From Inward to Outward : Pakistan’s Shift Towards Export-led Growth

Overview & Synopsis

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 report shows the compounding effects of para-tariffs on key import categories for the industrial sector, a key source of higher-value added exports. 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.