US firms back 80/20 EPZ rule

Say IMF curbs on 20% sales in local market may hit global circular economy

ISLAMABAD:

The International Monetary Fund's (IMF) condition to halt the sale of 20% of production by factories running in the Export Processing Zones (EPZs) in the local market may adversely impact the global textile circular economy and deprive western charitable entities of a sustained source of revenue.

A representation by a US-based business association to the IMF's Washington-based mission chief to Pakistan reveals how one Pakistan-specific condition can undermine a global recycling chain and charitable entities such as Goodwill, the Salvation Army and St Vincent de Paul.

According to the IMF's last report, Pakistan has assured the lender to comply in the following words, "We have drafted amendments to prohibit sales from EPZs to the domestic market, which will be implemented upon approval by the cabinet by September 2026".

But the US and Pakistani exporters have opposed the decision on the ground that they sell these goods in the local market after fully paying applicable duties and taxes. The exporters have also warned about legal consequences due to breach of commitments as the permission to sell 20% of goods locally and export the remaining 80% is part of the investment framework signed by relevant stakeholders.

US exporters have raised concerns about the withdrawal of the 20% quota and have directly approached IMF Mission Chief Iva Petrova. US firms have been supplying raw materials to Pakistani companies operating in these EPZs.

US exporters have informed their Pakistani counterparts that the IMF informally told them that it did not initiate the withdrawal of the quota, Abid Iqbal, representing Nashmia Industries, said while speaking in the Express News show – The Review – on Saturday.

Pakistan is a critical link in the global textile circular economy and used textiles collected in the US, Canada, Europe and elsewhere are sorted and graded in Pakistan and then directed to reuse, recycling, manufacturing and affordable consumer markets, according to the US-based Secondary Materials and Recycled Association (SMART).

It told Petrova that eliminating the rule would sharply reduce demand and prices for recovered textiles, weaken collection programmes and charitable revenues in North America, disrupt Pakistani recyclers and manufacturers, and cause more usable material to be landfilled or incinerated. The proposed revocation would cause tens of millions of dollars in lost revenue for charitable organisations across North America, it said.

The association further stated that organisations such as Goodwill, the Salvation Army, St Vincent de Paul and other thrift operators rely on the sale of donated goods to support workforce training, job placement, food assistance, substance-use recovery services, youth programmes, housing assistance and other essential community services.

Used clothing shipped from the US to EPZs represents approximately 9-10% of all Pakistani imports from the US. Pakistan is therefore not a marginal destination; it is a major market for used textile exports from the US and an important part of the broader North American used textile trade.

Under the EPZ Act of 1980, the authority can establish these zones with approval of the federal government. Under Rule 228 (5) of the Customs Rules, factories in EPZs are permitted to sell up to 20% of their production in tariff areas whereas the ceiling for Resalupur area was 30%.

EPZA has already moved a proposal in line with the IMF condition to the FBR to abolish the 20% quota from October 1. However, the industries ministry was of the view that the abolition of the quota was not part of the original IMF deal, which could be verified from the IMF's September 2024 report, according to proceedings of the Senate Standing Committee on Industries held late last month.

It said that the initial condition was only limited to the extent of not providing any new fiscal incentives, including tax concessions and subsidies but later the condition of quota abolition was also included.

Under the IMF deal, Pakistan was required to undertake an assessment of each SEZ and EPZ to see whether any distortions were created by these units. Pakistan had hired AT Kearney to prepare a report in June last year. According to the report, the EPZs did not cause any market distortions and it did not recommend the withdrawal of fiscal incentives, according to the record of the Senate Standing Committee on Industries. Last month, Special Assistant to the PM on Industries Haroon Akhtar Khan informed a parliamentary panel that his ministry was trying to convince the IMF to allow the establishment of new EPZs.

"We are deeply concerned, however, that eliminating the 80/20 rule would work against those objectives by jeopardising existing investments, eliminating jobs, reducing exports and foreign exchange earnings, and disrupting a critical part of the global textile circular economy," SMART said.

"The proposed revocation raises serious legal and contractual concerns, is not supported by the current tax and Customs treatment of domestic sales and would have significant consequences for employment, trade, charitable organisations, investment and textile circularity," it added.

Investors are of the view that 20% of production sold in Pakistan's tariff area consists of goods for which Pakistan is effectively the only market. These grades do not have a commercially viable alternative destination. Pakistani buyers understand this limited marketability and the goods are therefore frequently sold at or below costs.

Without the 80/20 framework, these goods would have to be shipped out of the region, adding thousands of dollars in unnecessary transportation and handling costs for every four or five containers processed in the zone.

EPZ operations also differ from many exporters in Pakistan in an important respect: they do not rely on the State Bank of Pakistan's foreign exchange reserves to finance imports of raw materials, machinery or other inputs. Instead, EPZ businesses fund these imports from their own foreign currency resources.