Thursday, June 19, 2014

Finland-Pakistan Trade: Revisiting the Potential

Majyd Aziz

The introduction of mobile phones in Pakistan brought about a brand that became a familiar and household name all over the country. Nokia was the dominating brand and ruled over the airways. Few consumers knew the country of origin and probably the Nokia distributors never needed to advertise the fact that Finland is the birthplace of Nokia (of course, the ‘nationality’ has since been transferred to Microsoft of USA). Over the years, cell phones have become a necessity rather than a luxury and gradually 130 million Pakistanis became cell phone users. This surge in usage resulted in the advent of a multitude of brands, mostly cheap gadgets from China or Korea’s Samsung. Nokia lost its leading market share while other heavily-advertised and affordable brands took center stage.

This narrative is a manifestation of how bilateral trade becomes hostage to one commodity or one brand or depending on a very narrow product base. This scenario drastically impacts on the imperatives of enhancement of bilateral trade and inducing investment in various sectors. Pakistan’s bilateral trade relationship with Finland has lost its luster. As is the norm in Pakistan’s export regime, the domestic exporters also are dependent on very few items of exports and there has not been any revolutionary diversity to expand the product base. Ergo, Pakistan’s exports to Finland are restricted to few textile and leather items.

Pakistan and Finland bilateral relations were established on 12 January 1951 and are based on cooperation in national security and economic development. Apart from the trade relations, Finland is also one of the ten countries that support the Multi-Donor Trust Fund. This Fund, administered by the World Bank, is financing the reconstruction and development work in Khyber-Pakhtunkhwa, Federally Administered Tribal Areas and Balochistan. Recently, being the member of EU, Finland supported the campaign that enabled Pakistan to achieve GSP Plus status in EU.

A survey of bilateral trade for the last five years reflects a downward trend in Finland’s exports to Pakistan while exports from Pakistan are on the rise. In 2009, Finnish exports were $418 million and subsequently dipping to $281 million, $110 million, $70 million and $63 million in the next four years. On the other hand, Pakistan’s exports that were $35 million in 2009 ascended the export ladder registering export figures of $52, $ 71, $72, and $75 in the next four years. What is prominent is that the main Finland exports were primarily the mobile phones that amounted to $ 372 million, $ 200 million, $57 million, $31 million and $18 million in the last five years. This trend is apparently due to either the low demand for Nokia due to excessive imports from China or, it is possible, that most of the Nokia phones could be entering the Pakistani markets via Dubai. In the case of Pakistan’s exports, the contribution of textiles is $23 million, $33 million, $53 million, $54 million and $ 56 million while the exports of leather goods were from $5 million and settling down to a maximum $10 million.

The desire and the determination to revisit the trade scene and chart out a pragmatic course led to Mr Rauli Suikkanen, Roving Ambassador of Finland accredited to Pakistan, (the Embassy of Finland in Islamabad has been closed down since 2012, not necessarily due to any law and order situation) making another focused journey to Pakistan. His presence in Karachi also reflected the need to build up the trade figures and create a favorable perception of the importance of Karachi inspite of the law and order situation. He was very ardent in his motivational interaction with an elite section of Karachi’s trade and industrial community at a business breakfast.  He informed his audience that Stora Enso, a Finnish paper manufacturer, has set up a factory in Kasur while Vaisla, a high-tech equipment manufacturer, is one of several Finnish companies that have been working in Pakistan. He was very optimistic about the increase in trade traffic and said that even though trade is less at this moment but there is a substantial potential for increase in the coming years.

The Finnish diplomat very artfully plugged Finpro, the Finnish trade, internationalization and investment development organization that is expected to provide impetus for growth in bilateral trade. The opening of Finpro offices in Karachi and Lahore are testimony to the action plan of the Finnish government to get Pakistan back on the radar of Finland’s trade and industry. Finpro will offer focal points for Finnish companies that want to look at business opportunities in Pakistan. He informed that Finland Pakistan Trade Council which was not active for past thirty years has now started activities in a very committed manner and the first ever Finland Pakistan Business Summit was organized in Islamabad in February 2014. Fifteen Finland companies and around thirty-five to forty Pakistani companies participated in the Summit that also had a high participation by the Pakistan government and certain cooperatives. The next similar event will be organized in Helsinki in August 2014.

