Prohibition on sales from EPZs to domestic market: Govt fails to convince IMF to withdraw condition

ISLAMABAD: The government has failed to convince the International Monetary Fund (IMF) to withdraw its condition of prohibiting sales from Export Processing Zones (EPZs) to the domestic market, with the issue is set to be taken up again during the Fund’s next review later this month, as Pakistan has committed under the Extended Fund Facility (EFF) arrangement to meet the condition by September 2026.

This was revealed by Secretary Industries and Production Saif Anjum while briefing a sub-committee of the Senate Standing Committee on Finance and Revenue here on Tuesday, where he further added that the Fund has set the condition of restricting EPZs from selling up to 20 percent of their production in the local market.

The Ministry of Industries and Production briefed the Committee on issues concerning EPZs and Special Economic Zones (SEZs).

READ MORE: Pakistan fails to meet structural benchmark on SEZs, EPZs: IMF

The committee was informed that, under the IMF Extended Fund Facility (EFF) conditionality, these zones would be phased out by 2035 to eliminate distortions and bring sectors at par under the tax regime.

“We have to comply with the Fund’s condition regarding EPZs, set under the EFF arrangement by September 2026,” Anjum told the committee, admitting that allowing EPZ-based factories to sell part of their production locally does not distort the domestic market but provides a vital cushion for export-oriented industries, as these contribute to around USD 800 million of exports.

The committee was also informed that the matter is currently sub judice. Responding to a question, an FBR official said the IMF had not been intervening in court proceedings. However, the Fund could only ask the government to pursue the matter. Regarding special economic zones (SEZs), the FBR official said there was sufficient time until 2035 and that the board would examine whether to phase out the existing arrangements or introduce improvements.

The meeting was held under the convenorship of Muhammad Talha Mahmood to consult the business community on industry relocation from Pakistan, industrial policy for economic growth, and measures to restore normal business hours.

Chairman Policy Advisory Board, FPCCI, Mian Zahid Hussain strongly urged the government to protect and continue the existing 80/20 facility for industries operating within the EPZs.

He expressed grave concern that under the IMF’s condition, the government has committed to completely prohibit sales from EPZs to the domestic market (presently 20 percent) by September 2026 and phase out existing zones by 2035.

He warned that any restriction or withdrawal of this established framework would severely damage investor confidence, disrupt international trade operations, and potentially force dozens of industrial units to shut down completely. Hussain explained that manufacturing operations naturally generate B-grade, C-grade, off-grade materials and necessary process wastage, which collectively account for nearly 20 percent of total production.

Under the long-standing regulatory framework, these specific materials are permitted to enter Pakistan’s domestic tariff area only after the completion of all customs procedures, value-addition checks, and the payment of full applicable duties and taxes, including customs duty, sales tax, and income tax.

After detailed deliberations, the committee recommended that EPZs and SEZs should not be adversely affected and called for renegotiation of the matter with the IMF, keeping Pakistan’s industrial and investment interests in view.

The Sub-Committee also discussed difficulties being faced by exporters and businesses in banking transactions and emphasized the need for practical alternatives, including the use of insurance guarantees in place of bank guarantees or cheques, where permissible.

The Sub-Committee was also briefed on the Battery Energy Policy, aimed at promoting the production of modern sodium and lithium batteries. It was informed that the policy is currently under review by a committee headed by the Deputy Prime Minister and is expected to be finalized soon.

The Ministry of Industries and Production also briefed the Committee on the National Auto Policy, particularly measures to promote the production and use of Electric Vehicles (EVs). It was apprised that viability gap funding of Rs 3 billion is available to support the initial establishment of 3,000 EV charging stations across Pakistan. The Convenor stressed that appropriate safeguards must be incorporated to protect and promote local industry while encouraging the transition toward electric mobility.

The Committee also discussed challenges confronting the housing and construction sectors. It was observed that cities need to expand vertically to address growing urbanization; however, high Floor Area Ratio (FAR) fees in the capital contribute to increased construction costs and inflated apartment prices. The Convenor recommended reviewing and revising the existing FAR fee structure to facilitate affordable housing and construction activity.

The Sub-Committee took up the issue of early market closures affecting businesses, particularly in the wake of power outages, where the business community pressed for an increase in trading hours to revive economic activity and boost tax revenues.

Power Division has warned that extending commercial timings could require an additional 600MW of electricity and push up generation costs. An official warned that running on HSD or furnace-oil plants could increase the fuel cost of electricity by around Rs5 per unit, further aggravating the cost of power generation.

The business community argued that income tax and sales tax collections can only increase when businesses remain operational, urging the government to abandon early market closures and facilitate normal business timings.

However, officials of the Power Division opposed the proposal, saying the country was currently facing a difficult power and fuel situation and that extending business hours would place additional pressure on the power system.

The Power Division further informed the committee that the country currently had only one day’s RLNG stock available. The ministry maintained that any move towards normal business hours would therefore have to be aligned with available generation capacity, fuel stocks and the overall power supply position.

The Committee was informed that the current power situation was linked to disruptions in RLNG consignments and subsequent load-management measures aimed at keeping electricity prices lower. The Committee recommended the gradual restoration of normal business hours, initially proposing an increase of at least 30 minutes in the existing market closure timings.

The Securities and Exchange Commission of Pakistan (SECP) briefed the Committee on unauthorized and illegal share transfers and legal disputes arising from forged signatures and other unlawful practices. The Committee was informed that SECP has undertaken digitalization of the share market and is taking strict action against individuals and companies involved in illegal activities.

The Competition Commission of Pakistan (CCP) also briefed the Committee on measures against cartelization and other anti-competitive practices, including action relating to fraudulent internal audits.

The Committee reiterated that coordinated institutional reforms, greater facilitation of businesses, and a predictable, business-friendly regulatory environment are essential for promoting investment, industrial growth, employment, and sustainable economic development in the country.

Copyright Business Recorder, 2026