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Smuggling on Afghan-Pak Border: Implications for Pakistan Economy.

Byline: Dr Zafar Mahmood - Email:

Different production structures and geographical proximity between Pakistan and Afghanistan present a classic case for voluminous legal trade between the two countries. The legal trade between the two countries, however, represents only a fraction of their total trade potential. Ironically, as compared to the legal trade, the size of illegal trade is exceptionally large. In Pakistan high tariff and non-tariff measures, and weak enforcement of trade controls and laws on the one hand, and, poor governance and fragile economic conditions in Afghanistan on the other create incentives for smuggling of goods. The cost of this smuggling is low which makes the price of smuggled goods in Pakistan not much different than their international market prices.

Restrictive international trade practices in Pakistan have mostly encouraged smuggling and in fact have largely defied the policy objectives such as protection to competing domestic industries, tax revenue generation and reduction in unnecessary consumption of imported goods. Thus, smuggling has important implications for Pakistani economy.

Historically, Pakistan's legal trade with Afghanistan has remained low and quite erratic. Only recently, the size of the legal trade has increased with the start of reconstruction activities in Afghanistan in the aftermath of 9/11. Pakistan's legal trade with Afghanistan has increased from US$ 170 million in 2000 to US$ 1.5 billion in 2009. Pakistan's legal imports from Afghanistan largely consist of food items, basic raw materials or intermediate products, carpets, etc. Whereas Pakistan's legal exports to Afghanistan mainly include manufactured goods, petroleum and trade-related services.

Afghanistan is a landlocked country; as a result all of its trade passes through the neighbouring countries that led it to sign transit trade agreements with them. In 1965 Pakistan and Afghanistan had signed Afghan Transit Trade Agreement (ATTA) which was replaced by Afghanistan-Pakistan Transit Trade Agreement (APTTA) in 2010 (for more details see January 2011 issue of the Hilal). As a result of ATTA, Afghanistan's trade in transit through Pakistan rose sharply. Although, the purpose of the transit trade is to facilitate the landlocked neighbouring country, yet stringent trade restrictions in Pakistan and weak governance in Afghanistan induces Afghan traders to misuse transit facility for en-route smuggling and for illegal re-export to Pakistan from across the Afghanistan border. According to some official estimates the size of this smuggling is about US$4-5 billion (excluding arms and drugs smuggling).

At the same time the size of illegal exports from Pakistan to Afghanistan is about half a billion US dollars. These numbers at best are grossly under reported because of under-invoicing of Afghan transit trade. It may be noted that Afghanistan not only imports through Pakistan, it also imports through Iran and bordering countries on the North, and by the air route. According to some estimates the rate of growth in illegal trade is about 10 per cent per annum.

Major products smuggled into Pakistan include: electrical goods, electronics goods, kitchen wares, toiletries, machinery, sanitary wares, chemicals, cycles, textile products, cigarettes, and auto parts. Interestingly, the composition of smuggling to Pakistan is fairly similar to that of Afghan imports through the ATTA that clearly shows that this agreement is grossly misused for smuggling activities.

Main routes used for smuggling activities include: Torkham, Weish/Chaman, Angoor Adda and Khand, Parachinar and Miranshah, Lalpura and Shah-i-Salim. First two are the major routes to smuggle traded goods, while the remaining routes are mainly used for both way smuggling of commodities.

Major factors responsible for smuggling are: lack of cultivable land in the border areas, high unemployment in the area because of the absence of economic opportunities, smuggling a highly profitable activity, cost of smuggling is low as compared to total impact of tariffs and non-tariff measures, importing goods into Pakistan involves cumbersome official procedures that imposes time and financial costs to legal importers, stringent trade and exchange restrictions, and lax enforcement of trade controls and laws in Pakistan.

Traders who get involved into illegal activities have to bear certain costs. Smuggling related costs include: extra transport or handling costs of goods because of the use of informal routes or modes of transportation, special packaging to evade detection, bribes, excess costs of foreign exchange paid in open foreign exchange markets, and the penalties if goods are confiscated by the law enforcement agencies and the goods carrier is caught. Cost of smuggling varies with the physical characteristics of the goods and according to the place of their delivery. Some estimates suggest that the cost of smuggling varies between 5% and 15% of the cost of goods. If the total impact of tariffs and non-tariff measures is more than the cost of smuggling then smuggling becomes a profitable activity and smugglers indulge into it.

The pertinent question is: what is the source of financing of smuggled goods? The main source of financing is Hawala/Hundi system. Afghan banks only issue an import permit while the importers arrange the foreign exchange. Sometimes Afghan traders buy foreign exchange from Pakistani foreign exchange markets and deposit it in Pakistani banks for transfer to foreign destinations.

Regarding the implications of smuggling on the Pakistan economy, it may be noted that on account of tax revenues government of Pakistan loses about Rs. 85 billion every year. But this is not the end of the story; Pakistan also loses about Rs. 40 billion worth of sales tax and excise duty because of the loss of domestic production due to smuggled goods.

Pakistani manufacturing industries that cannot compete with smuggled goods either reduce their production or stop production in extreme situations. Consequently, a large number of workers face the brunt of loss in terms of their jobs.

To avoid anti-dumping charges in Pakistan, some countries are reportedly dumping some of their products into Pakistani markets with the connivance of Afghan smugglers. This practice is also defying the effectiveness of Pakistani trade and industrial policies.

All in all, the presence of smuggling is mainly due to high tariffs and non-tariff measures as compared to the cost of smuggling, and lax enforcement of trade laws. There is, thus, a need to address the issue of smuggling by reforming the trade policy measures and effective enforcement of the law. Following measures can be adopted to control the problem of smuggling:

* Using high trade restrictions when the cost of smuggling is not very high induces smuggling. Thus, the government should try to introduce a tariff equivalent (sum of the quantitative impact of tariffs and non-tariff measures) equal to cost of smuggling. This would not only stop smuggling but would also provide benefits in terms of increased domestic production, employment and tax revenues.

* Pakistani manufacturing firms face difficulties while competing with smuggled goods because of their low productivity and efficiency. Under the World Trade Organization (WTO) rules the government cannot subsidize domestic firms, therefore government should launch a programme to enhance industries' competitiveness capabilities through skill upgradation and induction of modern technology.

* Afghan transit trade passing through Pakistan needs to be carefully monitored to control en-route smuggling.

* Afghanistan government may be requested to stop charging the so-called Maafee tax on imported goods that are intended for smuggling to Pakistan. The Maafee tax is very low as compared to the import duty charged on goods actually imported for consumption in Afghanistan. As I recommended elsewhere, Afghan goods should pay all import taxes in Pakistan, and the amount so collected by Pakistan should be reimbursed to the government of Afghanistan.

* Pakistan should allow only those transit goods for which government of Afghanistan has issued the foreign exchange.

* State Bank of Pakistan should ensure that the Pakistani commercial banks are not used by Afghan traders to make payments against their imported goods.

* All efforts need to be made to effectively enforce the trade laws of Pakistan so that benefits from the national trade regime are fully achieved.

The writer is HEC Foreign Professor and presently on the faculty of Pakistan Institute of Development Economics (PIDE), Islamabad.
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Geographic Code:9AFGH
Date:Apr 30, 2011
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