His task list during this visit also included discussions on the preparation of the broad-based agenda, including trade and investment, for the 2014 Inter Ministerial Meeting planned for August 2014 in Islamabad. The onus now lies on the Pakistani government to take the stakeholders into confidence so that a doable agenda is structured. Moreover, an important item on the agenda should be identification and presentation of new products that Pakistan could favorably be exported to Finland.

The fact that Finland is way ahead in many modern technologies and inventions is one more reason for Pakistan to take benefit of the available opportunities. Finland can also assist Pakistan in achieving formidable advancement in agriculture, horticulture, dairy and livestock. At the same time, both countries can take mutual advantage of the rich mining resources of Pakistan, especially in Balochistan. Finland is very highly developed in mining equipment while the mining sector in Pakistan has not realized its true potential due to archaic mining processes and non-availability of hi-tech equipment. Finpro should undertake a comprehensive study of the mining sector and introduce mining equipment through joint ventures, technology transfers, long-term financial credits, and expert advice and guidance. This will enable more Finnish involvement as well as enabling a paradigm shift in the lucrative and highly demanded mineral sector. It would also definitely lead both countries to a more strengthened and stable economic partnership.

Finland and Pakistan are moving on the right track. Finland is appreciative of the fact that a democratic order is in place in Pakistan and Ambassador Suikkanen underscored the continuation of democracy to strengthen the Pakistani economy. Pakistan, with a population nearing 190 million, can also learn from the fact that Finland, with only 5.50 million denizens, is considered one of the ideal countries in the world to live, where the corruption rate is the lowest in the world, and where the educational system is also deemed to be the best. Henry Ford, the US automobile tycoon, made a very poignant remark when he said that “Economy has frequently nothing whatever to do with the amount of money spent, but with the wisdom used in spending it.”

Sunday, June 15, 2014

SAARC Trade: Streamlining Banking Framework

Majyd Aziz

Regional trading blocs have demonstrated a pragmatic solution to enhancement in trade, investment, people movement, and a decisive approach towards conflict resolution. Despite initial misgiving and fear of job losses, revenue losses, or market losses, the evolutionary progress of regional blocs has transcended these doubts to a large extent. The success of regional blocs has enabled trade and industry to create regional linkages, cumulation and focal centers. EU, MERCOSUR, ASEAN, SADC, NAFTA, etc are vivid examples. SAARC is a well-meaning and visionary initiative but its true essence has yet to be savored and it is yet to achieve its potential.

One major impediment in facilitation of trade and investment in SAARC is the lack of banking instruments that are vital for fast track operations of financial facilities. The SAARC business community has to become more pro-active in convincing regulatory authorities and governmental decision makers to remove most of the obstructions and hurdles in opening up the financial sector for business transactions. The SAARC Chamber of Commerce and Industry should become the motivating factor if there is to be a sea of change in the way Intra-SAARC trade and investment is formalized, adopted and implemented.

The present scenario is that the seven SAARC members have no bank branches in Pakistan. Afghanistan has four banks but no branches in other SAARC countries. Bangladesh customers face huge problems in remitting money. In Maldives, a foreign bank is the focal corresponding bank for businessmen. Only one Nepali bank has branches in India. Bhutan has three banks but businessmen mostly use State Bank of India or Punjab National Bank.

Pakistani businessmen doing trade with India have to rely on third country banks for financial transactions. This entails added banking costs, is time-consuming, and at times, the Letter of Credit is susceptible to external factors such as built-up of tension at the border or some extremist event. During the three-day Second India Show held in Lahore in February 2014, where over 130 stalls were set up of Indian products, the Pakistani government accorded special permission to National Bank of Pakistan and MCB Bank to assist Indian exhibitors to deposit their daily revenue for safekeeping and legally remitting to India.

