NAVIGATING THE IMPACTS OF AFGHAN TRANSIT TRADE ON PAKISTAN’S ECONOMY

By: Maria Mansab

Navigating the complex web of economic relations between Afghanistan and Pakistan, the Afghan Transit Trade (ATT) becomes a vital cross-border trade axis. However, what was meant to be a trade facilitator has ended up posing serious economic difficulties for Pakistan. Due to the complex dynamics of this transit trade, there have been illegal operations, resulting in a catastrophic annual loss for Pakistan as Afghan traffickers manipulate tracker systems in transit vehicles. Pakistan has responded to this economic crisis with several regulations, such as import bans and processing fees, to reduce losses and comply with World Trade Organization (WTO) regulations. The economic impact on Pakistan’s imports and important industries is growing as the amount of Afghan transit trade increases, and this calls for deliberate actions to protect the country’s economic stability.

Pakistan finds itself at a crossroads of complexity and difficulty in the continuously shifting environment of regional commerce due to the complicated dynamics of its economic connection with Afghanistan. The ATT, which is an important avenue for cross-border trade but has unwittingly turned into a major source of economic pressure, is projected to cost $6 billion per year. The consequences are extensive; according to a report by the Pakistan Bureau of Statistics, illicit trade activities involving Afghan traders manipulating tracker systems in transit vehicles to cause technical issues cost the country’s economy $3 billion annually.

Pakistan has tightened trade regulations by implementing several steps in response to this economic threat. By prohibiting the import of 212 goods that were previously allowed into Afghanistan under the ATT, the Ministry of Commerce has taken a significant step. The Federal Board of Revenue (FBR) has also imposed a 10% processing fee on the five main categories of Afghan transit commercial items imported through Pakistan. While the goal of these actions was to stop the losses, they also demonstrated Pakistan’s compliance with WTO rules, which allow countries to implement safeguards for their home sectors. Pakistan maintains that these measures are required to prevent smuggling and safeguard its industry, stressing that the processing fee is a means of covering the operational expenses of the transit trade system rather than a tariff.

The increase in Afghan transit trade imports, which jumped by 67% to $6.71 billion in February 2022–2023 from $4 billion the year before, is exacerbating the economic pressure. Even though the ATT covers a wide range of imports, such as tea, tires, electricity, artificial fiber, and electronics, the hike has had a major effect on Pakistan’s actual imports. Rubber, tire, and electronic equipment imports have decreased by 42%, 62%, and 48%, respectively, while the textile industry has experienced a 48% reduction. The 34% decline in machinery imports, the 51% decline in tea imports, and the astounding 46% decline in fruit and vegetable imports have all hurt Pakistan’s economy.

With 102,886 containers shipped through Afghanistan in 2022–2023, the volume of transit shipments from the country has increased by an astounding 39%, indicating a significant change in the trade dynamics of the nation since the Taliban took control of Kabul. This increase has caused a 63% increase from $2.287 billion in FY22 to $3.731 billion in FY23, resulting in an annual income loss of Rs180 billion for Pakistan. It is also linked to an increase in items that are more likely to be smuggled within transit cargo. In the first two months of the current fiscal year, cargo volumes have been expanding gradually and have reached over 15,000 containers. It is anticipated that there will be over 130,000 containers overall in fiscal year 2024. A notable change in the nation’s trade dynamics is reflected in the rise of transit shipments.

There have been several fluctuations in the assessed import value of transit cargoes in the last few years. Starting at an astounding $4.5 billion, the fiscal year 2019–20 saw a modest decline to $4.4 billion in 2020–21 and a further decline to $4.01 billion in 2021– 22. But in the fiscal year 2022–2023, there was an unexpected uptick, with the assessed import value jumping to an astounding $6.7 billion—a 67% increase over the previous year. Estimates for FY24 indicate that imports will total $6.8 billion for the entire year. The frequency of commodities that are vulnerable to smuggling in transit cargo has increased by 63%, from $2.287 billion in FY22 to $3.731 billion in FY23. This worrying trend indicates that authorities and stakeholders are becoming more concerned.

The complex relationship between Pakistan and Afghanistan highlights the pressure on Pakistan’s reserves because Afghanistan imports $8.5 billion more annually than it exports ($1 billion). The ensuing deficit puts tremendous pressure on Pakistan’s currency market, boosting demand for US dollars and encouraging unofficial channels like hundi and hawala, which eventually cause the rupee to weaken.

The relationship between smuggling, the Afghan transit trade, and Pakistan’s economic difficulties emphasizes how urgently a comprehensive and strategic response is needed to minimize harm, protect homegrown businesses, and guarantee the long-term stability of the Pakistani economy. The correlation between the rise in transit trade and the decline in Pakistan’s purchases further emphasizes the need for focused actions to address this complex economic picture.