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Central Asia, Afghanistan and Pakistan Trade Review

Isfandyar Zaman Khan, Ali Ahsan, Saad Hayat Tamman, Gaukhar Ospanova,
December 2019
Executive Summary1
This review examines the untapped potential for trade between the Central Asian States of Uzbekistan,
Tajikistan with Afghanistan, Pakistan. In particular, it examines the causes of the extremely low bilateral
trade volumes and identifies key challenges and bottlenecks to trade, as well as select interventions
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designed to boost trading relationships.

I. Context
The countries of Central Asia and South Asia – particularly Uzbekistan, Tajikistan, Afghanistan and
Pakistan (the “CAAP” countries) – have much in common beyond the final syllable of their names. They
have all been linked to the historic silk route, and have remained connected through much of history by
proximity, culture and, of course, religion.
Yet these geographic and historical ties have not translated into the realm of economic exchange. Despite
large investments in transport corridors and recent strong interest to collaborate more closely – in particular
engendered by the opening of Uzbekistan, Central and South Asia continues to face significant obstacles to
intra-regional and global trade and transit. Inefficiencies in the trade payments, facilitation and trade
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logistics chain are made worse by a challenging political economy thereby preventing the region from
reaping the benefits of economic integration and sustainable access to markets.
Trade frictions are made worse by the overall trade dynamics and political economy of the CAAP countries,
not least by the the following “meta” issues:
▪ Trading potential is limited by the centrality of Afghanistan as the transit route and its poor
infrastructure, policies and procedures. In particular, any meaningful improvement in trade flows
between Pakistan and Central Asia depends upon a better transit partnership with Afghanistan. At
present, beyond Afghanistan’s inherent limitations, political tensions relating to Afghan-India trade
through Pakistan limit Pakistan’s ability to utilize land routes to Central Asia through Afghanistan
▪ Significant improvement in CAP trade requires concerted and cross-cutting governmental level
attention. Regrettably, this is lacking as alternate trading relations are more important (and more
established) for almost every country except Afghanistan, and – in a reductionist zero-sum view --
incremental attention to those alternate relationships holds the promise of greater return than efforts
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to advance CAP trade

▪ The considerable political tensions among CAP nations – not least Pakistan and Afghanistan but
also Uzbekistan and Tajikistan – pose additional hurdles to improved exchanges.

1The authors of this Report wish to acknowledge the facts, insights and findings of previous work undertaken by a 12-member
World Bank Team under the leadership of Mr. Stefka Slavova, Lead Economist for the GFCFC, during 2018. That team – whose
scope did not include Uzbekistan – produced an internal report titled “Tajikistan, Afghanistan, Pakistan Trade Corridor –
Preliminary Findings” in late 2018 that served as the starting point for this current exercise.

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CAAP trade remains embarrassingly low and a mere Rank of corresponding trade (Exp + Imp) with these countries

shadow of its realizable potential. Indeed, the sum PAK AFG UZB TAJ
total of trade between these four nations – with almost
USD 400 billion in combined GDP and apopulation Pakistan is the
3rd largest
approaching 300 million – amounts to well under USD trading
relationship with 3 50 12
3 billion annually (or less than 1% of combined GDP). Afghanistan

Afghanistan is
the 10th largest
Pakistan and Uzbekistan, two of the largest economies
10 trading
8 7
of the region, barely trade with each other – relationship with
Pakistan

Uzbekistan ranks 126 on the list of Pakistan’s largest

trading partners, while Pakistan is Uzbekistan’s 50th
126 8 5
largest trading counterpart.
II. An inflection point in trade
76 12 18
While the current reality of CAAP trade is sobering,
its potential is tantalizing2. The current level of SOURCE: International Trade Center; World Bank; Team analysis

roughly USD 3 billion in regional trade is a fraction of

the realizable opportunity – our initial analysis suggests that actual latent trade potential between the four
countries of the CAAP is closer to USD 10 billion, or a roughly 300% increase from present levels. 3
Pakistan Exports Uzbekistan
Some of the key products for USD Mn 2017 Imports USD Mn 2018

intra-region trade include (in Existing

3
7 Existing 1,108 5 1,113
4
USD): +47,250% +74%

Potential 949 2,271 3,220 Potential 1,825 111 1,936

Pakistan –
Uzbekistan: Gaseous Existing 1,199 415 1,614 Existing 155 282

hydrocarbons +51%
126 +215%

Potential 351 887

(764M), Cotton Potential 1,876 562 2,438
536

(218M), Cotton yarn Tajikistan

USD Mn 2018

(165M), Medicines Existing 9 33

25 +2,625%
Existing 72 127 199
(144M), Wheat Potential 543 364 908
+59%
(97M), Cane and Potential 166 152 318

beet sugar (70M)