There are some cogent reasons why the process of liberalization of financial facilities has not become a desirable reality. The homework has yet to be done in the regional context because the dynamics of all SAARC countries manifests distrust, discord and disharmony and where broad-based conflicts and contentious issues take precedence over trade and investment liberalization. However, the hardcore decisions will have to be taken because the other regional blocs are rapidly moving towards making financial dealings faster, reliable and more transparent.

It is emphasized that half-hearted efforts or individual banks working on their own in cross-border transactions would not be cost effective nor would they serve the real purpose. There has to be a concerted approach with a common clearinghouse fully armed with all data, regulations, and workable systems, such as easily accessible channels, consistency and flawless management of processes, and state-of-the-art information technology and communication, if SAARC is to have a successful banking model. It is imperative that there should be multi-policy coordination, including a dispute settlement mechanism, among all SAARC Central Banks. Moreover, intra-SAARC remittances must be made convenient and affordable. Unnecessary impediments are in effect Non-Tariff Trade Barriers too and therefore fast track financial facilitation process, including opening of Letters of Credit in each country’s currency, must be streamlined.

The answer also lies in promotion of seamless banking or branchless banking that can be achieved by getting all Central Bank Governors as well as leading bankers, information technology technicians, telecom operators, representatives of trade and industry, and banking management experts to finalize, decide and implement a SAARC-wise seamless banking framework. This would enhance trade, remove many obstacles, introduce regulatory compliance, and bring about customer accessibility, trust and satisfaction. Seamless banking is rapidly becoming the source of financial empowerment. The game changer has been the combination of advanced technology and consumer behavior that has enabled swift transactions at lesser cost with easy access. According to a McKinsey Report, the usage of internet banking has risen over 30% while mobile banking has shot up by 85% across the Asia Pacific region.  

Seamless banking is ideal for SAARC businessmen and more so for citizens in many respects. Many Indians and Pakistanis have kinfolk across the border and fund transfers are a norm. Bangladeshis working in Karachi routinely send part of their salaries through unofficial channels. SME importers and exporters face innumerable problems in sending payments for smaller orders. Pakistani participants at Indian exhibitions take back cash or find non-banking channels to remit their sales revenue. Pakistani artistes also have to circumvent the regulations to transfer earnings. Tourists, or devotees on visits to religious events or shrines, families to weddings or other family events, and of course businesspersons can make their trips comfortable and secured through seamless banking facilities.

As a well known poet versed: Ben-ul-Najoom ke faaslay kum ho chukay hain bahut  / Ben-ul-Qaloob ke liya idraak chahiye (The interstellar distances have decreased a lot over the years/ Lessening the universal remoteness between hearts needs understanding)

Indo-Pak Trade: Financial Facilitation

Majyd Aziz

Bilateral trade, especially among neighbors or within a region, has been highlighted as an ideal way to do business, plan investments, and develop a peaceful environment. Today, this narrative becomes more profound when taken in the context of bilateral relations between India and Pakistan. Although bilateral trade has demonstrated a noticeable increase in 2013, with Pakistan’s exports to India crossing the $500 million threshold due to a 28% increase, while India’s exports to Pakistan improved by 19% to cross the $2100 million figure, the underlining viewpoint is that the potential is immense and, simultaneously, mutually beneficial.

A major component of trade and investment bilateral regime is the availability of a streamlined, responsible, and defined financial facilitation system that enables enhancement and improvement in trade. However, in the framework of India and Pakistan, there is still a regimented and full of hurdles mode in vogue rather than any taking or initiating steps for removal of roadblocks and bureaucratic twists and turns.

Since there are no bank branches in each other’s country, the correspondent banks impose their own rules and procedures that hamper instead of facilitate financial transactions. In the Indo-Pak case, the Pakistani banks open Letter of Credit through foreign banks and vice versa. It is important that the Reserve Bank of India and the State Bank of Pakistan approve and allow banks to establish their branches across the border in more than one or two locations to enable maximum utilization of their services. 

