In a bold policy shift, the Government of Pakistan has approved a substantial reduction in import tariffs, amounting to Rs120 billion in the upcoming federal budget, aiming to open up the economy to foreign competition and encourage export-led growth.
Despite concerns raised by the Ministries of Industries and Commerce over the potential impact on the manufacturing sector and balance of payments, Prime Minister Shehbaz Sharif has endorsed the reform plan, which will be rolled out in phases over the next five years.
Key Highlights of the Tariff Reform Plan:
-
Customs duty slabs will be reduced from five to four:
0%, 5%, 10%, and 15% (currently up to 20%) -
First-year revenue loss:
Estimated at Rs120 billion, including:-
Rs15 billion from reduced customs duties
-
Rs50 billion from abolishing additional customs duties
-
Rs35 billion from reduced regulatory duties
-
Rs20 billion from Fifth Schedule revisions
-
-
Total revenue impact over five years:
A staggering Rs512 billion -
Additional customs duties:
To be completely abolished in four years -
Regulatory duties:
To be phased out over five years -
Fifth Schedule (covering capital goods/raw materials):
Will be abolished by year five
Changes in Duty Slabs:
| Old Slab | New Action | Impact |
|---|---|---|
| 3% (972 items) | Abolished | Items to be moved to 0% or 5% |
| 11% (1,121 items) | Lowered to 10% | Mild adjustment |
| 16% (545 items) | Reduced to 15% | Gradual relief |
| 20% (2,227 items) | Gradually abolished | Final slab to be removed |
Policy Objectives and Economic Rationale
The Finance Ministry and FBR, once advocates for higher tariffs to increase revenue, now support the tariff rationalization strategy, citing the need to:
-
Enhance productivity
-
Lower costs of capital goods and intermediate inputs
-
Encourage exports
-
Increase domestic tax collection through heightened economic activity
A trade-weighted average tariff is expected to fall from 10.62% to 9.57%, and customs duty average from 5.68% to 5.54% in the next fiscal year.
Concerns and Criticism
While the government sees this as a pro-growth move, several officials and ministries remain skeptical:
-
Commerce Ministry proposed six tariff slabs (0%-20%) to maintain a more balanced structure—rejected by PM.
-
Officials argue that high energy and labour costs may undermine the benefits of lower tariffs.
-
There’s worry that a sudden reduction could widen the trade deficit—with estimates showing a 1% tariff cut could expand the trade deficit by 1.7%.
Additionally, some government functionaries stress the risk of moving too fast without stabilizing external accounts, especially under the ongoing IMF programme, during which Rs300 billion of the total losses are expected.
Sectoral Exceptions
-
Automobile sector tariffs will remain unchanged
-
The government will continue to protect sensitive industries while gradually opening up others
Conclusion
Pakistan’s aggressive import tariff reform marks a significant shift toward economic liberalization. With eyes set on export competitiveness, the government is willing to take near-term fiscal hits for long-term economic gains.
However, balancing trade liberalization with the stability of the external sector and industrial competitiveness will remain a challenge. Only time will tell whether this ambitious move results in the desired economic transformation.
