Anti-smuggling drive stabilizes rupee as Pakistan curbs Afghan transit trade

Pakistan has intensified its anti-smuggling efforts, significantly curbing illicit trade under the Afghan transit trade agreement.

The crackdown has helped stabilize the rupee and reduced dollar demand, but it has also diverted trade routes toward Iran and Central Asia.

The country’s security forces, led by Chief of Army Staff Gen Asim Munir, have been taking strict action against smuggling networks, particularly those exploiting the Afghan transit trade system. This trade allows landlocked Afghanistan to import goods duty-free through Pakistani ports, but over the years, many of these goods have been smuggled back into Pakistan, bypassing local taxes and harming domestic industries.

Khan cited a report from South Asia Monitor that described how the transit trade had become one of the world's largest smuggling networks in recent years. Goods such as ready-made garments, cosmetics, betel nuts, chocolates, auto parts, and electronics were being imported for Afghanistan in volumes far exceeding its actual demand. These items, benefiting from duty exemptions, were then illegally diverted into Pakistan’s markets.

As a result of the crackdown, the volume of Afghan transit trade has fallen drastically. Previously, about 8,000 to 9,000 containers worth $500 million moved through Pakistan monthly. That figure has now dropped to just $90 million per month, according to Khan.

The Pakistani government first imposed restrictions on 200 imported items under caretaker Prime Minister Anwaarul Haq Kakar. These measures, which included bans on goods like tires, cigarettes, fabrics, electronics, and cosmetics, have been maintained by Prime Minister Shehbaz Sharif’s administration.

Khan noted that the government’s actions were triggered by the economic crisis of 2022-23, when the dollar’s open-market value surged to PKR 337, and foreign exchange reserves fell below $3 billion. Reports indicated that millions of dollars were being smuggled into Afghanistan daily, exacerbating Pakistan’s currency crisis.

Bloomberg reported in early 2023 that an estimated $5 million in cash was being smuggled to Afghanistan each day, undermining Pakistan’s banking system and further pressuring the rupee. Authorities responded by increasing surveillance of transit cargo, requiring electronic tracking, and mandating bank guarantees to ensure goods reached their declared destinations.

These measures have led to an 89% year-over-year drop in Afghan transit trade from July to November 2024. However, Iran and India have capitalized on Pakistan’s restrictions, with Iranian media reporting an eightfold increase in Afghan-bound cargo through the Chabahar port. Uzbekistan and Tajikistan are also seeing a rise in transit trade with Afghanistan.

Khan warned that while Pakistan’s anti-smuggling drive has yielded positive economic results, it has also reduced business for Pakistani ports, transport companies, and laborers.

He suggested that instead of outright restrictions, the government should encourage Afghan transit trade while ensuring stricter monitoring to prevent goods from re-entering Pakistan illegally.