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World 10-Sep, 2022

Why is Pakistan keen on resuming trade ties with India?

By: Anshul Vipat

Why is Pakistan keen on resuming trade ties with India?

After almost two years of bottleneck, Pakistan has announced that it is resuming trade with India. Pakistan's finance minister Miftah Ismail made a statement that Islamabad will be resuming the trade ties it had suspended almost two years before.

After almost two years of bottleneck, Pakistan has announced that it is resuming trade with India. Pakistan's finance minister Miftah Ismail made a statement that Islamabad will be resuming the trade ties it had suspended almost two years before.

We will open trade route with India because of this flood and food price hike," Ismail was quoted as saying by local media reports. Trade between the two countries were virtually suspended after the terrorist attack on a CRPF convoy in Pulwama in February 2019. The attack had almost led to a war-like situation between the two countries. Later in August the same year, Pakistan had suspended trade and lowered its diplomatic ties with India after the dissolution of Article 370 by the Indian parliament. Although, Pakistan resumed its diplomatic ties a few months later, trade between the two countries had virtually came to a standstill.

Why is Pakistan resuming trade with India?

One of the primary reasons Islamabad is keen on resuming ties with its arch rival is the disastrous flood situation that has gripped the country. According to reports, a third of the country is under water. The death toll from the floods has crossed 1,110 earlier this week. Prime Minister Shehbaz Sharif-led cash-strapped government had made a desperate appeal to the world for aid to deal with the crisis that has displaced 33 million or one-seventh of the country's population.

On Tuesday, International Monetary Fund (IMF) agreed to release $1.17 billion (€1.17 billion) in funds to the government of Pakistan. The IMF has also agreed to extend the program by an additional $1 billion.

Several other countries too have pitched in to help. Prime Minister Narendra Modi had also expressed his sympathies towards the death and hoped for early restoration of normalcy.

Islamabad's plummeting economy

The larger reason is Pakistan's plummeting economy. Pakistan is in the midst of a balance of payments crisis, with its foreign exchange reserves at the lowest and current account deficit widening at a rapid rate. According to a report by IMF, Pakistan's current account deficit is projected to increase from 0.6 percent of the GDP in 2020-21 to 5.3 percent of GDP in 2021-22. Pakistan is also battling high inflation rate which has touched 20 percent in July.

For ages, trade between the two countries was limited to agricultural and pharmaceutical products. Despite being neighbouring countries, trade between India and Pakistan has traditionally been low.

Before the suspension of trade in 2020, India's exports to Pakistan was about $2.17 billion, which was just 0.83 percent of India's total exports. The main products exported to Pakistan were vaccines and other pharmaceutical products, raw sugar etc, while majority of Pakistan's exports to India included tropical fruits, alcohol and other nuts.

In 2020, Pakistan had exported $2.42M worth of goods to India. The main products exported from Pakistan to India. During the last 25 years the exports of Pakistan to India have decreased at an annualized rate of 10.8%, from $42.5M in 1995 to $2.42M in 2020. Similarly, Indian exports to Pakistan dropped by a whopping 60 percent in 2019-20. India had also withdrawn the most-favoured-nation (MFN) status for Pakistan in February 2019. It imposed a 200 per cent tariff on all imports from Pakistan after the Pulwama terror attack. However, it didn’t ban either exports to or imports from Pakistan.

According to reports, India is planning to extend humanitarian assistance to Pakistan in the wake of catastrophic floods. While it will be a good gesture to help the neighbouring country at this moment, a complete resumption of trade between India and Pakistan is a long, time consuming and difficult process.

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