Pakistan Hopes to Rattle Taliban With New Trade Restrictions
Michael Hughes
October 7, 2023
Islamabad introduced trade restrictions targeting a frail Afghan economy because – apparently – threatening to send 1.7 refugees to Afghanistan wasn’t enough of a message to send the Taliban in one week. On the surface they appear more disruptive than anything, but the measures could be the opening salvo of a one-sided trade war if the Taliban refuse to curb support for the militant extremists that are wreaking havoc in Pakistan.
First, Pakistan imposed a 10% cargo processing fee on Afghan imports of confectioneries, machinery, home textiles, and garments, among other items. Islamabad had waived this duty when the Taliban first came to power to support Afghanistan’s struggling economy. How times have changed (within two years).
Then, Pakistan issued an order, dated October 3, entitled: “Measures to be taken regarding Smuggling Prone Items Imported by Afghanistan in Transit through Pakistan.” The order prohibits the export to Afghanistan of 212 items, targeting a wide-range of consumer goods. The list features fruits, nuts, home appliances, and seventeen types of clothes. According to ARY News, Pakistani officials said the move was intended to crack down on smuggling while others said it was meant to recoup financial losses with a budget deficit growing.
And filling a hole in the treasury is something Pakistan needs – albeit this does not seem like the optimum way to do it. The World Bank, in its latest regional outlook released on October 3, cut Pakistan’s 2023/2024 fiscal year GDP growth forecast to 1.7%, down from 2% in its April prediction, and well below Pakistan’s official target of 3.5%.
Meanwhile, exports are down 5% through August and industrial production shrank 15% through June. Per the terms of its $3 billion IMF loan, Pakistan committed to a FY24 budget surplus target of 0.4% of GDP, but is now projected to hit a deficit of -4% instead.
Here is the kicker: import controls that had depressed growth more than expected had been removed in accordance with the IMF lending program, and the World Bank advised reforming of import duty schemes and other trade limitations. In other words, the exact opposite of Islamabad’s new import taxes and draconian restrictions imposed under the guise of heading off smuggling.
PAKISTAN’S TRADE LEVERAGE
In 2002, Afghanistan’s total exports stood at $1.9 billion – accounting for nearly 15% of gross domestic product. Food accounted for about 60% of exports, coal 25%, followed by textiles at 12%. 60% of Afghan exports went to Pakistan – about 85% of which was food and coal and the remainer textiles and other categories. Point being, the 10% processing fee targeting some food and textile categories will have an impact.
Afghanistan also looks vulnerable when it comes to coal. Consider that Afghanistan’s annual exports of coal averaged about $50 million from 2016-2020. In 2022, Afghanistan exported a whopping $467 million worth of coal, 99% of which went to Pakistan. However, this wasn’t only about Pakistan helping the starving neighbor. The business growth was mutually beneficial. The price of coal from Pakistan’s primary source – South Africa – skyrocketed amid the country’s power crisis.
So, it makes sense that Pakistan would be reluctant to target Afghan coal imports. However, that could change. The World Bank said “anecdotal evidence suggests that Pakistani importers are reverting to their traditional suppliers due to the decreasing price difference between Afghan and international coal.” And, imagine what the price differential would be if Pakistan adds a 10% processing fee? And just like that about 3% of Afghanistan’s GDP would disappear.
When it comes to imports, Iran is the most crucial country of origin for Afghanistan. Iran accounts for 22% of Afghan imports. However, although Afghanistan need not rely on Pakistani imports, they rely on the Karachi port. And it appears Pakistan is already cracking down. According to Tolo News, one thousand containers of goods destined for Afghanistan have been halted in Karachi, resulting in “millions” of dollars in losses for Afghan traders.
“Karachi port is the easiest and cheapest way for our businesspeople. Thus, the traders are most interested in carrying their goods through this port. There are also other alternate ways such as Uzbekistan but carrying goods takes much time via this way,” said businessman Zalmai Sarwari.
Neither of these measures make sense for Pakistan’s economic interests. If Islamabad wants to crack down on smuggling, it should first crack down on the Pakistani customs officials in bed with smugglers.
So, the next question is: what is really going on here? In the end this appears what could be a desperate last resort on the part of Pakistan before launching an actual invasion of its long-time neighbor. It would oust the Taliban, install a puppet, then ironically attempt to implement the U.S.-British COIN strategy in yet another decade-long conflict. The one difference being that Pakistan would probably not have to deal with a neighboring state affording sanctuary to the insurgents.