IMF-backed tariff reforms raise concerns for Pakistan's auto industry despite rising car sales

Arab News

13 hours ago

KARACHI: While Pakistan's automobile manufacturers are still parsing the government's new financial plan, industry experts on Friday said proposed International Monetary Fund (IMF)-mandated reforms, such as the rationalization of trade tariffs, could erode long-standing protections for local industry.
Finance Minister Muhammad Aurangzeb said the government plans to reduce the overall tariff regime by more than four percent over the next five years to steer the country toward an export-led growth model in line with the IMF program.
Under the National Tariff Policy 2025-30, the government aims to abolish additional customs duties (ACDs), regulatory duties (RDs) and provisions under the Fifth Schedule of the Customs Act, 1969. The goal is to simplify Pakistan's tariff structure by reducing it to four duty slabs ranging from 0 to 15%.
The IMF-backed reforms are expected to lower Pakistan's weighted average tariff by 3.2% points to 7.4%, said Shafiq Ahmed Shaikh, an automobile industry expert and former general manager of Pak Suzuki Motor Company Ltd.
'These tariff cuts will reduce protection to the auto industry along with reduction of the cost of vehicles,' he said. 'It is a very sensitive point for industry… [and] must be discussed with the stakeholders for good, long-term and acceptable solutions.'
PARA-TARIFFS
Abdul Waheed Khan, spokesperson for the Pakistan Automotive Manufacturers Association (PAMA), said regulatory duties are designed to protect local industry and discourage unnecessary imports.
'The ACD too should gradually be abolished because such para-tariffs are not good,' he told Arab News.
Para-tariffs are taxes and duties levied in addition to standard customs tariffs, such as ACDs and RDs. While often introduced to curb imports or raise revenues, they are controversial because they can create complexity, raise costs and distort trade policy.
Pakistan's federal budget also proposes raising the sales tax on 850cc small vehicles to 18% to bring parity between petrol or diesel-powered cars and hybrids.
'This would increase the cost of vehicles for middle income groups,' said Khan of PAMA, which represents the local operations of Honda, Suzuki, Toyota and 16 other manufacturers.
'This is not good for our Made-in-Pakistan policy as small vehicles will go costlier at a time when people's disposable incomes are already not so good,' he continued, declining further comment on the budget.
CARBON LEVY
Pakistan's automobile market, long dominated by Japanese firms like Honda, Toyota and Suzuki, has recently seen new entrants, particularly Chinese and Korean electric vehicle (EV) manufacturers like BYD, SAIC and Kia, operating through joint ventures.
'The existing industry will face good competition from EV and as we know, the future is of Electric Vehicles specially from China,' Shaikh, the automobile industry expert, told Arab News.
As one of the countries most affected by climate change, Pakistan also plans to introduce a carbon levy of up to Rs10 ($0.04) per liter on petrol, diesel and furnace oil over the next two years.
The move is intended 'to discourage excessive use of fossil fuels and provide financial resources for climate change and green energy programs,' Finance Minister Aurangzeb said in his budget speech earlier this week.
Shaikh dismissed suggestions that the levy would raise car prices, arguing that consumers would instead begin shifting to EVs.
Prime Minister Shehbaz Sharif also announced plans to impose differential taxes on the sale and import of vehicles based on engine size to promote the adoption of two- and three-wheeled EVs and reduce oil imports and pollution.
Syed Asif Ahmed, general manager of marketing at MG Motors, said the 'industry is seeking clarity on recent budget.'
He noted that while the finance bill was silent on hybrid electric vehicles (HEVs), social media was abuzz with reports that the government may raise the sales tax from eight % to 18 % next year.
'If true, this will jeopardize the huge investment done by almost all automakers on HEV,' Ahmed said.
The MG Motors executive also warned against reduced regulatory duties on used cars and commercial imports under schemes meant for returning expatriates.
'[The] used cars importers are abusing the gift, baggage and transfer of residence scheme for commercial trading,' Ahmed said.
CAR SALES
While stakeholders have voiced concerns over policy shifts, vehicle sales continue to show signs of recovery.
Passenger car sales rose 31% in May to 11,119 units, while cumulative sales from July to May in the outgoing fiscal year increased 32% year-on-year to 94,388 units, according to PAMA data.
'[The] growth is supported by a more stable macroeconomic environment, lower interest rates, easing inflation and improving consumer sentiment,' said Myesha Sohail, an analyst at Topline Securities Ltd., in a recent research note.
Sohail expects this momentum to continue into the next fiscal year, driven by lower interest rates and a pipeline of new models across combustion, hybrid and plug-in hybrid categories.