Shift to higher tariffs worsens constraints: WB
ISLAMABAD: In an already challenging business and investment climate —characterised by a misaligned exchange rate regime, high energy costs, regulatory complexity, limited access to finance and crowding out by state-owned enterprises — import tariffs on raw materials and intermediates further undermine firm productivity, sales and wages, especially when duty exemption schemes are inefficient or poorly implemented, says the World Bank.
The bank in its economic policy note, “From Inward to Outward: Pakistan’s Shift Towards Export-led Growth” stated that the shift toward higher tariffs exacerbated existing constraints on firms, further undermining export growth and competitiveness.
To further unlock export-led growth, tariff reforms must be accompanied by a broader package of structural reforms to address constraints in the business and investment environment.
It noted that over the past decade, Pakistan’s tariffs have increased markedly, after reaching its lowest levels in the early 2000s.
Over the past decade, Pakistan’s import tariffs have risen largely due to the expanded use of para tariffs (regulatory duties and additional customs duties). Tariffs have been progressively hiked to fill in revenue gaps, increasing their already higher-than-expected contribution to tax revenue given the country’s level of development. Higher tariffs have also been used to protect domestic industry from foreign competition, often under the guise of industrial policy, resulting in selective protection and market distortions. The compounding effects of para-tariffs on key import categories for the industrial sector, a key source of higher-value added exports.
The bank further stated that the outcome is a complex tariff structure with high average rates of effective protection, cascading import duties and a discretionary list of product exemptions offering concessional duty rates under special circumstances (e.g. for national security or protection of national economic interests). A World Bank study of these exemptions show that large and well-connected firms disproportionately benefit from exemption schemes and smaller firms less so. Ultimately, high import taxes, ad hoc additional taxes and discretionary exemptions shift cost structures for firms and ultimately redirect the flow of investments and resources, most often away from productive sectors to more influential sectors.
Within a context of high import tariffs, Pakistan’s export performance and competitiveness has remained weak. Exports have declined from over 15 percent of GDP in the 90s to slightly over 10 percent in 2024, one of the lowest in the region and among middle-income countries.
For many major export categories, market shares and value chain diversification have remained stagnant or declined. Import tariffs on finished products also distort resource allocation by encouraging firms to produce for the domestic market rather than for export markets by protecting them from import competition.
The bank stated that several initiatives have been undertaken to improve tariff policy and boost the enabling environment for export growth. These include institutional reforms that transferred the tariff policy mandate from the Federal Board of Revenue (FBR) to the National Tariff Board—an inter-ministerial body supported by the National Tariff Commission. More recently, the government has shown commitment to prudent macrofiscal management and has pursued structural reforms including the planned privatisations of state-owned enterprises (SOEs), energy sector reforms, and an accelerated business regulatory reform agenda.
In December 2024, it launched URAAN Pakistan—a five-year economic blueprint aligned with the Prime Minister’s Economic Transformation Agenda and Implementation Plan. Both documents center on an export-oriented growth agenda.
To further unlock export-led growth, tariff reforms must be accompanied by a broader package of structural reforms to address constraints in the business and investment environment.
Key complementary reforms, (as highlighted in our latest Pakistan Development Update) include: (i) ensuring a liquid inter-bank foreign exchange market operates alongside the fully market-determined exchange rate; (ii) fast tracking energy sector reforms to provide low costs and reliable energy to firms; (iii) enhancing the trade finance ecosystem to unlock affordable and accessible financing for exporters; and (iv) streamlining business regulations by establishing a National Regulatory Delivery Office, enacting the revised Investment Act, and creating a single business registry. Filling key leadership positions in competition authorities and advancing insolvency reforms will further enhance regulatory effectiveness and investor confidence to promote export-oriented investments.—TAHIR AMIN
