KARACHI: The central banks of Pakistan and Iran have finally devised a detailed mechanism to settle trade transactions between the two countries through banking channels.

Pakistan’s trade with Iran has been nominal for more than a decade. No banking channel existed between the two countries as Iran remained under international sanctions imposed by the United States and United Nations.

Hopes for better bilateral trade relations grew when the sanctions were lifted about two years ago.

The State Bank of Pakistan (SBP) said on Tuesday it has devised a payment settlement mechanism with the Bank Markazi Jomhouri Islami Iran (BMJII) to settle trade transactions between the two countries.

While the two central banks are trying to develop trade relations, political relations have been marred by a recent statement by the Iranian military chief about a possible cross-border raid against alleged militant hideouts in Pakistan.

During the first nine months of 2016-17, Pakistan exported goods worth $24 million to Iran. Imports during the first eight months of the fiscal year were just $54,000. The bilateral trade volume is the lowest compared to the level of trade Pakistan enjoys with other regional countries.

Iranian President Hassan Rouhani visited Pakistan and met Prime Minister Nawaz Sharif in the last week of March. They agreed to boost the trade volume to $5 billion by 2021. Their talks focused on increasing Pakistan’s electricity imports from Iran and reviving plans for a gas pipeline between the two countries.

The SBP said the mechanism will be available as an additional mode and does not restrict the use of other permissible mechanisms for the settlement of trade transactions. This mechanism will be available for the payment of goods and services traded between Pakistan and Iran.

Transactions eligible for the settlement under this mechanism will be denominated in the euro or yen and based only on documentary letters of credit (L/Cs).

As per the mechanism, the importer’s bank in Pakistan will credit the foreign exchange (ie amount due under the L/C) in the Nostro account of the SBP for onward payment to the exporter in Iran and inform the SBP about the same.

On confirmation of the receipt of funds in the Nostro account, the SBP will instruct the BMJII to pay the exporter’s bank for onward payment to the exporter in Iran.

On receiving payment instructions from the importer’s bank in Iran, the BMJII will instruct the SBP to make payment in Pakistan. The SBP, on receiving instructions from the BMJII, will credit the Nostro account of the exporter’s bank in Pakistan in foreign currency.

“Participating banks shall ensure that transactions conducted under this mechanism are not proscribed and do not involve individuals/entities proscribed under international sanctions,” said the SBP.

Published in Dawn, May 10th, 2017