on the terms best suited to Pakistan and revive its talks with India for Iran-Pakistan-India gas pipeline. India needs security, Pakistan needs royalty and "friends". Such tripartite confluence of trade-based interests can potentially bring $6 to $8 billion royalty to the cash-strapped Pakistan. All must work for each other. This is trade of interests and a recipe for growth.

 

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The transit trade controversy
Ijaz Hussain



The Memorandum of Understanding on transit trade that the Gilani government recently signed with the Afghan government in Washington is proving to be a hot potato.

Opposition political parties are out to wreck it on the ground that through this MoU, the government has granted India the right of transit trade to Afghanistan and beyond. The PMLN has threatened street agitation if the government does not back down on the issue.

The military, including the army chief and the ISI, have reportedly expressed apprehensions about the said MoU. The Foreign Office spokesperson on his part has rubbished the idea that Pakistan has granted any right of transit trade to India. He has contended that the MoU is nothing more than an MoU, and that Pakistan and Afghanistan will finalise an agreement by the end of the year. Besides, India, in his view, has no place in the MoU as Pakistan deals with all issues concerning India, including trade, on a bilateral track.

Given this explanation, aren’t the apprehensions unfounded? And if so, shouldn’t the controversy be put to rest?

The opposition’s apprehensions appear justified when we juxtapose them with the text of the MoU and other available evidence. It is true that the MoU does not mention India by name. However, reference to it is unmistakable when one looks at the opening paragraph which, while emphasising the need to improve the conditions of international and cross-border trade, recognises the advantages of greater regional and global trade linkages and export-oriented business development.

This is also evident from another clause that proposes to establish “a transit corridor connecting Pakistan’s border areas with Afghanistan and giving the two countries access to each other’s neighbouring countries”.

It is equally noteworthy that after the signing of the MoU, the Afghan president, in an interview to an American television channel, also confirmed that the document in question was not specific to Pakistan and Afghanistan, and that it was regional in character. Given this admission, it is pertinent to ask: to whom does the term “regional” refer to, if not India?

Secretary Hillary Clinton’s statement that the conclusion of the MoU was an “historic” event and that the agreement had been “under discussion for 43 years without resolution” also supports this conclusion because, honestly speaking, there is nothing “historic” about signing of the Pak-Afghan transit trade agreement except India. Nor has the subject been under discussion for over four decades in relation to Afghanistan; however, it certainly has been with reference to India.

Notwithstanding the above controversy, is it in Pakistan’s interest to grant India the right to use Pakistani territory for trade with Afghanistan and Central Asia?

To address this question, we need to examine the objections that have been advanced against it. First, it is contended that Pakistan’s trade with Afghanistan will suffer because cheaper Indian products will come to replace Pakistani products. This argument applies mutatis mutandis to ISAF, which too imports goods from Pakistan for reconstruction purposes. It is also argued that smuggled cheaper Indian goods would flood Pakistani markets as do at present the goods of other countries that Afghanistan imports under the existing APTA. It is argued that this will be a sure recipe for haemorrhaging Pakistan’s economy.

Finally, critics point out that India, which is trying to destabilise Pakistan by fuelling insurgency in Balochistan and FATA, could misuse the right by transporting military material in Indian vehicles to Afghanistan, which will undermine the security of Pakistan.

Most of these arguments on the face of it look convincing. However, on close scrutiny they lack substance. Take for example the argument that the grant of this right will lead to replacement of Pakistani products by those of India. This may be largely true but it is also an acknowledgement that our products are not internationally competitive. The remedy for this is not to employ negative tactics but to be competitive.

As to the argument that smuggled, cheaper Indian products will flood the Pakistani markets, again the apprehensions are not unfounded. However, the remedy for this does not lie in closing the Afghan market to Indian products or products from other countries, but for Pakistan and Afghanistan to devise effective ways and means to tackle the problem of smuggling.

As to apprehensions about Pakistan’s security, they are genuine but a way can be found to take care of them.

As against the above view, there is another perspective that fervently favours granting India the right of transit trade through Pakistan. According to this view, it would be highly beneficial for Pakistan as it will not only lead to its economic development but also help build political bridges between the two nuclear foes.

It further contends that this would be a continuation of the “exception” under which Pakistan agreed to let the gas pipeline from Iran go through its territory to India; and that in fact the only change will be that it will replace the pipeline (which appears to be currently out of equation) with the road.

Finally, it maintains that Pakistan’s present policy to refuse India the transit right till the resolution of the Kashmir dispute has not paid off as India is using the Iranian port of Chahbahar for trade with Afghanistan and beyond.

There are no two opinions about the soundness of the need for Pakistan to exploit its geo-strategic location. Similarly, the other viewpoint as outlined above has considerable merit. However, it is not fair to suggest, as the protagonists of this viewpoint seem to do, that Pakistan should agree to gratuitously accord India the right of transit trade through Pakistani territory. Acting upon this advice will be comparable to Musharraf’s decision to abandon the UN Kashmir resolutions without seeking anything in return from India.