▪ Afghanistan –
Uzbekistan: Coal (14M), Natural gas (427M), Vegetables, fruit juices (100M+)
▪ Afghanistan – Pakistan: Cement (112M), Medicine (116M), Clothes (94M), Nuts (62M)
▪ Pakistan-Tajikistan: Petroleum oils (143M), Sugar (45M), Medicines (33M), Cotton (112M),
Cotton yarn (37M), aluminum (107M)
▪ Tajikistan – Uzbekistan: Aluminum (102M), Cement (28M), Petroleum gas (140M), Wheat (102)
▪ Tajikistan – Afghanistan: Cement (41M), Electricity (40M)
But beyond the numbers and figures, there is a broader reason to believe that this is also the right time to,
so to speak. Significant change is underway in the region – most notably, perhaps, Uzbekistan is
experiencing a dramatic period of reform and opening up. At the same time, peace talks – and the attendant

2 Bilateral trade potential has been examined as the intersection of goods that are exported by a CAP country in significant
volumes that are also imported by other CAP counterparts in substantial amounts.
3 It is important to note that the above analysis only establishes the theoretical potential in trade in particular goods. While

serving as a rough and ready measure of realizable potential, it has its limits

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promise of greater stability and security – are gaining currency in Afghanistan. While in Pakistan the new
government of Prime Minister Imran Khan is undertaking significant structural reforms to enhance exports.
This commitment to reform is already being reflected in hard numbers – for instance, the 2019 World Bank
Ease of Doing Business Report cites both Uzbekistan and Pakistan for being among the top 20 reformers
globally.
III. Trade Challenges
As alluded to earlier, the list of impediments to improved trade within CAP is long and range from the
existential (e.g., security in Afghanistan) to the mundane (e.g., delayed release of Letters of Credit). As an
initial step, we sought to collate and structure and an overview of the entire range of challenges to improved
trade in the region. We categorized the challenges across four areas (1) Infrastructure and resource
mobilization, (2) Regulatory and institutional challenges, (3) the regional and intra-country business
environment, and (4) Political and governmental relations and priorities.
Given the breadth of the
constraints, it is advised to CAP Trade: Select Challenges
look at areas which are Infrastructure: A lack of cost effective and reliable transport and transport infrastructure especially
A
road and rail links
actionable and also Banking and Payments: Unavailability of competitively priced trade products and cumbersome and
B
potentially addressable in a Infrastructure & delayed payments
Resource
C Connectivity: Limited connectivity (e.g., direct flights) and cumbersome visa processes
shorter time frame. Mobilization

D Donor support: Unreliable (and declining) donor support sustains Afghanistan’s import capacity
The shortlist of pain-points
E Tariffs: Significant lack of harmonized tariffs distorts trading relationships
was refined in numerous
F Borders and Customs: Unreliable and capricious border processes resulting in delays
bilateral meetings with
Regulatory & Standards and inspections: Absence of consistent and standardized regimes for labelling and
stakeholders and in aa Institutional G
inspecting products including food safety standards

November full-day H Trade agreements: Deficiencies and gaps in existing bilateral and regional trade agreements

Roundtable in Dubai that I Illegal trade: Significant cross-border smuggling undermines documented trade volumes

brought together J Security: Unsettled security situation – esp. in Afghanistan – undermines regional trade
representatives of Chambers K
Corruption: Despite steady a improvement on the corruption index, high levels of administrative
Business corruption across the region are a significant “tax” on trade
of Commerce from all 4 Environment
L Competitiveness: Absence of significant exportable goods with demand within CAP counterparts
countries, as well as leading
Political tensions: Significant and long standing political tensions between CAR nations are
private sector entities engaged M
reflected in trading ties
Government
in CAAP trade. This resulted relations N Strategic Clarity: Lack of prioritization of CAR trade and relationships relative to other alternatives
SOURCE: Team analysis
in the finalization of the
following focus areas:
IV. Focus sectors
Addressing barriers to trade has a direct effect on trade competitiveness and can result in increased private
investment in key tradable sectors encouraging exports and creating employment. Reducing trade
transaction costs is a necessary complement to economic liberalization for developing countries to
effectively participate in regional and global markets.
1. Improved trade finance processes

There are four principal frameworks for trade payments in the region, all of which are subject to significant
constraints that raise the cost of doing business:

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 a) Letter of credit: Primarily between large entities, B2G or G2G trade. This would normally be the
most efficient mode of transacting but the absence of correspondent banking relationships and high
documentary and compliance costs make it unfeasible for most small to medium sized exporters.
b) Advance payment trade: Is a leading means of trade between most importers in the region but is
highly inefficient in that requires 100% cash payment in advance, normally by wire transfer, before
goods are shipped thus limiting trade to big firms and not SMEs.
c) Contract based trade: Negligible trade based on contract terms where payment is specified by
contract which may allow for a 30 or 60 day period post delivery to make payment.
d) Informal (hawala) channels: The hawala system is an informal value transfer system whereby
money is transferred through a network of brokers.

