News Analysis |
Pakistan is an agriculture based economy since the majority of the population is, directly or indirectly, employed in the agricultural industry. It contributes to about 24 percent Gross Domestic Product (GDP) of Pakistan and is the one of the biggest source of foreign exchange earnings in the country. Rice has been one of the most important exports of Pakistan in the agricultural industry and Iran has been one of the chief importers of Pakistan’s Basmati rice.
In the past 5 years, Pakistan has been gradually losing its Basmati rice market in Iran to India. The chief reason for the loss was the sanctions imposed on Iran by the international world for pursuing its nuclear program and developing missile technology. In May 2011, the US blacklisted Iranian central bank followed by further sanctions in 2012. This seriously hampered Pakistan’s trade with Iran and the market was gradually taken over by India.
The issue of Letter of Credit will also be resolved since Pakistan won’t have to deal with US banks. Pakistan will be added to the Financial Action Task Force (FATF) list in June 2018. The increasing hostility from the USA might also result in sanctions against Pakistan.
GVS spoke to a few members of the Rice Exporters Association of Pakistan (REAP) who informed us that Pakistan lost 90% of its market to India when sanctions were imposed on Iran. Despite permission of the State Bank of Pakistan (SBP) to trade with Iran, no bank in Pakistan got involved in the trade. The main reason for it is that all banks in Pakistan deal in US dollars and while making an international transaction, they have to obtain a letter of credit (LC) from the US.
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Since the US has put sanctions on Iran, the transactions were frozen at the US and exports and banks were unable to obtain their required amount. Another major reason that the REAP members pointed out is that Pakistani grain cannot compete with the new Indian grain 1121 which is longer in size and cooks much better than the Pakistani grain. They further told us that with the efforts of the REAP, the exports were increased by up to 15-20% but Pakistan still lacks control of the Iranian market.
How did India find a way around the Sanctions?
All banks in India also deal with in the US dollars and Indian exporters faced the problems as Pakistani exporters but the Indians found an ingenious solution to this problem. India chose a small state owned bank called UCO bank to trade with Iran. It does not deal in the US dollars but in the local currencies, that way it doesn’t have to engage with the US to obtain a letter of credit (LC).
The REAP proposed that the SBP needs to create a separate bank with focus on regional trade, one which deals with regional currencies like Chinese Yuan, Iranian rial, Saudi rial etc.
India has traded with Iran using the barter system; the deals are made in the US dollars but paid in the Indian rupees after conversion. When India imports oil from Iran, rather than paying immediately, the money is credited at the UCO bank and when Iran exports something from India, the amount is subtracted from the credit at the UCO bank.
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India mainly exports rice, wheat, oilseeds, cotton, tea, potato, dairy products, textile products, chemical products, food products, steel, cement, coconut and banana to Iran. The trade value between Iran and India was 13 billion dollars in the year 2014-2015 while it was only 1.13 billion dollars with Pakistan in the same year.
The new Indian Rice
The other major reason for the India takeover of the market is that India developed a new rice seed called Pusa 1121 in 2003 which became widely used in 2007. It has greater yield for a lower cost and it has greatly enhanced Indian rice exports. The grain is also one of the chief reasons for Indian takeover of Pakistani rice markets.
India greatly invested in agricultural research and produced rice of superior quality compared to that of Pakistan. On the other hand, Pakistan did not invest enough on agricultural research and the same old techniques and crops are being used for several decades.
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What needs to be Done?
A challenge for Pakistan turned out to be an opportunity for India. They adapted with the needs of India and evaded international pressure while dealing with Iran. Pakistan failed to create new institutes to cope up with the growing needs of time and lost 90% of its rice market in Iran to India. There have been reports of surges in trade volume but they are nowhere close to the old export rates.
India chose a small state owned bank called UCO bank to trade with Iran. It does not deal in the US dollars but in the local currencies, that way it doesn’t have to engage with the US to obtain a letter of credit (LC).
The REAP proposed that the SBP needs to create a separate bank with focus on regional trade, one which deals with regional currencies like Chinese Yuan, Iranian rial, Saudi rial etc. that way, Pakistan would be able to bypass the sanctions imposed by the US and deal directly with these countries without the need of US dollars to support the transactions. The issue of Letter of Credit will also be resolved since Pakistan won’t have to deal with US banks.
Read more: Pakistan on its way to becoming a cashless economy
Pakistan will be added to the Financial Action Task Force (FATF) list in June 2018. The increasing hostility from the USA might also result in sanctions against Pakistan. If such a situation arises, Pakistan needs to have a back-up plan and lower its reliance on the US dollar. Opening a bank for regional currencies will also promote trade with other Central Asian and South Asian countries.