Need of the hour: A push for tariff liberalization in Pakistan

Islamabad, March 26 2025: Pakistan and the International Monetary Fund (IMF) have reached an agreement to significantly reduce the country’s average tariffs by 43% over the next five years. This decision aims to liberalize Pakistan’s economy and increase its exposure to international competition. EAG believes that this could foster much needed competitive pressure into the economy, helping to kickstart the economic activities which otherwise have remained rather elusive. However, the ominous clouds of a balance of payment crisis continues to hang over Pakistan, which will complicate matters as the government relaxes restrictions on imports. EAG advocates that the government must adopt monetary and fiscal tools to counter pressures on the exchange rate and the inflation rate from a rising current account deficit rather than use administrative measures that have had much longer term implications on the economy.

The tariff reductions will be implemented through a new National Tariff Policy and adjustments to the Auto Industry Development and Export Policy. While the IMF initially sought a larger decrease, Pakistan committed to lowering the weighted average applied tariffs from 10.6% to approximately 6% by 2030. This comprehensive plan involves phasing out various customs and regulatory duties across different import sectors.

Pakistan has one of the highest tariffs on the imports of automobiles in the world, exceeding 50% as per International Trade Center’s Trademap.org. Import tariffs on passenger motor vehicles exceed 75%. Similarly, Pakistan also imposes high tariff rates, exceeding 30%, on the imports of parts and accessories. Customers either face higher prices in Pakistan or purchase variants that lack quality and features available elsewhere. Opening up to imports will result in greater competition that may not only reduce the prices but allow consumers to purchase varieties with comparable features and varieties. Another aspect that is often overlooked is that the tariff protection provided to domestic producers may only be catering to the segments with the lowest value addition in the automobile industry while the investments in basic assembling facilities, which have limited contribution towards value addition, may instead drain foreign reserves. Cars assembled in Pakistan have failed to find consumers abroad. It is also likely that cheaper and simpler variants of parts and accessories are likely being produced under the deletion program, with higher valued and more complex parts and accessories, such as the engine, sourced from abroad. Challenges such as lack of technology transfer, low levels of economies of scale and negligible research and development could be tackled if competitive pressure in the industry is increased. This may force local producers to invest in more efficient production processes and procedures as well as introduce variants at more competitive prices but also include features comparable to those available in other markets. It can eventually increase exports of vehicles and parts and accessories from Pakistan.

In a recent working paper titled ‘Pakistan and the rest: A tale of dismal productivity growth, misallocation, and missing transformation’, the authors, Pirzada et al, show that Pakistan severely lags its regional counterparts in the participation in global value chains. Several East Asian economies that have restructured their economy and achieved higher economic growth rates show high participation in backward linkages as they have built resilient and sustainable linkages between exports and imports. Low tariffs are crucial in achieving such linkages. We recommend that to encourage productive and export-oriented investment, it is imperative to remove distortions that would otherwise inhibit the ability of businesses and consumers to interact efficiently.

According to the tariff profile provided by the World Trade Organization (WTO), Pakistan’s simple average MFN applied tariffs on agricultural products is 13% and on non-agricultural products is 9.9%. The slab with tariff rates between 15% and 25% is the largest, with more than 35% of the imports falling within this range. Comparatively, India imposes higher tariffs rates on the imports of agricultural products than non-agricultural products, with more than 60% of the latter falling within the tariff rates slab of 5% to 10%. We propose a reduction in the tariff rates by moving products to a lower slab, specially for the non-agricultural products in the immediate run.

Although the reduction in tariffs on imports is likely to spur innovative activities and foster competition, the IMF needs to ensure that the government undertakes reforms to reduce the costs of trade and doing business in Pakistan. For instance, Pakistan significantly lags behind in the use of non-tariff measures. Such measures not only enhance the quality and standards of goods produced in Pakistan but ensure that production processes and practices comply with international standards and certifications. As such measures are largely prevalent on the imports into the major trading partners, it has become increasingly important for Pakistani exporters to comply with such measures. Less than one-third of the imports into Pakistan face NTMs, while the global average is approximately 75%. It is imperative to develop products that comply with the regulations imposed by the export destination markets in order to increase the diversification of exports from Pakistan. This will also help reduce the costs to export as local producers comply with the international standards on production processes and procedures.

Furthermore, it is imperative to encourage investments in human capital as well as in SMEs to ensure better participation of firms in international trading activities. Policymakers must push to negotiate for regional trade agreements with trading partners and include provisions that pursue the development of human capital and other factors that will improve the trading environment in Pakistan. This has become increasingly important as global trade policies are becoming more complex day by day.

Lastly, EAG advocates that the government ensures its bureaucracy as well as policymakers have the right set of capabilities to induce a more conducive trading environment. This should not only include local custom and trade officials but also representatives in foreign trade missions abroad. In addition, the government must enhance the skills of policymakers to not only negotiate agreements that are favorable for Pakistan but also improve the perception of such agreements within the wider business community. For instance, the free trade agreements currently negotiated by Pakistan face severe criticism on their ability to deliver the promised benefits to the domestic producers and the consumers.   

In essence, EAG strongly advocates for lowering import tariffs and eliminating the use of administrative measures to curtail imports. It is necessary to refrain from practices that create distortions in the market as well as keep businesses unproductive and uncompetitive, reducing their ability to export. Establishing better linkages between exports and imports will allow the economy to escape the vicious cycle involving frequent balance-of-payment crises.

ECONOMIC ADVISORY GROUP

The Economic Advisory Group is an independent platform of individuals drawn from economics, policy and the private sector. It was formed in January 2021, under the auspices of PRIME Institute, an independent think tank, which serves as its secretariat.

Chair: Aadil Nakhoda, IBA Karachi

Members:

Ahmed Jamal Pirzada, Bristol University

Ali Salman, PRIME Institute

Mueen Batlay, Think Build Scale Pvt Ltd

Muhammad Adil Mansoor, Business Recorder

Muhammad Ashraf Khan, Retired Federal Secretary

Najma Pirzada, The Life Sciences Division

Sajid Amin Javed, SDPI

Samir Ahmed, LUMS

Vaqar Ahmed, SDPI

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