Recent developments have placed significant pressure on the hawala system of trade. Terror financing
concerns are thus forcing traders to engage with traditional banking channels which are proving
cumbersome and expensive, making a perennial problem truly acute.

Action across the following areas can help address this growing pain point and unlock latent trading
potential:

a) Correspondent banking links

The absence of correspondent banking ties has been noted as an immediate and solvable issue by
bankers across the region, and especially between Uzbekistan and Pakistan.
More broadly, almost all exporters and importers have expressed concerns about the difficulty of
getting recognition from banks for their trade documentation, which is directly tied to the absence of
correspondent banking relationships.
b) Central Bank coordination

There is very limited coordination or interaction between the central banks of CAAP. The absence of
even basic exchanges has meant that regulations and rules across the banking landscape are not
harmonized and remain onerous.
At the same time, central bankers have expressed an openness and appetite for greater interactions and
exchanges. The Pakistan central bank has offered to host and facilitate trainings for their Central Asian
counterparts. While the Uzbekistan central bank has suggested that a working group to identify areas
of cooperation would be extremely helpful.
c) Documentary coordination
Rules regarding the provision of documents for movement of goods and payments has been a source of
great angst amongst both customers as well as banks themselves. In many instances, regulations don’t
allow for payment transfers until extensive documentation is provided in complete form and in original.

Banks and traders both have expressed great interest in streamlining or simplifying documentary
requirements as well as the process for the sharing and recognition of documents between jurisdictions.

d) Insurance market development

Insurance for goods transiting from Pakistan to Central Asia via Afghanistan is essentially unavailable,
and cost-prohibitive when available. As such, multiple freight operators as well as traders indicated that
the cost of losses in transit is something that is simply an essential part of their business model and
substantially raises the cost of transport.

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e) Link up local payments networks
There is an opportunity to explore the feasibility of common payment mechanism to facilitate low cost
real-time settlements – the external payment network links provided by entities such as Visa and
Mastercard have high transaction costs that are not feasible for high volume, low margin trade
payments.

While the feasibility of such a payments network is unclear, it would be useful to understand the
potential for such a regional payments gateway and the perspective of financial regulators across
CAAP.

2. Enhance B2B connectivity

The lack of information on opportunities for trade and collaboration was cited by virtually every single
exporter or importer. There was significant appetite from all sides for opportunities to increase
transparency and information sharing in terms of trading opportunities across CAAP borders. Several
options are worth exploring in this regard, as discussed below.
a) Organize trader forums
Even though there has been some recent increase, there remain limited forums for interaction between
businesses in Central Asia and South Asia. It is therefore worthwhile to evaluate a set small to medium-
scale forums bringing together business organizations from the CAAP countries. Such conclaves can
be sector focused – for example, agriculture or pharmaceuticals – or based on recommendations by
national chambers of commerce and industry.

b) Link chambers of commerce

Identifying and bringing together relevant chambers of commerce – potentially at one of the trader
forums noted above – could be a starting point of deeper institutionalized exchanges. There is also value
to examining the feasibility of joint regional or bilateral chambers of commerce (along the lines of, for
example, the Pak-Afghan Joint Chamber of Commerce).

3. Standards and Inspection

(a) Recognize and reduce certifications
CAAP countries impose several national phytosanitary testing and certification requirements on
imports. Several of these are duplicative with the requirements of the exporting nation. This not only
increases the cost of doing business, but also delays perishable goods at border crossings. For instance,
Uzbekistan will carry out its own mandated lab tests at port of entry for produce from Pakistan and
Afghanistan – whiles lab tests are awaited the goods are held up at the crossing.
Aligning standards and ensuring mutual recognition of lab tests – such that lab certifications from the
exporter are sufficient for the importing country – could help boost trade in some of the highest potential
areas such as agricultural and food items.
(b) Establish technical coordination committee
The absence of regional recognized standards reflects the fact that there is no technical coordination
between regulatory authorities in these countries. There is also a lack of alignment on labs which test
and certify goods for exports. Support to facilitate such exchanges, including both logistical and
technical expertise would be a key catalyst to enhancing phytosanitary trade and addressing this failure.
4. Transport policy

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 Facilitate uniform axle-load requirements: Central Asia, Afghanistan and Pakistan all have different axle
load requirements:

▪ Central Asia→ 8 tons /axle, enforced → 24-ton load

▪ Afghanistan → 12-14 tons /axle, enforced → 37-ton load
▪ Pakistan → 12 tons /axle, unenforced → 60-ton load
The difference in truck loads means that trucks cannot pass seamlessly across borders and need to be
unloaded and reloaded. While this is to the advantage of domestic trucking entities, it introduces significant
costs and delays.
V. Quick win areas

Apart from the concerted set of actions recommended above, a set of quick wins can lead to near term
progress (i.e., 9-12 months) and build buy-in and momentum for the broader program:

i. Establish correspondent banking links:

ii. Increase central bank coordination
iii. Improve documentary coordination
iv. Organize trader forums
v. Link chambers of commerce