KARACHI: The local auto industry and its suppliers are facing uncertainty ahead of the FY26 budget as the International Monetary Fund (IMF) is reportedly pressuring the government to rationalise auto tariffs and permit the commercial import of used cars.

The IMF believes the auto sector is highly protective, and there is a need to rationalise tariffs to improve competitiveness and efficiency to benefit consumers. There are over 40 per cent taxes and duties on locally produced vehicles.

On May 6, auto assemblers and part vendors met Special Assistant to Prime Minister (SAMP) Haroon Akhtar Khan in Islamabad and conveyed their concerns that the local industry would collapse if commercial imports of used cars are allowed and tariffs on CBU are lowered below a certain threshold.

The SAPM assured them that the government did not intend to jeopardise the industry and the investments. On the contrary, the ministry will protect the local industry and try to achieve balanced tariffs with industry consultation.

The old guards within the local assemblers and parts vendors are alarmed as the government moves to rationalise the excessively high tariff protection under the IMF’s direction.

Assemblers fear collapse of industry if used cars’ commercial import allowed

The part makers have been operating under the highest tariff protection, enjoying effective rates as high as 98pc. The landed price of any part is valued at $100, with 46pc duty, 18pc GST, and minimum 15pc margins, totalling $198.

They stressed this entire burden must be borne by consumers, who are already grappling with inflation and stagnant wages. The IMF, recognising the extraordinarily high effective tariff protection rate, has recently directed the government to rationalise the tariffs under the latest standby arrangements.

This will provide a lot of relief to consumers, as prices may be adjusted with a reduced duty structure. The old guards within Pakistan Association of Automotive Parts and Accessories Manufacturers (Paapam) wish to maintain the highly inefficient tariff structure and are seeking meetings with government officials to resist IMF demands.

Their usual arguments are that any reduction in tariffs will cause irreparable damage to the industry without addressing the core issue of overprotection and excessive pricing of parts in the market.

However, auto parts vendors, under the umbrella Paapam, believe that their competitiveness can be judged through the supply of Rs325 billion worth of auto parts to the local industry, estimating a foreign exchange saving of minimum $480 million annually, along with collateral advantage of direct jobs of over 150,000 and over 500,000 indirect jobs through Tier-2 and Tier-3 suppliers, besides providing taxes separately to the state coffers.

During the first stage, the government has proposed to rationalise tariffs by five per cent to 10-15pc, along with gradual reduction in additional customs duty (ACD) and regulatory duty (RD). The tariff reduction on higher engine size CBU is proposed to be much higher.

Part makers contest that their pricing are generally on a landed cost (minus) model, thus saving foreign exchange and assuring price stability, though their competitiveness can be judged if they can compete on FOB cost instead of landed cost.

The National Assembly Standing Committee on Industries has been questioning part makers and local assemblers that if they are indeed competitive and produce global quality parts and vehicles, then why have they not been able to export from Pakistan?

Many Paapam members have invested in modern technologies, followed by joint ventures and technical collaborations with various foreign companies. Over 40 Paapam members are also exporting parts to Europe, Africa, the US and China, though the exports are negligible.

Paapam disagrees with the IMF impression that the Pakistani automotive sector rests upon a highly supportive tariff-protective sector.

An auto assembler said rationalisation of auto tariffs, along with added competition by new entrants, will help the government reduce vehicle prices and may also help in improving sluggish demand in the auto sector.

Published in Dawn, May 11th, 2025