Cars, Tariffs & IMF: FY26’s Auto Reset
The local auto industry in Pakistan is on edge. As the government prepares to announce the Fiscal Year 2026 (FY26) budget, uncertainty looms large. The International Monetary Fund (IMF) has turned up the heat—urging policymakers to cut protective tariffs and allow the commercial import of used cars. The goal? To make the market more competitive and consumer-friendly.
But for many in the industry, this feels more like a threat than an opportunity.
IMF’s Stance & Industry’s Fear
The IMF views Pakistan’s auto sector as excessively protected. Currently, over 40% of a locally assembled vehicle’s price comprises taxes and duties. Some auto parts are shielded by effective protection rates as high as 98%. That means a $100 car part can end up costing nearly $200 after duties, taxes, and margins.
From the IMF’s perspective, this isn’t sustainable. High costs limit consumer access, suppress competition, and discourage innovation. By lowering tariffs gradually, the aim is to allow better pricing, quality, and efficiency to emerge organically.
However, automakers and parts manufacturers are unconvinced. In a recent meeting with Special Assistant to the Prime Minister (SAPM) Haroon Akhtar Khan, they warned that a rapid shift—especially allowing used car imports—could destabilize an industry built over decades.
Mr. Khan reassured the stakeholders that the government intends to protect local investment. Still, he acknowledged the need for a balanced approach—supporting both the industry and the public interest.
New Policy Framework
According to media reports, the government, under its new National Tariff Policy 2025–30, has committed to major reforms—aligned with IMF recommendations but paced cautiously.
Here’s what’s planned:
- From FY26, duties on used car imports (Customs Duty + Additional Customs Duty + Regulatory Duty) will be 40% higher than those on new cars, with a 10% reduction annually, reaching parity by 2030.
- All ACDs will be phased out, and Regulatory Duties will be reduced by up to 80%.
- Reforms to the Customs Act’s Fifth Schedule are also on the table.
- The average tariff rate is set to fall from 10.6% in FY25 to 7.4% by FY30, and under 6% in the auto sector.
Additionally, the government has pledged to remove all import quantity restrictions on cars under five years old by Q1 of FY26. Environmental and safety regulations will replace the current age limits starting July 2026.
Protective policies like AIDEP 2021–26 will be gradually discontinued under a new auto policy launching July 1, 2026. This includes:
- Complete removal of ACDs and RDs
- Substantial cuts in Customs Duties
- A shift toward climate and safety compliance systems for imported vehicles
The government also plans to finish a comprehensive review of non-tariff barriers (NTBs) by December 2025, aimed at eliminating complexity and distortions in the import-export framework.
A Mirror to the Industry
One of the most telling critiques has come from the National Assembly Standing Committee on Industries. Their question to local manufacturers is blunt but fair: If your parts and cars are truly competitive and of global quality, why aren’t you exporting them?
It’s a question that gets to the heart of the issue. If the industry is genuinely world-class, it should be able to hold its own—even without tariffs.
Insights from Our Experts
Our experts/sources suggest that despite the IMF’s push, there’s little appetite within the government to actually reduce import duties. In fact, if any relief does come on one front—say, lower duties on Completely Built Units (CBUs)—it may be offset by increased taxes elsewhere.
The reasoning? Revenue. The government depends heavily on these duties. And right now, it’s unclear whether they’re willing—or able—to give that up, even gradually over five years, as they’ve vaguely promised the IMF.
What’s Next?
The path forward isn’t clear. What is clear, though, is that something needs to change.
The auto sector can’t remain in a bubble forever. Sooner or later, protectionist policies start doing more harm than good—leading to higher prices, lower quality, and missed opportunities on the global stage.
At the same time, reform needs to be smart. Sudden tariff cuts or an unregulated flood of used imports could destabilize an industry that still has growing to do.
A phased approach—transparent, balanced, and rooted in dialogue—may be the only way forward. The government must bring all stakeholders to the table: manufacturers, suppliers, consumers, and yes, even the IMF.