There is also no NOSTRO arrangement between Indian and Pakistani banks. There is no Test Arrangement used within the banking channels for Indo-Pak trade. Moreover, additional expenses are incurred due to procedural delays and payments made through Asian Clearing Union. There is an imperative need to establish a Currency Swap Agreement among SAARC countries with India becoming the prime facilitator by establishing a US$ two billion outlay. There is also a crucial need for Alternate Dispute Resolution mechanism involving, initially, the SAARC Chamber of Commerce and Industry as the focal point. With the popularity and benefits of Islamic Banking in many countries, it is also felt that Islamic Banking may become a prime source of financial facilitation in the future, especially as a financial intermediary between Pakistan and India, taking into consideration the huge Muslim population of India.

It has been observed that in case of any negative event triggering tension between the two countries, banks often change the 90-days Letter of Credit to Sight Letter of Credit that often results in cancellation of the business deal. Moreover, because of the problems related to acceptance and confirmation of L/Cs, at times trade transactions are carried out through a contract offered by the bank, that states the details of the trader and of the transaction but does not ensure payment guarantees and thus serve as a restriction to trade. It seems that there exists a mistrust or disconnect between the banks of both Pakistan and India.

Importers  of  refined  petroleum  distillates report that  Indian  banks  do  not  honor  L/Cs  opened  by  Pakistani  banks  issuing  beyond  an  arbitrary limit  of  about  US$ 10,000  due  to  this trust  deficit.  The  fear  is  based  on  assumed noncompliance  of  terms  of  credit or delayed payment  by  the  issuing  bank.  As  a  result,  shipments  are  released  in  parts  replicating  overheads,  transport  costs  and  processing. Some other finance related issues include cumbersome payment system, restrictive official foreign exchange allocation, regulations concerning terms of trade for import payments, non-acceptance of letter of credit, higher commission of foreign banks offering letter of credit and lack of bank branches.

India is considering the establishment of a South Asian Development Bank that would fund infrastructure projects and also promote trade in the SAARC region. The decision is seen as playing a critical role in facilitating trade within the eight-member Association. As most of the non-tariff barriers are an infrastructure deficiency, that need funds to be fixed, trade facilitation is essentially a question of finding money. That is what the proposed South Asia Development Bank is expected to facilitate. 

Another very disconcerting issue relates to the service sector. A case in point is that Pakistani artistes who are invited to perform in India are not allowed to open a Bank Account due to Reserve Bank of India’s policy of proof of possession of property and address in India. Since Pakistani artistes usually live in hotels or enjoy home hospitality, and since they are not allowed to buy property, they cannot open the accounts. Interestingly, one Pakistani artiste applied for an Indian PAN Card and mentioned his Pakistan address and the card was surprisingly delivered to his Pakistani address. Yet, when he went to open an account, he was denied the facility. Moreover, RBI stipulates that payments must be made through banking channels and thus the artiste is in a Catch-22 situation. It is reported that Pakistani artistes have to pay 25-30% of their Indian income to their agents or third parties for obtaining payments by countering the RBI rules and regulations.

It is important that businessmen should understand the complexities of politics of each other’s country. Traditional hostilities between India and Pakistan will continue to hamper trade liberalization. They should comprehend very explicitly that Non-Tariff Trade Barriers would not vanish due to feel good factors. As tariff goes down, NTBs will increase. Every week new NTBs are invented. In fact, non-facilitation of finance is not an ordinary NTB. It is a CNTB (Cumulative Non-Tariff Barrier). Fault also lies with the business community of both India and Pakistan as they do not have the critical mass to compel the governments to change or remove the NTBs and other irritants that impede trade. However, the advantage of proximity for strategic sourcing is one prime reason why it is imperative that there should be liberalization of trade among SAARC countries, and especially between India and Pakistan. Businessmen must not lose hope. They should persevere with 4Cs: Continuity, Consistency, Commitment, Courage. The optimism is that the Modi and Sharif governments would, in reality and practice, take long steps forward to achieve trade and investment liberalization. As James Broughton stated, “the only limits are, as always, those of vision.”