IMF advises Pakistan to avoid using tariffs for industrialization and sector protection

The International Monetary Fund (IMF) has suggested Pakistan government avoid the use of tariffs to promote industrialization and protect certain sectors, as such policies weaken exports, hinder participation in global value chains, and incentivize rent-seeking.

The Fund, in a recent report, advocated urgent efforts to remove trade barriers.

The first National Tariff Policy (2019-24) made the tariff schedule simpler and allowed many imported materials to be duty-free.

As discussions continue for the next phase (2025-29), the IMF suggests that the new tariff schedule should remain simple and not use tariffs to protect uncompetitive sectors.

“The authorities should remain focused on reducing trade-weighted average tariffs and simplifying import/export documentation processes,” the report stated.

Moreover, policies to promote specific domestic sectors, such as export subsidies and local content requirements, are suggested to be discontinued.

“They are likely to promote resource misallocation and may violate international obligations”.

The government has provided subsidies through low-cost loans and other benefits, making financing and taxes more favorable compared to other countries.

The tax system has given hidden support to sectors like real estate, agriculture, manufacturing, and energy, often through Special Economic Zones (SEZs).

The government also controls prices for things like farm products, fuel, power, and gas, and uses high tariffs to protect certain industries.

Despite these efforts, the business sector hasn’t grown as expected. Instead, these incentives have reduced competition and kept resources in inefficient industries.