Pakistan’s proposed withdrawal of the 20% EPZ domestic sales allowance has raised concerns over textile recycling, investment, employment and exports.
KARACHI: Pakistan’s plan to withdraw a long-standing allowance permitting factories in Export Processing Zones (EPZs) to sell up to 20% of their production in the domestic market has triggered opposition from exporters, investors and international textile-recycling groups, who warn that the move could disrupt jobs, investment and a wider circular-economy supply chain.
The proposed change is linked to Pakistan’s commitments under its International Monetary Fund (IMF) programme. According to the latest programme review, the government plans to amend the rules governing EPZs and prohibit domestic sales from these zones into the domestic tariff area. The amendments are expected to be placed before the federal cabinet by September 2026.
Under the existing 80:20 arrangement, EPZ manufacturers can export 80% of their production while selling up to 20% domestically after paying applicable duties and taxes. Industry representatives say the mechanism formed part of the regulatory environment under which many companies invested in Pakistan.
The proposed change has drawn particular concern from the textile-recycling sector. The US-based Secondary Materials and Recycled Textiles Association (SMART) has approached IMF Mission Chief to Pakistan Iva Petrova, warning that the removal of the domestic-sales facility could affect the international market for recovered textiles.
Pakistan plays a role in sorting, grading, reusing and recycling used textiles collected in North America and Europe. SMART has warned that reduced Pakistani demand could lower the value of recovered textiles and potentially affect textile-collection programmes and charitable organisations in the United States.
US exporters supplying used textiles and other raw materials to Pakistani recycling and manufacturing businesses have also reportedly raised concerns over the proposed policy.
Industry Questions IMF-Linked Condition
The issue has also exposed differences within the government over the interpretation of Pakistan’s IMF commitments.
Proceedings of the Senate Standing Committee on Industries reportedly showed that the Ministry of Industries and Production maintained that eliminating the 20% domestic-sales quota was not part of the original IMF agreement. The ministry’s position was that the initial requirement focused on preventing new fiscal incentives rather than removing an existing domestic-sales mechanism.
The Export Processing Zones Authority has reportedly forwarded a proposal to the Federal Board of Revenue to eliminate the allowance from Oct. 1.
The existing framework is governed by the EPZ Act of 1980 and relevant customs rules. Rule 228(5) has historically permitted EPZ factories to sell up to 20% of their output in the domestic tariff area after applicable duties and taxes, while a higher limit applied to the Resalpur zone.
Investors Warn of Higher Costs
Industry representatives argue that some products manufactured or processed in EPZs have limited demand in international markets. They say forcing companies to export such goods could increase transportation and handling costs without necessarily producing meaningful additional export earnings.
Investors have also warned that the removal of the mechanism could reduce the commercial viability of some operations, potentially affecting employment and future investment.
The dispute is unfolding alongside a broader government assessment of Pakistan’s SEZs and EPZs. An assessment reportedly found that EPZs were not creating significant market distortions and did not recommend withdrawing existing fiscal incentives.
The government has continued to view EPZs as a tool for attracting investment, supporting employment and expanding exports. Officials have also sought greater flexibility to establish additional zones.
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