Pakistan-Iran trade hurt by LC issue

KARACHI: The unwillingness by Pakistani banks to accepting letters of credit (LC) of Iranian banks is badly hurting Pakistani exports to the neighboring country.
Local banks are refusing to accept LCs of even those Iranian banks which do not fall under United Nations (UN) or United States sanctions, sources told Pakistan Today on Tuesday.
According to sources, the UN and the US have imposed a ban on five major banks as part of a sanctions regime on Iran for alleged illicit nuclear activity. However, Pakistani banks are point blank refusing to receive LCs from unsanctioned banks of the neighbouring country. This constitutes a major hindrance to Pakistani exporters.
Despite repeated requests by both foreign and local exporters, the banking issue is not being resolved by the concerned authorities in Islamabad. Interestingly, the sources claimed, this comes at a time, when LCs of sanctions-free banks of the host country are being accepted by Pakistan’s competitors in the region.
As central banks of Pakistan’s rivals are facilitating their exporters in terms of trade with Iran, Islamabad’s exports to Iran are likely to suffer and lose potentially lucrative markets in Iran, they pointed out.
Under the present situation, Iranian importers are either utilising other suppliers or import via Dubai by opening LCs from banks located in the United Arab Emirates (UAE); thus goods ultimately destined for Iran are transited through Dubai. On arrival, new documents are being prepared for these goods which are then being shipped in launches to small ports in Iran, the sources added.
The caution exhibited by the State Bank of Pakistan (SBP) which forbids local banks from accepting such LCs have placed major exporters of Pakistan at a great disadvantage as they mostly refuse to ship goods directly to Iran due to higher risk entailed, sources highlighted.
The commercial attache of Pakistan in Tehran, in his a recent report, has also underlined the issue, saying that due to the banking problems, there is a consistent decline in the country’s exports to Iran specially for major items like cotton cloth, yarn and textile apparel. According to the report though, the country’s embassy in Tehran had repeatedly requested bodies such as the Ministry of Commerce and Trade Development Authority of Pakistan (TDAP) to address the issue with SBP; but the problem remains unresolved.
“If banking problems is not resolved on a priority basis, exports are destined to fall as Iranian importers switch to other sources, where they can conduct business through LCs,” the report warned.
According to sources, Pakistan’s trade deficit has grown from $361 million in 2008-09 to $ 895 million in 2009-10; however total trade between the two countries hit the benchmark of $1.0 billion in 2009-10 for the first time. It was recorded at $1.3 billion and registered an increase of 77.4 percent over last year’s figure which was $736 million.
It is worth mentioning here that Iran’s annual import requirement of rice of 0.8-1.0 million metric tonnes was mainly imported from Pakistan, India, Vietnam and Uruguay. Higher quality rice variants such as basmati and sela was imported from Pakistan, which exports almost 88 percent of its total rice exports to Iran. The main Pakistani products which were imported by Iran were rice, fruits/vegetables, cotton and synthetic fabrics, readymade garments, surgical and sports goods. Cereal was another major export item to Iran, which accounts for 44.89 percent of total exports.