IMF-backed move to End EPZ local sales Quota sparks concerns over textile recycling, jobs

KARACHI: A proposed move to withdraw the permission allowing factories operating in Pakistan’s Export Processing Zones (EPZs) to sell up to 20% of their output in the domestic market has triggered concerns among exporters, investors and international textile-recycling organisations, who fear the policy could disrupt investment, employment and a wider global circular-economy supply chain.

The controversy has emerged after Pakistan committed to the International Monetary Fund (IMF) that it would amend the existing rules governing EPZs and prohibit sales from these zones into the domestic tariff area.

According to the IMF’s latest programme review, Pakistan has committed to introduce amendments aimed at ending domestic sales by EPZ-based manufacturers. The report states that the amendments were to be placed before the federal cabinet for approval by September 2026.

However, exporters and industry representatives have challenged the move, arguing that the existing 80:20 arrangement was part of the investment and regulatory framework under which many businesses established operations in the zones.

Under the existing system, EPZ manufacturers can export 80% of their production while selling up to 20% in Pakistan after payment of applicable duties and taxes. Industry stakeholders say the domestic-sale provision is particularly important for products that have limited commercial demand in overseas markets.

The proposed abolition has also attracted attention in the United States because American companies supply raw materials and used textiles to Pakistani businesses operating in the EPZs.

The US-based Secondary Materials and Recycled Textiles Association (SMART) has approached IMF Mission Chief to Pakistan Iva Petrova, warning that eliminating the domestic-sales provision could have consequences extending beyond Pakistan’s industrial sector.

The association has argued that Pakistan occupies an important position in the global textile circular economy, particularly in the sorting, grading, reuse and recycling of used textiles collected in North America and Europe.

According to SMART, used clothing and textile materials collected in the United States, Canada and European countries are sent to Pakistan, where they are sorted and graded before being channelled into reuse, recycling, manufacturing and affordable consumer markets.

The association has warned that ending the 80:20 mechanism could reduce demand for recovered textiles and place downward pressure on their prices. Such a development, it said, could weaken textile-collection programmes in North America and reduce the income generated by charitable organisations from donated clothing.

Organisations including Goodwill, the Salvation Army and St Vincent de Paul depend partly on revenues generated from donated goods to finance a range of social programmes, including workforce training, employment assistance, food support, recovery services, youth programmes and housing assistance.

SMART has therefore cautioned that a major disruption in Pakistan’s used-textile market could have financial consequences for charitable organisations in North America, with potential losses running into tens of millions of dollars.

The association also warned that reduced demand for used textiles could ultimately result in a greater volume of reusable material being sent to landfills or incinerators rather than being recycled or reused.

US exporters raise objections

US exporters have also expressed concern over the proposed withdrawal of the 20% domestic-sale allowance. Their concerns are significant because American suppliers form part of the upstream supply chain that feeds Pakistani recycling and manufacturing units located in EPZs.

Abid Iqbal, representing Nashmia Industries, said during Express News programme The Review that US exporters had communicated their concerns to Pakistani counterparts.

According to Iqbal, US exporters had also been told informally that the IMF itself had not initiated the proposal to remove the 20% quota.

The development has consequently raised questions within the industry about how the condition was incorporated into Pakistan’s commitments under the IMF programme and whether sufficient consultation took place with affected stakeholders.

Industry representatives have also warned of possible legal and contractual disputes, maintaining that the 20% domestic-sales provision was part of the regulatory and investment framework under which businesses made their investment decisions.

They argue that companies entered the zones with an understanding that they would be able to export the bulk of their production while disposing of a limited portion in the domestic market after meeting applicable tax and customs obligations.

EPZ rules and proposed amendment

The Export Processing Zones Authority (EPZA) operates under the legal framework established through the EPZ Act of 1980. The law enables the establishment of export processing zones with approval from the federal government.

Under Rule 228(5) of the Customs Rules, EPZ-based factories have historically been allowed to sell up to 20% of their production in the domestic tariff area, subject to applicable duties and taxes. A higher limit of 30% had been applicable to the Resalpur area.

