Pakistan, IMF agree on tariff cuts
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Pakistan and the International Monetary Fund (IMF) have made further adjustments to the economic liberalisation plan and agreed to cut weighted average applied tariffs to around 6% — a reduction of 43% over five years in the protection level available to local industries.
The country has the third-highest trade-weighted average tariffs in South Asia at 10.6%, and after the implementation of the full liberalisation plan, it will have the lowest weighted average tariffs in the region.
The final adjustments were made during a virtual meeting held on Thursday, according to government sources.
It has been agreed that the weighted average applied tariffs will be reduced from the current 10.6% to just around 6% over five years, starting in July this year, they added. This 43% reduction in tariffs will completely open the economy to foreign competition.
But the reduction will be achieved under two different policies. Under the new National Tariff Policy, the weighted average tariffs will be reduced to 7.4% by 2030. To cut these further to around 6%, the government will lower tariff protection available to the automobile sector through the Auto Industry Development and Export Policy (AIDEP) 2026-30 from July next year, according to the sources.
The Ministry of Commerce deals with the National Tariff Policy, while the Ministry of Industries is responsible for the AIDEP Policy.
They added that excluding the tariff reduction plan for the automobile sector, the weighted average applied tariffs will now be 7.4% compared to the earlier understanding of 7.1%. The difference between the 7.4% and the earlier agreed 7.1% was due to the status of the import tariffs for Customs Chapter 27, which deals with the duty structure of imported energy products.
The government has agreed to completely abolish additional customs duties, cut regulatory duties by 80%, and withdraw concessions under the fifth schedule of the Customs Act, according to sources.
The IMF had long been raising concerns over the protection available to local industries, but Pakistani authorities were reluctant to open these areas.
Pakistan's agreement with the IMF on trade liberalisation comes at a time when the world is closing its borders to foreign companies.
The plan states that the 7% additional customs duty on specific goods will be abolished from July this year. Likewise, the 2% additional customs duty on the zero-tariff slab will also be abolished in July. The 2% duty on the 3% tariff slab will be cut to 1% in the next fiscal year and to nil from the year 2027.
The 4% additional customs duty on the 16% tariff slab will remain unchanged for the next fiscal year but will be reduced to 3% the following year and completely abolished in 2030.
The 6% additional customs duty on the 20% tariff slab will be reduced starting in 2026-27 and abolished in 2030.
Sources said that the IMF demanded the government reduce the weighted average tariffs to around 5%, but the authorities committed to cutting it to around 6%.
Pakistan has assured the IMF that it will seek approval of the new tariff policy from the federal cabinet before the end of June. The tariff reduction will be implemented in the fiscal year 2025-26 budget, to be presented in Parliament in June.
Pakistan has also assured the IMF that in the future, it will not introduce any new regulatory duties except where essential, and a sunset clause will be introduced for their elimination.
Pakistan has committed to addressing vehicle affordability by setting out a path to reduce protection by 2030, including eliminating all additional customs duties and regulatory duties in the auto sector and rationalising customs duties with the highest slab of 20%.
When added to the duty reductions envisaged under the new tariff policy, this will bring the weighted average tariff to 6% by 2030, according to the understanding reached on Thursday.
The maximum duty on all imports in the auto sector will be 20% by 2030, sources said.
In the case of regulatory duty, duties currently ranging from 55% to 90% will be cut to 48.5% and 80% in the first year and will be brought down to 26.5% to 44% in the last year. Regulatory duty currently falling in the range of 45-50% will also be cut by up to 10% in July. Goods carrying relatively lower duties will see a smaller reduction in the first year.
According to the plan, a new 6% customs slab will be introduced. The 11% customs duty slab rate will be reduced to 9% within two years. The 16% customs duty slab rate will be cut to 12% in three years. There will be no change in the 20% duty slab.
Detailed discussions were also held with the IMF on Chapter 27 in Pakistan's Customs Tariff, which covers mineral fuels, mineral oils and products of their distillation, bituminous substances, mineral waxes, and petroleum products.
IMF officials were of the view that the government was using import tariffs to adjust petroleum product prices. However, the government makes these adjustments through the petroleum levy. Commerce ministry officials argued that the IMF should view Chapter 27 imports in the context of volatility in the energy market.
Authorities believe that trade liberalisation could push exports to $47 billion by 2030 and that the economy could grow by 4.6%. Imports are projected to increase to $84 billion under the liberalisation plan.
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