Policy with purpose: Backing FOB to boost dollar reserves
FOB stands for 'Free on Board'. – an international shipping term that specifies the point at which the responsibility for the goods and costs of transport transfers from the seller to the buyer during sea or inland waterway shipments.
About 30 years ago, a major shift began in global trade practices. Countries around the world, particularly emerging economies, recognized the strategic importance of controlling their own logistics, shipping, and freight pricing.
They hired consultants who guided them and made these global traders realize how sizeable the freight element was in the total costs.
Moving away from Cost and Freight (CNF/CFR) agreements, where foreign sellers' controlled. freight, nations increasingly embraced FOB terms to gain autonomy over their trade routes and freight costs.
This trend was especially evident in rapidly industrializing economies like China, India, and Southeast Asian nations. And the developed countries like US, UK and EU.
By taking charge of freight, these countries were able to retain a larger share of their trade-related expenditures, build stronger domestic shipping industries, foster competitive freight markets, and better manage their foreign exchange reserves. The move toward FOB was not just a commercial tactic – it became a key part of national strategies to enhance economic sovereignty and trade resilience.
Today, this historic shift remains a cornerstone of successful trade economies worldwide – a blueprint that Pakistan can also follow to strengthen its economic foundations.
With a prime geographic location, the country holds significant potential to become a regional trade hub. Today, over 90% of Pakistan's trade relies on foreign carriers, costing around $5 billion annually in freight payments.
Shipping costs typically account for 5–15% of a product's value, influenced by mode, distance, and cargo type. Sea freight remains the most economical for bulk goods, while air freight, though faster, is more expensive.
A closer look at Pakistan's trade practices highlights a crucial area for reform. It is imperative that the stakeholders as well as the policy makers initiate this drive to conversion to FOB. This shift will be a big contribution to many improvements including but not limited to forex reserves, logistics and freight industry among other associated segments.
CNF (Cost and Freight)
Under CNF, the seller covers transport coststo the destination port by adding within the price, but the buyer assumes risk once the goods are on board. While sellers manage shipping logistics, buyers are exposed to voyage risks unless separately insured. CNF remains popular among Pakistani importers, particularly for large shipments.
FOB (Free on Board)
FOB places responsibility on the seller to load goods onto the vessel, after which the buyer controls shipping and insurance. It gives importers greater control over logistics, costs, and risk management.
Currently, around 90% of Pakistan's imports use CNF terms – opposite to global trends, where FOB dominates. Our veterans of Jodia bazar are still managing to utilize FOB shipment mode. However, our corporates do not explore or convert to FOB shipments which is where the bulk of imports lie today.
Why FOB makes strategic sense for Pakistan
Retaining foreign exchange
CNF leads to billions of dollars flowing overseas in freight payments. FOB allows Pakistani companies to arrange shipping locally, conserving precious forex reserves.In this scenario, the company would have efficient utilization of company cashflows as payments are normally made to the carrier once the shipment arrives. The buyer will have considerably more control over the shipment and negotiation power over local charges in terms of pricing and credit.
Better cash flow and payment terms
FOB allows payment for freight after cargo arrival, improving cash flow compared to CNF, where advance foreign currency payments are often required through LCs on confirmation of the order at least 60 days ahead of cargo arrival.
Pakistan's current economic climate, with exchange rate volatility and dollar shortages, FOB allows importers to pay only for the goods in foreign currency while managing freight payments in pkr or separately offering better foreign exchange management.
In CNF, the importer has to open an LC (Letter of Credit) with a bank at least 60 days before good arrival which means advance payments, that too in foreign exchange. For example, an order is placed, the seller asks for a month for production and then subsequently another 30 days transit time whereas he demands to have an LC arranged at the time of confirmation of the order.
This is essentially advantageous for importers with fluctuating demand, as it provides flexibility in payment schedules and enables better allocation of financial resources. Importers can optimize their budgets, thereby enhancing overall financial stability and operational efficiency.
The above factors contribute essentially to their market competitiveness and ability to adapt to varying economic conditions and can play a significant role in Pakistan's overall trade enhancement as now is an increasingly opportune time amidst ensuing trade wars and changing tariff structures.
Cost control and transparency
Importers can negotiate better rates with local freight forwarders, enhancing transparency and competitiveness.
Risk management
Buyers can independently insure and monitor shipments, ensuring better protection than relying on foreign sellers' arrangements.
With FOB, Pakistani importers can choose their own freight forwarders or shipping lines, negotiate better rates, and ensure cost-efficient logistics. This flexibility can lead to lower overall shipping costs, especially when dealing with high-volume imports.
Since, 'coercion' isn't practical in a free market; incentives and education are more effective tools than mandates.
From an economic sovereignty and forex stability point of view, it is better if importers opt for FOB, while exporters can use either, depending on commercial advantage. Policymakers can play a role in nudging the market toward FOB for imports through targeted incentives, capacity building, and awareness campaigns.
From a policy or economic standpoint, respective stakeholders include:
Ministry of Commerce – responsible for trade policies and regulations.
Federal Board of Revenue (FBR) – through customs and import/export duties.
State Bank of Pakistan (SBP) – governs foreign exchange, payment mechanisms.
Ministry of Finance – indirectly involved via fiscal policy and foreign exchange control.
TDAP (Trade Development Authority of Pakistan) and TCP – supports exporters and may promote CNF for export competitiveness and FOB for import competitiveness.
Policy recommendations
Stakeholders such as the Ministry of Commerce, FBR, SBP, Ministry of Finance, and TDAP can play a critical role by:
Offering tariff incentives for FOB-based imports
Relaxing forex rules to ease local freight payments
Educating businesses about the financial and strategic benefits of FOB
Policymakers should use incentives and awareness campaigns to nudge the market towards FOB – aligning with global practices and strengthening economic resilience.
Shifting Pakistan's imports towards FOB terms is a strategic move and the need of the hour. It will conserve forex, empower local industries, and give importers greater cost control.
A smart formula: FOB for imports, CNF for exports. This approach will position Pakistan as a more competitive and resilient player in global trade.
The article does not necessarily reflect the opinion of Business Recorder or its owners
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