IMF urges Pakistan to ease used car import restrictions, introduce carbon tax

• IMF demands phase-out of all industrial zone incentives by 2035.
• Pakistan must enforce agriculture tax, energy reforms, levy laws.
• FY26 budget needs IMF-aligned approval, with focus on reforms.
  

ISLAMABAD: The International Monetary Fund (IMF) has introduced new structural benchmarks for trade liberalisation in the upcoming budget, calling for the elimination of all quantitative restrictions on the commercial import of used motor vehicles under five years old, along with the implementation of a carbon levy of Rs5 per litre, The News reported.

To comply with the structural benchmark until December 2025, the IMF has bound Pakistan to prepare a plan based on the assessment conducted to fully phase out all incentives related to Special Technology Zones and other industrial parks and zones by 2035.

Although the IMF staff report on Pakistan does not specifically mention China, banning incentives for SEZs will definitely contain China in the longer term.

The IMF made it mandatory to implement the enacted Agriculture Income Tax (AIT) laws through a comprehensive plan, including the establishment of an operational platform for processing returns, taxpayer identification and registration, a communication campaign, and a compliance improvement plan, adopt legislation to make captive power levy ordinance permanent and notifications of the annual electricity tariff rebasing and gas tariff adjustment from July 1, 2025.

In its staff report released on Saturday from Washington DC after the completion of the first review and release of the second tranche under EFF and newly struck Resilience Sustainability Facility (RSF), it was the condition of the IMF to get parliamentary approval for a FY26 budget in line with IMF staff agreement to meet the programme targets.

The IMF staff in their appraisal stated that risks remain elevated amidst rising global uncertainty. External risks are increasing, notably from the economic and financial impact of the April 2 US tariff announcements and subsequent market reaction, broader geopolitical tensions, and elevated global economic policy uncertainty, with potential spillovers to (already tight) global financial conditions and commodity prices. “Domestic political economy pressures to unwind and delay reforms remain present and may intensify.”

The finance minister and the SBP governor made written commitments that “given challenges from an increasingly uncertain external environment and lingering vulnerabilities and structural rigidities of our economy, we are firmly committed to continuing with sound and prudent macroeconomic policies and structural and institutional reforms to place Pakistan on a path towards long-term sustainable and inclusive growth that will help raise living standards for all Pakistani citizens”.

Specifically, in the months ahead our policies will be guided by the following: Prudent execution of the FY25 budget will continue and the FY26 budget, to be formulated in close consultation with the Fund, will serve as our fiscal anchor with an underlying primary surplus of 1.6% of GDP.

Efforts will also continue as planned to raise revenue-to-GDP, broaden the revenue base, and improve tax compliance. Monetary policy will remain appropriately tight, with due consideration to lagged pass-through from past rate cuts, to ensure that inflation durably stays within the target rate, while the exchange rate will be allowed to adjust freely to buffer external pressures.

Pakistan committed to phasing out all additional duties (including through import and sales taxes) currently charged for “localised” items/inputs in the auto sector, and to removing the regime of special duties applied to imports used for the auto sector, including through the 5th Schedule to the Customs Act and SRO 655(I)/2006. These changes will be implemented gradually, as envisaged in the NTP 2025–30. 

This principle will also apply to any new electric vehicle (EV) production, which will mean an increase and regularisation of the tariffs and other protection (including through preferential sales taxes) of some inputs. By July 2026, we will seek to extend the principle of removing the preferential treatment of local production to other industries, to be implemented in a gradual manner over the period until FY30, in consultation with the relevant ministries.