EPZA has reportedly forwarded a proposal to the Federal Board of Revenue (FBR) to eliminate the 20% quota from October 1 in line with the IMF-related commitment.

The proposal, however, has exposed differences within the government over the scope and interpretation of the IMF condition.

Proceedings of the Senate Standing Committee on Industries held last month indicate that the Ministry of Industries and Production maintained that abolition of the 20% domestic-sales quota was not included in the original IMF agreement.

According to the ministry’s position, the initial IMF requirement was restricted to preventing the introduction of new fiscal incentives, including tax concessions and subsidies, rather than immediately eliminating the existing domestic-sales mechanism.

The ministry has reportedly argued that the later addition of the quota-related condition requires further clarification.

Assessment of EPZs

The issue is also linked to an assessment of Special Economic Zones (SEZs) and EPZs that Pakistan was required to undertake under the IMF programme.

The government engaged consultancy firm AT Kearney to assess the zones and determine whether their operations were creating distortions in the domestic market.

According to records presented before the Senate Standing Committee on Industries, the assessment completed last year concluded that EPZs were not creating significant market distortions. The report, according to the parliamentary proceedings, did not recommend withdrawing existing fiscal incentives.

The issue has therefore become a point of discussion between government officials and the IMF as authorities seek to reconcile the lender’s programme requirements with Pakistan’s investment and export policies.

Last month, Special Assistant to the Prime Minister on Industries Haroon Akhtar Khan told a parliamentary committee that the Ministry of Industries was attempting to persuade the IMF to permit the establishment of additional EPZs.

The government’s position indicates that authorities continue to regard export processing zones as a potential instrument for attracting investment, generating employment and increasing exports.

Industry warns of investment and employment impact

Investors and industry representatives have strongly opposed the proposed removal of the 80:20 mechanism, saying the policy could undermine the commercial viability of some EPZ operations.

They argue that a portion of the goods sold in Pakistan consists of grades and materials for which the domestic market is effectively the only commercially viable destination.

According to industry stakeholders, these products may not have sufficient demand in international markets. Pakistani buyers, aware of their limited alternative marketability, often purchase such goods at or below cost.

Industry representatives contend that forcing manufacturers to export the entire output would therefore not necessarily increase exports in a meaningful way. Instead, they argue, some products could incur additional logistics costs without generating corresponding export earnings.

Under the existing arrangement, goods that are difficult to sell internationally can be disposed of within Pakistan after payment of applicable duties and taxes. Removing this option could require companies to transport such material outside the region.

Investors estimate that shipping these products away could add thousands of dollars in transportation, handling and related costs for every four or five containers processed at an EPZ facility.

They fear that such additional expenses could make some operations financially unviable and discourage future investment in export processing zones.

Concerns over exports and foreign exchange

Industry representatives have further argued that EPZ businesses have a distinct financial structure compared with many conventional exporters.

According to investors, EPZ companies do not depend on the State Bank of Pakistan’s foreign exchange reserves to finance imports of raw materials, machinery and other production inputs. Instead, they use their own foreign-currency resources for such imports.

They maintain that this arrangement means EPZ-based businesses can bring capital, machinery and raw materials into Pakistan without placing the same direct pressure on the country’s official foreign exchange reserves.

The industry has consequently warned that the proposed policy could have unintended consequences by discouraging existing investors, reducing employment opportunities and weakening export-oriented manufacturing.

SMART has similarly argued that eliminating the 80:20 framework could jeopardise investments, jobs, exports and foreign exchange earnings while disrupting an established international textile-recycling network.

The association has also raised legal and contractual questions, saying that the proposed change could affect companies that made investment decisions on the basis of the existing EPZ regulatory framework.

As the government moves towards implementing the IMF-linked reforms, industry stakeholders are seeking further consultation and clarification before the 20% domestic-sales facility is withdrawn.

The debate now centres on whether the government can meet its commitments under the IMF programme without undermining the investment incentives, recycling networks and commercial arrangements that have developed around Pakistan’s EPZs over several decades.