Major tariff cuts for auto sector: cheaper cars expected as part of IMF deal

ISLAMABAD: The government has agreed to a major demand from the IMF to fully liberalise the economy for external competition. Under this agreement, average import tariffs will be reduced by one-third over the next five years, bringing them down to just 7.1 per cent.

According to sources, key sectors for economic liberalisation will include minerals and the auto sector, with the latter enjoying the most protection. Balochistan, an insurgency-affected region, is rich in minerals.

With this new understanding, Pakistan and the IMF are close to a staff-level agreement, which is a critical condition for the approval of a $1 billion tranche by the Executive Board.

However, the reduction in average tariffs by one-third is expected to cause a revenue shortfall of Rs278 billion, which the government aims to compensate for through increased economic activity resulting from trade liberalisation.

Sources further revealed that the government has agreed to completely eliminate additional customs duties, reduce regulatory duties by 75 per cent, and withdraw concessions under the fifth schedule of the Customs Act.

Over the next five years, the overall average tariff will be reduced from the current 10.6 per cent to 7.1 per cent, with the changes starting in July this year.

This 33 per cent reduction in tariffs will fully open the economy to external competition. Pakistan’s agreement with the IMF on trade liberalisation comes at a time when countries like the US are closing their borders to foreign companies.

Pakistani companies, which have grown under tariff protection, are not ready for external competition, putting the burden on consumers. The average tariff in South Asia is 5.3 per cent, while in Asia it is 7.5 per cent.

The IMF agreement will be implemented through the new National Tariff Policy, which will be formulated by July this year. The new Auto Industry Development and Export Policy will be introduced in July 2026. Sources mentioned that Pakistan has assured the IMF that it will secure cabinet approval for the new tariff policy by the end of June.

Implementation of the tariff reduction will take place in the 2025-26 budget, which is set to be presented in Parliament in June. Additionally, Pakistan has assured the IMF that no new regulatory duties will be introduced in the future, except in cases of extreme necessity, and if imposed, a time limit will be set for them.

Additional customs duties will be merged with customs duties or regulatory duties. Sources stated that major changes in auto sector tariffs will lead to cheaper vehicles, and the government is committed to ending unnecessary protection for the auto industry by 2030. The government has also promised to rationalise the customs duty structure, with the average tariff for the auto sector being reduced to 5.6 per cent.

The IMF has also sought assurances that the tariff programme will continue for five years beyond the conclusion of the IMF programme in 2027 and will not be derailed.

Non-tariff barriers in the mineral sector will also be removed. Pakistani officials believe that free trade agreements are a major reason for the high rates of regulatory duties, as the government uses these duties to restrict imports from China.

According to Express News, the expected increase in imports and trade activities will offset the revenue loss from duty reductions, with domestic tax collections projected to reach Rs14 trillion, according to estimates from the Ministry of Commerce. Officials believe that trade liberalisation could boost exports to $47 billion by 2030 and the economy could grow at a rate of 4.6 per cent.

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