Pakistan bends banking rule to make way for exports to and through Iran

In the midst of the continued war in the Middle East, Pakistan’s commerce ministry has eased one of the most rigid parts of its export rulebook for shipments moving through Iran. 

The temporary exemption, effective from March 24 to June 21, 2026, allows exporters to send certain goods to Iran, and rice to Central Asian Republics through Iran’s land route, without the usual financial-instrument requirement that normally governs exports under Pakistan’s trade regime. 

The decision marks the first moment in which Pakistan seems to be adjusting trade realities along its border in accordance with growing global conflicts. For decades, trade between Iran and Pakistan has largely been barter based and informal because of international sanctions on Iran. On top of this, Pakistan’s continued conflict with Afghanistan and the subsequent border closure has meant usual trade routes to Central Asia have also been closed off. 

According to one expert, Pakistan is possibly trying to take advantage of the current international situation. By easing trade requirements, Pakistan might even want to set a precedent of some form of trade with Iran — which could be beneficial for both countries even after the war ends.  

What was the requirement?

Before this exemption, exporters sending goods out of Pakistan were expected to comply fully with SBP-notified foreign exchange procedures under Para 3 of the Export Policy Order, 2022. In practice, that has meant routing exports through documented, bank-compliant payment channels so that export proceeds are traceable and can be repatriated into Pakistan within the prescribed time. It was mandatory for exporters to use letters of credit or advance payments under this rule.

The rule is designed to protect the country’s foreign exchange regime since one of the biggest leaks of forex out of Pakistan has always been the Pak-Iran border.

This kind of framework would work easily in markets where banking links are normal. The Pak-Iran market is far from being one of those. The condition made it almost impossible to trade with Iran for institutionalised and big exporters due to sanctions on Iran and a non-existent banking link between the countries.

In fact, owing to the absence of traditional banking channels between Pakistan and Iran, the government operationalised a barter trade mechanism with Iran in 2023 which was later revised in October last year. 

It is also important to note that this is also not the first time Islamabad has reached for a workaround. The Commerce Ministry’s 2024-25 yearbook says it removed the mandatory financial-instrument requirement for mango exports to Iran, describing the move as one that eased costs and procedural burden for seasonal trade. 

In December 2025, the government also granted a one-time exemption from Para 3 for kinnow and potato exports to CIS countries through Iran, with SBP advising that the waiver be season-specific, subject to controls for repatriation of export proceeds, and not treated as a precedent. 

Most of the recent exceptions were made due to the closure or increased scrutiny at the Torkham border, and armed conflict in Afghanistan on the Durand Line.

What is the change?

This is the backdrop to the latest relaxation. While the formal export rule assumes a banking pipeline that, in this case, has long been patchy, functionally unavailable for many transactions, the latest decision broadens that earlier piecemeal approach. 

According to the reported notification, Pakistan will now allow rice exports to Central Asian Republics and Azerbaijan through Iran’s land route, while permitting a wider basket of exports to Iran itself through the same corridor. That basket includes food and agro-based items as well as selected manufactured goods, among them seafood, potatoes, meat, onions, maize, citrus fruit, bananas, tomatoes, frozen chicken, pharmaceuticals and tents. The exemption is temporary, lasting three months, which suggests the government is testing a trade-facilitation valve rather than rewriting the export rulebook outright. 

But this relaxation is not a free pass. Exporters were told to undertake that export proceeds will be repatriated within the prescribed period. While such undertakings usually are difficult to enforce down to the last container, the move is more out of desperation than strategy.

The policy shift does not legalise undocumented trade. It tries to keep the trade moving where formal instruments are hard to arrange, and export numbers are falling like dominoes. 

How could this help Pakistan?

There is no sugarcoating the fact that Pakistan’s regional export numbers are going from bad to worse ever since the war with Afghanistan. Exports to all the central Asian states, as well as to Afghanistan have slowed down considerably due to a partially closed gateway and unsafe passage.

Pakistan’s exports to Afghanistan fell to $219.5 million in July-December 2025 from $505.8 million in the same period a year earlier, a drop of more than 56%, according to SBP data. In the meantime imports from Afghanistan also remained small, falling to $6.3 million from $10 million over the same period. Baseline comparisons remain difficult because trade had already been hit by prolonged border closures on the Afghan side and by reduced momentum in Central Asian markets. 

While small in magnitude, this border trade does not represent the hundreds of thousands informally traded on that border, keeping the economics of those regions afloat.

More importantly, exports to the five Central Asian states were also considerably down. They fell by 9.59% year-on-year in the first four months of FY26, even before this latest exemption was introduced. 

With the global political situation not warming up to any resolution in the near future and the forward-looking projection of fuel prices touching the sky, the government needs to find alternate trade routes, even if it means losing out on some amount in duties. 

Meanwhile the current situation in Iran, consumption and demand are at an all time high, especially for food. So while Pakistan’s forex reserves may take a hit and this leniency may result in future border control issues, what it does is that it gets the wheels rolling.

Not to mention that the immediate benefit is also nominally more practical. For exporters of perishable goods such as fruit, vegetables, meat and seafood, delays created by documentation bottlenecks can destroy margins way before the consignment hits the market. So if this temporary waiver reduces one layer of friction at a moment when the western route matters more than usual, it could result in better margins. 

SBP itself warned in its February 2026 Monetary Policy Report that the prolonged closure of Pakistan’s western border was constraining exports, especially pharmaceuticals and cement, to Afghanistan and landlocked Central Asian destinations. 

This move can also act as a proof of concept. Pakistan has traditionally been using Afghanistan for its trade with Central Asian countries. Ever since the Afghan Pakistan Transit Trade Agreement (APTTA) in 2010, Pakistan has not had to look past Afghanistan except for a few times. Things back then were also simpler because the sanctions on Iran were not as severe.

So this move is also a test of whether Iran can function as a workable transit corridor into a larger northern market when the Afghan route is unreliable. If the waiver helps even partially restore volumes in products already suited to land transport, the decision may outlast its three-month life in one form or another. If it does not, the government will be forced back to the deeper question it has been avoiding for years. Whether Pakistan’s export rules are too dependent on financial rules dictated by a western influence and assumptions that do not hold on its own north-western frontier.

The move is also strategically justified. Reuters reported in November 2025 that Afghanistan was increasingly shifting trade to Iran and Central Asia to reduce dependence on Pakistani routes, particularly through Chabahar and overland links with Uzbekistan, Turkmenistan and Tajikistan. If Afghanistan and other regional traders are actively diversifying away from Pakistan’s traditional corridors, Islamabad has an incentive to ensure its own exporters are not stranded by a compliance regime built for easier banking environments. Put plainly, if the region is rerouting, Pakistan cannot afford to behave as though the old route still does all the work. 

The effect of this trade remains to be seen in the months to come and the last section of this story will not be written by the notification or the amendment, it will be written by the monthly trade data. But one thing that may end up getting ignored in this is that once again the government’s taxation and compliance policies are held hostage by on-ground economic realities. And as long as this keeps on happening, a sizable tax reform is unlikely in this country.