The Pakistani government should absolutely seek a quid pro quo for the grant of this right. The argument that this right is no longer important for India because it has found an alternative route from the Chahbahar port is without much substance. If it were true, why would India be so keen to seek it and that too surreptitiously? The fact of the matter is that the Iranian route cannot replace the Wahga-Khyber route as it is longer (by 800 kilometres), cumbersome and eventually costlier.

Here the question arises: what quid pro quo can Pakistan seek from India? It can ask the latter to do the following: withdraw the support that it is extending to insurgents in Balochistan and FATA; withdraw its troops from the eastern border to the positions that they held before the Mumbai incident; resume the peace process with the view to resolve the Kashmir dispute.

Will India be prepared to make these concessions? Given the fact that President Zardari made an enormous concession to India in Washington by granting it the right of transit trade through Pakistan, it would be surprising if he did so without getting an adequate quid pro quo. There may have been some kind of understanding between the two countries along the above lines. Is our guess warranted? Only time will tell.


The writer is a former dean of social sciences at the Quaid-i-Azam University. He can be reached at hussain_ijaz@hotmail.com

 

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Business community opposes Afghan transit trade agreement​

ISLAMABAD (May 27 2009): The business community has impressed upon the federal government to avoid inking new Afghan Transit Trade Agreement to save the economy and industrial sector from further damage as it will provide Indian products free access to Pakistani markets. The business community has also called for bringing the agriculture and services sectors in tax net.

The transit trade agreement would be tantamount to accepting the Indian hegemony, therefore, no self esteemed Pakistani would accept this agreement, said Asad Mashhadi, President Rawalpindi Chamber of Commerce and Industry (RCCI). He was briefing the media about the declaration of the conference of Presidents of Chambers of Commerce and Industry from all over Pakistan.

The RCCI hosted the conference to discuss the prevailing situation in the country. The conference was organised to discuss the local and international pressures faced by the country. Recommendations were prepared at the conference to save the industrial sector from further damages.

President Rawalpindi Chamber Asad Mashhadi presided over the day-long conference, while Mirza Abdul Rahman President Attock Chamber, Naseem-ur-Rehman Mardan chamber, Malik Ashiq Awan President Haripur Chamber, Mian Hamid Javed President Faisalabad Chamber, Muhammad Akram Badshah President Gujranwala Chamber, Malik Khalid Pervaiz President Gujrat Chamber, Abid Hussain Khokhar President Jhang Chamber, Chaudhry Shafqat Rasool president Okara Chamber and Raja Muhammad Anwar Jhelum Chamber, Shahban Khalid Acting President Islamabad Chamber and Tairq Iqbal Mughal Vice President Shiekhupura chamber participated in the conference.

"If the revival of the Afghan Transit Trade Agreement is imperative then the government should make the categories and quantities of products clear and notify them, besides providing Pakistani business community access to Central Asian Markets," Mashhadi said, adding that the entire NWFP should be included in the establishment of ROZs.

Presidents of Chambers have demanded of the government to declare the NWFP a war affected area and announce special incentives for the industrialists of the province, particularly for the industrialists of Swat and other parts of Malakand division. They also demanded special incentives for the industrialists of the Northern Areas for the revival of their industries. Asad Mashhadi said the presidents of chambers had asked the government to bring a revolutionary budget to revive the country's economy and remove distrust.

In budget proposals for the upcoming budget, the conference called for bringing the General Sales Tax to single digit from present 16 per cent, and for bringing the Income Tax rate on corporate sector to 25 per cent.

The participants of the conference demanded the inclusion of agriculture and services sectors in tax net, saying that minimum taxable amount be brought to Rs 300,000 from existing Rs 180,000 and every individual in any sector coming in this slab be brought to tax net. He said agriculture contributed 22 percent in the GDP but its share in taxation was just one percent. The multiple slab system be converted into a one rational slab, he added.

The conference termed the load-shedding a major set back to the industrial sector and asked the government to decrease the electricity tariff, Mashhadi said, adding that the government should look towards the alternative energy sources to fulfil the requirements of masses as well as industrial sector.

Mashhadi told the media that the conference deliberated on the issue of the bank loans outstanding with business community and it was demanded that bank loans to industrialists be restructured, besides giving easy loan financing to support the small and medium enterprises. He said: "banking sector has earned a lot during the last three years by squeezing the business community, but now there is the time to pay back by reducing interest rates."

The conference urged the government to settle the law and order issue in the country, especially in the NWFP without any further delay and pay concentrate towards revival of the economy. They also underlined the need of reducing interest rate and cutting down tax slabs.

The business leaders offered their full support to the affectees of Swat operation and expressed solidarity with them. They also discussed ways and means to increase the co-operation and co-ordination between all the Chambers of Commerce and Industry. The meeting also called for halting all kinds of tax audit except desk audit. Mashhadi said involvement of Chambers in the national policy making was vital for the progress of the economy. The potential of the industrial sector was not yielding any results due to law and order situation and energy crisis, he added.

The participants of the conference were of the view that Pakistan has a lot of potential as well as human resources, but due to misperception and lack of proper marketing and branding techniques, it is far behind. "We could not add value to our products due to high cost of doing business," he added.