The Federal Cabinet of Pakistan approved the framework for barter trade earlier this month. The state has given the green light for barter trade with Iran, Afghanistan, and Russia for certain goods such as petroleum and gas. This move is aimed at circumventing the Western sanctions imposed on these countries and reducing the strain on Pakistan’s dwindling foreign exchange reserves. Pakistan’s Commerce Minister, Naveed Qamar, stated that the employment of the barter trade model would allow the country to augment its exports.
Barter is the trade of goods or services amongst two or more sides without using money or a monetary mechanism like a credit card. Thus, bartering means the furnishing of a good or service by one side in exchange for another good or service from the other side. Recent years have witnessed a contraction of industrial growth in Pakistan. Moreover, given the current economic crisis, the country hardly has enough cash to cater for the expenses of one month of controlled imports. According to a statement released at the end of May, the foreign reserves of Pakistan’s central bank have come down to USD 4.09 billion because of external debt payments. Thus, with the lack of cash on the part of Pakistan and the trade embargoes upon the respective trading parties, barter trade will be a conducive scenario. The barter system would allow Pakistan to get its needs met despite the shortage of cash. Likewise, approval of the barter trade mechanism with Russia, Iran and Afghanistan will allow the latter three to engage in international trade notwithstanding the Western restrictions.
The recently sanctioned special government order, dated 1 June 2023 and titled Business-to-business (B2B) Barter Trade (BT) Mechanism 2023, contains a list of goods that can be bartered. State-owned and private enterprises will require approval to be a part of the barter trade mechanism.
The development is a result of various negotiations with all the parties. Chairman Pakistan Afghanistan Joint Chamber of Commerce and Industry (PAJCCI), Zubair Motiwala, appreciated Pakistan’s approval of barter trade with the said countries. He termed the advance as a “dream come true”. On 6 June 2023, Chairman PAJCCI iterated in an official statement that the eventual approval of the barter trade method is the result of a succession of meetings for the last two years. The chamber had been presenting various proposals to enable economic ties with Afghanistan, such as opening new border crossings, waiving off e-form requirements for an extended time until the confirmation of a substitute mechanism, decreasing numerous manual checks etc. Likewise, in the case of Iran and Russia, the arrangement will allow the countries to engage in trade with Pakistan by sidestepping the Western trade embargoes on them. The United States has designated third-party sanctions on the countries buying oil from Iran. However, it may ignore a barter deal since China acquires massive quantity of illegal Iranian crude exports with next to no resistance from the United States.
Explaining Pakistan’s import of oil from Russia, Danila Ganich, Russia’s Ambassador in Pakistan attributed it as a good omen and stated that the barter system would be beneficial to both the states. Similarly, Ali Fekri, Deputy Minister and Head of the Organization of Investment, Economic and Technical Assistant of Iran (OIETAI) also underlined the significance of the new arrangement in his high-level meeting this month with Pakistan’s Federal Minister for Economic Affairs, Sardar Ayaz Sadiq.
Deputy Director of the Sustainable Development Policy Institute, Sajid Amin, maintained that the arrangement could benefit Pakistan primarily via oil and energy imports from Russia and Iran without increasing the demand for dollars. The mechanism is worthwhile, given the dearth of dollars faced by the countries.
Trading items under a B2B BT mechanism will be permitted on the grounds of “import followed by export”. The value of imported goods would determine the extent of the exports to be made depending on the tolerance mechanism provided in the order. The mechanism enlists 26 items that Pakistani entities can export to Russia, Afghanistan and Iran, including various food items, pharmaceuticals, leather-related items, articles of wood and paper. In return, the order contains three separate lists of items that Pakistan can import from the three countries. The items range from petroleum crude oil, chemical products, minerals and metals to a variety of food items.
Besides its significance in terms of helping Pakistan tackle monetary deficit and sidestep Western sanctions on Iran and Russia, another highlight of the mechanism is its projected support in reducing cross-border smuggling. Though the barter trade system might not resolve the issue of smuggled currency, primarily across the Afghan border, yet, it could reduce the inflow of smuggled items from Afghanistan and Iran. In May, Pakistan Petroleum Dealers Association (PPDA) highlighted that 35% of diesel in Pakistan had reached illicitly from Iran, given the acute balance of payment crisis. The newly implemented mechanism is expected to address this scenario.
The arrangement is anticipated to have long-term dividends for the economy and international relations of Pakistan. However, the scenario is expected to invite criticism from those regional and international players that do not agree with enhanced trade relations with either Iran or Russia. Nevertheless, the implementation of barter trade mechanism will fortify the country’s economic standing by decreasing Pakistan’s reliance on the dollar and improving its exports. Reducing cash-strapped Pakistan’s reliance on the dollar would considerably lessen the debt resulting from international imports and decrease the state’s monetary shortfall.
